Enjoy the current installment of “weekend reading for financial planners” – this week’s reading kicks off with a new lawsuit against the CFP Board, brought by an advisor who was sanctioned for improper use of the “fee only” term and is now trying to take the CFP Board to court to clear the record. There are also two notable articles about changes in the space for new advisor business models and online advice startups, as LPL pulls the plug on NestWise, but a number of new online investment platforms are gearing up to debut later this year and in early 2014.
From there, we have several articles about social media and technology, including a great profile of three advisors who are using social media successfully to drive new clients to their firms, a look at how large broker-dealer firms are starting to open up to using social media and challenge the RIA early adopters, and an intriguing focus group study that found despite Gen X and Gen Y use of technology that they still show a strong preference to have a real human being from their financial services firm that they can interact with and get personalized advice from.
There are also a few technical articles this week, including a discussion of the IRS announcement to allow same-sex married couples to file joint tax returns (regardless of whether their current state of residence recognizes the marriage), some proposed regulations from the IRS on how the small business health insurance premium tax credit will work beginning in 2014, and a look at the new “navigators” being funded under the Affordable Care Act to help people navigate the health insurance exchanges.
We wrap up with three interesting final articles: the first is from Bob Veres, who suggests that perhaps advisors need to do more to help clients avoid dwelling on the potential worst-case scenarios that leave a tremendous opportunity cost on the table; the second looks at how despite the popularity of the concept, the “wisdom of crowds” is not really as robust as it’s made out to be, and in fact can be highly susceptible to herding when people know what others are thinking and doing (e.g., as is true in the case of markets!); and the last is from the blog of Rick Ferri, and explores the idea of a “stewardship” standard, the potential next step proposed by Don Trone beyond the fiduciary standard. 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 August 31st/September 1st:
Florida Advisers Sue CFP Board – In the news today, a Florida advisor and his wife, both CFP certificants, are suing the CFP Board over a disciplinary case brought against them regarding their compensation disclosures. The incident began in March of 2011, when the CFP Board received a complaint that the couple was describing their compensation under Camarda Wealth Advisory Group as “fee only” even though they also owned a commission-based insurance agency called Camarda Consultants. Under the CFP Board’s rules, advisors who are entitled to receive commissions from a related party (including a commission-based entity they also own) are not permitted to call themselves “fee-only” and must describe their compensation as “commissions and fees” instead. The Camardas received a letter of public admonition in March of 2012 for misrepresenting their compensation, which they appealed but the CFP Board appeals panel also ruled against them, so the Camardas are suing the CFP Board in court to block the public admonishment (though they are not otherwise seeking damages). The Camardas claim that the CFP Board did not consider that Camarda Advisors and Camarda Consultants were separate entities, did not look to whether any clients had actually been misled, and that there was no evidence of any form of revenue-sharing arrangements between the firms.
LPL Shuts NestWise Startup – This week LPL Financial announced that it was shutting down NestWise just 16 months after it was established when LPL acquired Veritat; the unit was intended to offer services to middle-class investors through a combination of monthly retainers and AUM fees. The decision to close NestWise appears to have been driven by a combination of LPL’s strategic shift to reallocate resources – NestWise had nearly 40 staff members – to other parts of the company supporting its existing advisor base, and also the fact that NestWise was not meeting expectations for growth (its Form ADV from last year indicated 120 clients and $130,000 in assets, though those details are very outdated given that the company was only in existence a few months when the stats were filed). In the meantime, NestWise’s chief execute Esther Stearns has iterated her commitment to serving this segment, which also includes LearnVest and Edelman Online amongst its competitors, and notably the current NestWise homepage indicates that the closure is not necessarily a failure of the NestWise concept but simply a shift in strategic priorities from parent company LPL. Whether Stearns will reinitiate the effort at another company remains to be seen; she has stated that she has no specific plans at this time.
Advisor Threat? Wave Of New Online Services Incoming – From Financial Planning magazine, reporter Charlie Paikert looks at a new wave of online-only advice platforms getting ready to launch for consumers soon. In fact, platforms that will offer account aggregation and algorithmic portfolio construction advice have raised $70 million in venture capital since the beginning of the year, and firms that offer broader online personal financial advice and/or some actual advisor services have raised a whopping $215 million in venture funds this year (either as new startups or additional funding for existing startups like LearnVest and Wealthfront). Some of the new names include Financial Guard, which currently provides advice and recommendations to employees on their 401(k) portfolios but will soon roll out an online service for consumers that aggregates client accounts and analyzes their mutual funds and ETFs for $16/month. Another platform called JemStep, which launched earlier this year, offers similar services and already tracks $2B of assets aggregated on its platform. Other offerings coming soon include Quovo, an analytical service for large sophisticated investors (e.g., family offices, small foundations) that will expand to consumers next year, and NestEgg Wealth that aims to launch an online wealth management service focusing on retirement and portfolio optimization in 2014; these new offerings will compete with some existing platforms like SigFig and FutureAdvisor. Yet the reality is that not all of these high-tech offerings are succeeding; BloombergBlack shut down abruptly earlier this year, and LPL pulled the plug on its mass market offering NestWise this week. Advisors quoted in the article suggest that the greatest threat may not be to comprehensive financial advisors, but simply to those that are charging too much for delivering only investment management; while online services WebMD and TurboTax have had an impact, not everything fits into an algorithm, which is why doctors and accountants are still around. At the same time, it will be crucial for even comprehensive advisors to continue to improve their technology infrastructure to survive and thrive.
Turning ‘Friends’ Into Clients – From Investment News, this article takes a deep dive into the stories of three financial advisors who are using social media successfully to gain clients and grow their businesses. First up isBrittney Castro of Financially Wise Women, whose goal was to get people (specifically, professional women in their 30s and 40s) to subscribe to her blog’s email list and once they did, start talking to them about financial planning… two years later, Castro is bringing in an average of four new client inquiries every week which is turning into four new clients every month from her efforts, which now include web videos, tweeting, and will soon introduce a podcast. Castro found that to reach her target audience, Facebook was the best channel, and as a result she focuses her efforts there, while notably doing very little on LinkedIn and only using Twitter primarily as a tool to network with other professionals and the media. Advisor Jude Boudreaux has focused his new marketing efforts more directly on Twitter, which he uses to grow his presence in his local (New Orleans) community, slowly building connections and relationships that turn into clients. Boudreaux notes that the most important issue in the context of Twitter is not to be too salesly; he has 19 interactions about other topics for every one tweet he makes related to his business. The third advisor, Sophia Bera, has also been active on Twitter, noting that it has turned into in-person relationships, connections to a blog for which she now writes, speaking opportunities, and often digital communication (e.g., Twitter) turns into deeper digital communication (e.g., Skype chats). Bera also emphasizes that social media and Skype allow her to be less focused on a prospective client’s location, allowing her the ability to work with clients anywhere.
Brokerages Charging Into Social Media – This article from Investment News looks at how the social media landscape is beginning to shift, as independent broker-dealers and wirehouses are increasingly starting to adopt social media tools and strategies. Thus far, social media has been used more actively by independent RIAs, due to some combination of their greater flexibility to explore new technology and that FINRA regulations have been more restrictive (or at least, have been interpreted as being more restrictive by broker-dealer compliance departments). Yet as social media monitoring tools have begun to roll out to large firms, they are getting more comfortable with meeting their compliance burdens (albeit at a greater cost to afford the requisite archiving software), and there is slightly more freedom across brokerage firms to use social media. Yet the real story is that the next wave of social media tools emerging go beyond just archiving and monitoring, and into the realm of integrating social media selling, marketing, and analytics tools, with Actiance, Hearsay Social, and Socialware all rolling out solutions, and RegEd working on one that will be available soon. Overall, adoption of social media amongst large firms is broadening as well, and what in the past was required to be pre-written, preapproved posts is now increasingly flexible at many firms.
Generations X and Y Prefer Old-Fashioned Service – Notwithstanding all the focus on working with younger clients and leveraging technology, an interesting focus group study from corporate anthropologist Andrea Simon finds that affluent Gen X and Y clients ultimately still want personalized service and active guidance from their financial institutions. In a world where bank and brokerage executives are focusing on attracting Gen X and Gen Y with integrated technology, online financial games, and social networks that allows customers to compare financial decisions and give rewards, most of the focus group found these concepts uninviting, and instead focused primarily on the frustration that with so much technology, it’s extremely difficult to actually reach a person who knew their name and account information and could just answer their questions. The underlying point of the study: while there’s still plenty of room for banks to experiment with technological bells and whistles, doing it to the exclusion of individual attention and personal relationships will not succeed. While the research was applied in the context of bank and brokerage firms, it arguably makes a strong case for why individual financial planners still have a lot of room to succeed in an increasingly technology-driven world.
IRS Grants Same-Sex Married Couples Equal Federal Tax Filing Status – The big news in the tax world this week was the announcement by the Treasury and the issuance of Revenue Ruling 2013-17, which declares that same-sex couples that were legally married will be permitted to file a joint tax return, regardless of whether they currently reside in a state that recognizes the marriage, resolving a key point of uncertainty that has loomed since the Supreme Court struck down a key provision of the Defense of Marriage Act on June 26th. The new joint treatment will apply for couples who had gotten extensions on their 2012 tax returns (as those aren’t due until October 15th), and for all such married couples in 2013. In fact, same-sex married couples will now be required to file jointly for 2013, or file as married filing separately. The new ruling also clarifies the situation for same-sex married couples who have been considering filing amended tax returns for the 2010, 2011, and 2012 tax years (within the statute of limitations) or amended gift and estate tax returns (as the new ruling applies for gift and estate scenarios as well). Going forward, same-sex married couples will now be assured that they will be eligible for Federal income and estate tax treatment as a married couple, regardless of whether they relocate to a state that does not recognize their marriage, though notably states themselves are still permitted to not recognize a same-sex marriage for the purposes of their own state income and estate tax laws.
Proposed Small Employers’ Health Insurance Premium Tax Credit Rules Issued – Also out from the IRS this past week were proposed regulations clarifying how the Small Business Health Insurance Premium Tax Credit will work beginning in 2014. First effective under the Affordable Care Act in 2010, this small business tax credit applies for companies with 25 or fewer employees who have average annual wages of $50,000 or less (not including compensation of owners, partners, and more-than-2% shareholders of S corporations) and offers a credit of up to 35% of premium contributions (25% in the case of tax-exempt organizations) made on behalf of employees (as long as the employer funds at least 50% of the premium cost). Although these rules have already been in place for several years, they shift beginning in 2014, as the credit increases to 50% for small businesses (35% for tax-exempt organizations), but going forward companies must purchase coverage on the Small Business Health Options Program (SHOP) exchange in order to qualify for the credit, and beginning in 2014 there will be a two-year limit on how long the credit can be claimed (i.e., businesses eligible for the credit will remain eligible for 2014 and 2015 but no longer after that, and in the future new businesses that become eligible will be able to claim the credit twice). Some transitional rules will apply for employers with health plans that do not renew on a calendar year basis to coincide with the launch of the SHOP exchanges at the beginning of 2014.
Who Are Obamacare Navigators And Will They Steal Your Identity? – On her Forbes blog, financial planner Carolyn McClanahan discusses the role of “navigators,” created under the Affordable Care Act to help consumers make decisions about health insurance and navigate the new insurance exchanges. Navigators will assist people in determining whether they’re eligible for premium assistance tax credits, if they may be eligible for Medicaid, whether coverage provided by an employer is “affordable” under the law, and more. While not everyone will need the help of a navigator – most will simply obtain insurance through their employer, via Medicare, or using the online health insurance exchange websites – legislators recognized that some people may need further assistance, and the navigators are intended to fill that void. The issue that has arisen with navigators, though, is that in order to help people sign up for coverage, navigators will need to know the number of people in the family, their income levels, and their other sources of health insurance coverage, which has raised concern about whether navigators may use this personal information inappropriately. Yet McClanahan notes that Section 4302 of the Affordable Care Act applies the same requirements to navigator information as are applied to HIPAA, the highly stringent privacy and data protection rules that apply for all medical information, including a $25,000 fine for improper use (and of course identity theft itself is a Federal crime). In addition, McClanahan notes that in reality, the navigators will only be asking about family size, income, and employment information, which is actually less invasive than the questions health insurance companies currently ask about personal medical and health information (which isn’t used for the new health insurance policies on the exchanges).
The Price Clients Pay for Worst-Case Forecasts – In Advisor Perspectives, Bob Veres makes the interesting point that as clients and the world at large give inordinate attention to downside scenarios, from cascading debt crises to spiraling inflation to tax burdens and economic malaise, perhaps planners are spending too much time catering to client concerns about media-driven negativity instead of functioning to counteract it and help clients avoid the huge opportunity costs of not participating in a world that is actually humming along just fine. Interviewing Dennis Stearns – a financial planner who happens to be an expert in scenario planning as well – the article makes the point that the future ultimately really is more opportunity than risks, but the risks are what the media magnifies. Thus, the Japanese tsunami was feared to disrupt global supply chains, yet in reality is that just a little speed bump; the 2005 Asian bird flu scare was predicted to potentially trigger a 1930s-style collapse, yet nothing of the sort actually happened. Looking back further, Stearns notes that despite the real catastrophes that have occurred – the American Civil War, the Russian Revolution, China’s purges, economic upheavals, the 1918 flu epidemic, two world wars, and more… the population of the world has grown six-fold, average life expectancy has doubled, and real income over inflation has multiplied over 9 times. So how can planners look at the future more optimistically, or at least more realistically? Stearns provides an interesting look at how the energy scarcity picture could soon change, how a technology multiplier may soon create dramatic increases in productivity, and nanotechnology that may soon revolutionize medicine (and drastically reduce healthcare testing costs). Ultimately, Stearns makes two key points: first, that clients (and sometimes their advisors) too caught up in the negativity may drastically underweight equities and risk assets and leave a lot of opportunity on the table; and second, that advisors in the future will need to become more skilled at counteracting this 24/7 negativism to help keep clients on track.
Sometimes 1,000 Heads Aren’t Better Than One – This article by Cass Sunstein looks at the research on “the wisdom of crowds” – the idea that if you aggregate the knowledge of a lot of people, you can come up with some remarkably accurate answers on average, even if the guesses of the individual participants aren’t very accurate. The concept of crowd wisdom has been recognized as being highly influential in the context of markets, with an explosion of “prediction markets” where the crowds place their investments (i.e., “bets”) on the likelihood of various outcomes, and some research has supported than when prices suggest events are likely to occur with a 90% (or 80% or whatever) probability, they really do seem to occur 90% (or 80% or whatever) of the time. Aggregating large numbers of predictions was also a heavy component of the process Nate Silver used in his successful efforts to predict the outcome of the 2012 elections state by state. Yet Sunstein notes that there is a crucial caveat to the “wisdom of crowds” rule – it turns out that crowds may have much less wisdom when their members are listening to one another. Suddenly, the guesses become less predictive and more like herding behaviors that can reflect serious biases. In fact, with herding, remarkably small nudges can have a material impact. For instance, in one study, researchers found that when “the wisdom of crowds” is used to cull the comments on news articles, a single initial up-vote or down-vote materially impacted the outcome, leading to a 32% increase in the likelihood that the first viewer would also upvote the comment, and an artificial increase in the average rating of comments by a whopping 25% after 5 months (notably, downvote impact was not as sustained and tended to recover). The conclusion of the researchers was that positive social influence accumulates and can create a tendency towards ratings bubbles, while negative social influence tends to be neutralized by crowd correction. While not applied in the context of markets, the parallels about the potential lack of crowd wisdom seem striking.
Beyond The Fiduciary Standard – From the blog of Rick Ferri, this article makes the point that while we can differentiate between a suitability standard and a fiduciary standard for advisors, there is another, third tier of standards beyond fiduciary, which Ferri (adopting a term from Don Trone of 3ethos) labels as a “stewardship” standard. The basic concept is that while suitability is about having a reasonable basis to believe a recommendation is “suitable” (or at least, that’s it NOT UNsuitable), and a fiduciary standard requires acting in a client’s interests under the legal letter of the law, a stewardship standard is about acting within the higher moral principles of serving and benefiting others. Ferri provides a series of examples of advisors who might be fiduciaries under the regulatory letter of the law, but not its stewardship principle – from advisors who use actively managed strategies but don’t clearly disclose how much they’re underperforming, to those who charge 1% AUM fees to “manage” a passive portfolio that could be obtained for far less (ostensibly without providing any other value-adds), to trustees of public pension funds who change performance benchmarks to muddle subpar returns. The fundamental point – ultimately, even being regulated as a fiduciary may not be enough, or alternatively those who truly act on the principles of serving their clients’ interests (not just the letter of the law) may wish to consider talking about themselves not just as fiduciaries, but stewards.
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. You can see below his new Bits & Bytes weekly video update on the latest tech news and developments, or read “FPPad Bits And Bytes” on his blog!
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!