Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the big news that 7 major universities, including Duke, Yale, and MIT, were all sued this week in class action lawsuits over the investment and record-keeper expenses of their 403(b) plans, opening a new chapter in the ongoing ERISA backlash against large employer retirement plans for failing in their fiduciary duty to manage their costs for employees. Also in the news this week was discussion of the ongoing shifts in money market funds, in preparation for new rules rolling out in 2 months that could introduce redemption fees and even floating NAVs for some money market funds.
From there, we have a few practice management articles, including: a review of upstart RIA custodians Equity Advisor Solutions and Folio Institutional; how TD Ameritrade continues to maintain its lead as the RIA custodian with the widest breadth of integrations thanks to its open architecture VEO platform; how the rising tide of ERISA fiduciary lawsuits may be shifting 401(k) plans to prefer 3(38) outsourcing providers over 3(21) plan consultants; and how advisory firms should consider measuring not only the productivity and efficiency of their financial advisors, but also their operations staff.
We also have a several more technical articles, from a look at what questions and issues to consider when selecting a donor-advised fund, to how shifts in the working habits of women and mothers have decreased the relevance of Social Security's "family" benefits (and whether a new caregiver credit should be introduced for working mothers), and whether retirement income strategies that combine portfolio withdrawals and laddered annuity purchases may be more effective than either is alone.
We wrap up with three interesting articles: the first looks at how financial advisors need to burnish their public perception by showcasing the best of what financial advice can provide (to combat the slew of negative perceptions about the broader financial services industry); the second urges financial advisors to be more careful about the language they use to describe themselves, noting that if we can't appropriately distinguish between the profession and the industry, between advisors and salespeople, and between clients and customers, then what chance do consumers and the media have; and the last calls on professional financial advisors to adopt and embrace the DoL fiduciary rule, noting that all true and bona fide professions have a fiduciary duty to clients, and that the implementation of a fiduciary rule for financial advice could mark the starting point for the true emergence of the financial planning profession.
Enjoy the "light" reading!
Duke, Johns Hopkins, UPenn & Vanderbilt [Follow On The Heels Of MIT, NYU, & Yale] Under Fire For Excessive 403(b) Fees (Greg Iacurci, Investment News) - This week, an avalanche of lawsuits were filed against major educational institutions, alleging their 403(b) defined contribution plans charged employees millions in excess plan fees. The announcements started on Tuesday with lawsuits against Yale, New York University, and MIT, and followed two days later with the additional lawsuits against Duke, Johns Hopkins, UPenn, and Vanderbilt. The shift is notable, as while there have been a spate of recent lawsuits against employers sponsoring 401(k) plans where employees allege a breach of ERISA fiduciary duties due to the use of high-cost funds, these lawsuits appear to be the first wave against the $900B in the 403(b) marketplace. Notably, though, the lead law firm in all 7 of the university lawsuits is Schlichter, Bogard & Denton, the law firm that has pioneered the excessive fee litigation in the 401(k) marketplace over the past decade. In this context, the shift is significant, both because of Schlichter's success already in the 401(k) environment, the potential size of the 403(b) marketplace, and because some suggest that 403(b) plans have actually been slower to adopt the ERISA fiduciary prudence concepts, which means the recent lawsuits may still just be the tip of the iceberg. In addition, the details of the allegations thus far have been striking, including complaints that the plans may have offered too many investment choices (in some cases more than 300 options), causing "decision paralysis" amongst participants and more substantively by diluting the 403(b)'s own bargaining power as a fiduciary (along with the outright failure to use institutional share classes instead of retail share classes in some cases), along with problematically using "duplicative" record-keeping services (which also allegedly resulted in 'excessive' fees as high as $200-$300 per participant).
Money-Market Funds Scramble Ahead Of SEC's Floating NAV Rule (Jeff Benjamin, Investment News) - On October 14th, the SEC's new rules for money market funds will kick in, including the potential for special up-to-2% redemption fees and the ability to halt redemptions up to 10 business days in certain circumstances for retail and institutional funds (with reduced restrictions for money market funds that hold only government bonds), and the implementation of a floating NAV for institutional money market funds. With implementation looming, the $2.7 trillion money-market-fund industry is already in flux, with over $500B of prime money funds (which buy corporate and government bonds) shifting to exclusively government bond money funds (which face reduced restrictions under the new rules), primarily via brokerage firms changing the default option on their sweep products. Notably, prime money funds typically pay a premium of about 25bps over government funds, but the difference in yield hasn't been enough to sway a large volume of investors; in fact, the shift may ultimately be so significant that the spread on prime money funds could widen to 50bps, in part to compensate for the greater potential for redemption fees, gated liquidated, and in the case of institutional funds the impact of a floating NAV.
How Custodians Folio Institutional And Equity Advisor Solutions Keep On Ticking (Lisa Shidler, RIABiz) - While most advisors are familiar with the "big four" RIA custodians of Schwab, Fidelity, TD Ameritrade, and Pershing Advisor Solutions, some smaller "under-the-radar" custodians include Equity Advisor Solutions and Folio Institutional. The Equity Advisor Solutions platform currently serves about 130 advisors (up from must 70 last year), with cumulative assets under management of $13.5B, and is technically built atop the even-larger Equity Trust Company custodian. Its core offering for RIAs is built around Orion Advisor Services, with supporting tools for portfolio management, trading, and model-building, along with invoicing and billing capabilities, and the custodian is notable for its willingness to hold "alternative" assets such as hedge funds, real estate, and private placements (given Equity Trust Company's prominence as a self-directed IRA custodian for retail consumers as well), which makes EAS popular for both small RIAs and broker-dealer breakaways who are looking for a solution that mixes together alternative and traditional asset classes in a single platform. By contrast, Folio Institutional best fits the niche of advisors who want to serve small accounts, given the firm's capabilities to execute at low cost and even to handle fractional shares (including for ETFs in 401(k) plans), though Folio leadership emphasizes that their open architecture tech-heavy platform is relevant for independent RIAs of all sizes that are looking to scale their business. Accordingly, Folio also recently launched Advisor Connexion, a "robo technology" tool to help further automate the onboarding process for new clients, with both a questionnaire to gather client information, and e-signature capabilities. In total, Folio now serves 405 advisors (their AUM is undisclosed), in addition to a much-larger base of individual retail investors through FOLIOfn, its self-clearing broker-dealer launched in 1999.
[TD Ameritrade] In The Lead (Joel Bruckenstein, Financial Advisor) - TD Ameritrade recently wrapped up its 6th annual Technology Summit, showing off a whopping 105 integration partners through its VEO open architecture platform (in a world where most other custodians still only offer limited integrations to a select number of partners in each advisor software category). The growth in the VEO platform is a resounding success for TD Ameritrade's strategic decision to operate as an open architecture platform, and has both allowed established companies to form deep and high-quality integrations, and also become the RIA custodian of choice for advisor technology startups by making it easy for them to launch with TD Ameritrade integrations. To further support digital onboarding, TD Ameritrade has deep integrations with DocuSign (e-signatures) and LaserApp (to help populate electronic forms), and both tools are made available for free to advisors using TD Ameritrade. More recently, TD Ameritrade rolled out an "Advanced Alerts" platform, which facilitates not only information flow to advisors, but can be pushed out via the VEO API to other technology partners, which can then use the alert to trigger an action or an entire cross-technology workflow (e.g., when a client address is changed on TD Ameritrade, the advisor's CRM can detect the alert and automatically update the field in the client's CRM record as well). And going forward, TD Ameritrade is working on VEO One, the next generation of its advisor workstation, building heavily around a single unified dashboard that advisors can customize for themselves (by arranging 'widgets' that can draw from any of the technology solutions integrated with VEO). At the same time, though, Bruckenstein notes that other custodians have been increasingly moving in a similar direction, as competing custodians are increasingly open to more integration partners as well, and Pershing recently announced its own new open API store.
Post-DOL: Time To Consider 3(21) and 3(38) Services? (Ed McCarthy, Wealth Management) - While advisors who work with individual investors are still absorbing the implications of the Department of Labor's fiduciary rule on IRA rollovers, those advisors and consultants who work with employer retirement plans under ERISA have been increasingly discussing ERISA 3(21) and 3(38) fiduciary investment services. With a 3(21) service, an outsourced firm provides a list of approved funds to use, but the plan sponsors make the final decision about the funds that will be offered in the plan (which means both the sponsor and the provider share in the fiduciary responsibility). With a 3(38) arrangement, on the other hand, the outsourced provider acts as a discretionary investment management and is entirely responsible for the choice of (and fiduciary liability for) the plan's fund offerings. In some cases, advisors themselves operate as 3(21) or 3(38) fiduciaries, though a number of mega-providers including Willis Towers Watson, Wilshire Associates, and Morningstar, are offering 3(21) and 3(38) services to advisors (who in turn can bring them to the table with a small plan sponsor). Thus far, the marketplace has been dominated by 3(21) services (estimated to be as much as 90% of Wilshire Associates' fiduciary service assets), as plan sponsors seemed to prefer the greater flexibility and desire to stay involved in fund selection decisions. With a rising volume of fiduciary lawsuits, though, along with the potentially increased fiduciary burden as the DoL updates its fiduciary rule, there has been more recent interest in 3(38) services. Which actually presents notable challenges to advisors and consultants primarily in the business of supporting 3(21) fiduciary services today, as if the marketplace shifts to 3(38) instead, much of the value-add the advisor/consultant once delivered will now be displaced by the outsource provider instead, forcing the 401(k) plan consultant to shift his/her own value-add.
Quality Over Speed: How Firms Measure Up (Bob Veres, Financial Planning) - While most advisory firms have straightforward metrics to evaluate the productivity of their financial advisors, from the number of clients and amount of assets and revenue they're responsible for, to the quantity of referrals and client satisfaction surveys, Veres notes that there are remarkably few metrics to evaluate the performance of operations staff. Yet without any ability to evaluate the operational performance, there's no way to reward excellent team members, or identify problem areas for improvement. The starting point is to measure the number of clients that each operations staff member is serving (which is easiest when they're assigned onto a specific team serving a particular advisor and his/her clients), and then look at complexity of those clients (e.g., does one operations staff member service a disproportionate number of complex "A" clients while another is struggling just to serve a smaller number of simpler "B" clients?). From there, advisory firms can actually look at how long it takes tasks to be completed - based on the time in the CRM from task assignment to completion - to spot especially productive or potential problem employees. Of course, it's also important to consider "qualitative" aspects of staff performance as well - in the context of operations, this might include the volume of client complaints, the ability to learn from inevitable mistakes, and how pleasant (or rude) a staff member is on the phone. Nonetheless, the key point is to recognize that operation team productivity is something that can at least be partially measured... especially when it's accomplished via a central CRM that tracks the activity and related workflows to completion.
12 Questions To Ask When Selecting A Donor-Advised Fund (Ken Nopar, Advisor Perspectives) - There are now nearly 250,000 donor-advised fund (DAF) accounts in the U.S., offered by a wide range of sponsors, including commercial DAFs from companies like Schwab and Fidelity, independent DAF sponsors like American Endowment Foundation, and single-issue DAF sponsors at religious organizations, universities, and community foundations. And while donor-advised fund sponsors may seem to be substantively similar, there are important distinctions to recognize. Key questions to ask/consider include: which types of grant recommendations with the donor-advised fund approve (as some regional DAF sponsors require grants to be within the local geographic area, and others might limit grants to only those related to the mission of the DAF sponsor); what types of assets can the DAF sponsor accept (most will accept publicly-traded stock, but some cannot handle more complex assets such as privately-held C or S corporation stock, LP or LLC interests, real estate, or private equity, and/or may have minimum sizes for illiquid donations); can the financial advisor manage the DAF assets, at what amount, and can the managed account be transferred to another custodian (crucial for advisors who still wish to manage the donor-advised fund assets themselves and might change custodians in the future); what are the fees, and timing for opening accounts, funding contributions, and making grants; are there requirements on when or how much can be granted, and to what organizations (e.g., some single-issue charities require a portion of every distribution go back to the sponsoring charity); what service support is available, both to the advisor and to the donor-client; and what happens to the account at the death of the fund creator (including the advisor's ability to continue the management of the account)?
How Work & Marriage Trends Affect Social Security’s Family Benefits (Steven Sass, Center for Retirement Research) - Social Security spousal and survivor (i.e., "family") benefits were originally designed in the 1930s, when most households were comprised of a single-earner married couple. In today's environment, where more and more married women work in dual-income households, these family benefits have become less relevant for retirement income. However, the simultaneous rise of single mothers has created new and unique challenges from the perspective of Social Security, which did not effectively contemplate single-earner unmarried families; thus, single working mothers are not eligible for most family benefits, nor are divorced women who were married for less than 10 years, despite the fact that their child-rearing duties may limit their work opportunities, income potential, and therefore their prospective Social Security credits and benefits. In turn, this raises questions of whether Social Security formulas need to make adjustments to recognize the reality of modern families, from an "earnings sharing" approach for married couples to allocate benefits (as opposed to the existing primary worker-secondary earner and divorced-spouse rules), and the possibility of "caregiving credits" that mothers could earn to support their Social Security benefits (regardless of marital status, and perhaps in lieu of today's spousal benefits approach).
New Approaches to Retirement Income: An Evaluation of Combination Laddered Strategies (Mark Warshawsky, Journal of Financial Planning) - While a number of studies have compared the benefits of using a 4% rule "safe withdrawal rate" approach to buying an immediate lifetime annuity for retirement income, relatively few have analyzed combinations of portfolio withdrawals plus partial annuitization. One early study back in 2001 found that partial annuitization of a portfolio appeared to improve retirement outcomes, but may have been distorted by the relatively high interest rates of the time (at least compared to the current environment). Accordingly, Warshawsky revisits the impact of partial annuitization using a more current annuity pricing model, and examining the impact of not only annuitizing a portion of wealth up front, but also by systematically laddering annuity purchases over time throughout retirement. For instance, the results showed that using 15% of the account balance up front for an immediate annuity, plus small purchases of additional annuities each subsequent year for 0.5% of initial wealth (such that another 10% of wealth is annuitized over the subsequent 20 years), produces superior income results with only a modest decrease in terminal/legacy wealth (where much of the decrease is simply attributable to the fact that the retiree was able to spend more during life). More generally, the results suggest that combination strategies can give advisors more tools for clients, to blend together goals for higher income, rising income over time, size of bequest, 'firmness' of the income floor, or upside potential (in favorable markets).
What Advisors Can Learn From the Gravedigger's Dilemma (Mark Tibergien, Investment Advisor) - The financial services industry faces a long uphill battle to regaining the public's trust, from the long-standing abuses of salespeople, to the mistakes that even fiduciary advisors have made, all of which causes reputational damage to financial advisors along with an almost-inevitable backlash of additional government regulation (for which the recent DoL fiduciary rule is simply a good case-in-point example). And the problem not only makes it harder to get clients, but also exacerbates financial planning's talent shortage, as it's difficult to attract new people into financial advice when the public perception of the entire industry is so negative - and the perception is only reinforced when new advisors join firms where their first and immediate focus is sales and new business development. So how does the emerging financial planning profession turn around its negative public perception? Tibergien cites the story of Hungary's first national grave-digging competition, where dozens of gravediggers entered a contest to prove they were the best in the (burial) business... and in the process, created a situation where the best of their industry could demonstrate their passion, integrity, and expertise, in the hopes of attracting new people (as the Hungarian Undertakers Association is struggling with their own shortage of young talent!). By analogy, this suggests that the financial services industry needs to come up with an opportunity to showcase the best of what financial advice has to offer - a role that our industry associations could/should collaborate on - and stop accepting the financial advisor's role as the evil and greedy stereotype portrayed in TV and movies.
Watch Your Tongue: Terms That Help — And Hurt — The Planning Profession (Bob Veres, Financial Planning) - Both consumers and the media still regularly confuse professional financial planners with the broader financial services industry and salespeople from brokerage firms, which Veres suggests is driven in part by our 'loose' use of important terms and labels. For instance, when we talk about the people who provide professional investment advice and financial planning, they should be referred to as "the profession", separate from the broader "industry" that includes product manufacturers, broker-dealers, and Wall Street firms (just as we separate doctors as professionals from the broader medical industry that includes drug manufacturers). Similarly, we should recognize that the consumers who work with professionals are clients, not "customers", as the latter is the merely the descriptor of someone who buys a transactional product. And we almost must be clear even when we talk about "fiduciary" duty, which fiduciary we're talking about, as the DoL fiduciary rule is actually stricter than the SEC's disclosure-is-enough fiduciary approach (which in turn is still more strident that what some industry organizations like SIFMA have advocated for as being "fiduciary"). But perhaps most important is simply to be clear about distinguishing the label "financial advisor" from those who are brokers and insurance agents, as the media in particular still carelessly refers to Wall Street brokers as "advisors" even when they're not subject to an advisor's fiduciary obligation to clients. Of course, it's challenging to regain control of terms that have been abused and misused in the common lexicon - especially when there are competing firms who benefit from the obfuscation around clear definitions - but as Veres notes, if we as professionals can't get clear about our own terminology, what hope does the media or average consumer have?
The DOL Standards Are Coming! Get On Board (Richard Wagner, Financial Advisor) - While critics have predicted the DoL fiduciary rule will bring disaster, Wagner suggests that it's impossible to conceive of financial planning's emergence as an authentic profession without no-nonsense fiduciary standards; in other words, an authentic profession requires a clear distinction between legitimate client-centric professionals and company salespeople. And while there has been much angst about how the fiduciary rule will be implemented, the essence remains rather straightforward: a fiduciary is an individual possessing superior knowledge and power about certain matters, who freely accepts the reliance, trust, and confidence of someone less knowledgeable, and therefore must be held accountable in that uneven relationship to act in the client's best interests. Accordingly, the DoL fiduciary rule should be welcomed by the profession, not feared, as it will force those who hold out as advisors to truly be accountable as such, rendering a more even playing field and a clearer landscape for consumers. Though ultimately, Wagner points out that if financial planners use the new fiduciary rule simply to double-down on profitably serving the top 10% higher net worth clientele, financial planning may still not truly emerge as a profession, as that requires also figuring out ways to work on behalf of the bottom 90%, too.
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.