Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with the news that the IRS has issued new regulations to provide additional guidance on the Section 199A “pass-through business deduction”, with a particular focus on cracking down on professional services firms (which includes financial advisory firms) to prevent them from abusing potential “loopholes”, like cracking up their businesses into pieces that might have been eligible for the deduction.
Also in the news this week is a discussion that RIA custodians are considering whether to adopt a new pricing model of offering custody services for a basis point charge, rather than just trying to make money on the underlying products that clients implement… in what would be a very positive realignment of the costs that advisors and their clients pay with the value that custodians provide, but could be challenging to transition to the currently-less-transparent “free” model of custody for advisors.
From there, we have several retirement-related articles this week, including research on the kinds of words and images that consumers use to describe retirement (which importantly but not surprisingly varies depending on their own demographics and background), tips to prevent loneliness in retirement for new retirees who often unwittingly become very socially isolated, why more and more retirees are looking for “phased retirement” approaches that blend part-time work with retirement, and the real-world difficulties that many older workers are facing in actually finding meaningful part-time work in retirement.
We also have a few practice management articles, from a fascinating study about what next generation advisors really want in a financial planning job (with 78% wanting to do comprehensive financial planning, but only 2% showing interest in sales and marketing!), how to speed up training for next generation advisors by becoming a more effective mentor, and the rising demand of next generation advisors for family leave policies given that more and more are launching their financial planning careers while also starting a family.
We wrap up with three interesting articles, all around the value of reading itself to advance our knowledge and skills: the first explores the physiology of the brain and how reading literally helps the brain form new connections that can improve our fluid intelligence and ability to spot important patterns; the second looks at the important balance between both book knowledge and real-world knowledge (as book knowledge alone misses real-world applications, but real-world knowledge alone misses important patterns and opportunities that aren’t necessarily intuitive); and the last is a series of four “summer reading” book suggestions on the leading industry books that are most relevant to financial advisors today.
Enjoy the “light” reading!
IRS Provides Guidance On Pass-Through Deduction And Targets Loopholes (Lynnley Browning & Ben Steverman, Bloomberg) – This week, the IRS published long-awaited regulations on the new Section 199A pass-through business deduction that was created last December by the Tax Cuts and Jobs Act, with a particular focus on limiting potential “loopholes” like the so-called “crack and pack” strategy for service businesses that are otherwise limited from claiming the deduction once income exceeds $207,500 (for singles, or $415,000 for married couples). The essence of the crack-and-pack strategy was to split a professional services firm into a subset of different entities to compartmentalize them and allow at least some portions of the business to benefit from the pass-through deduction (e.g., by splitting off secretarial and administrative staff into a separate company eligible for the pass-through deduction that would then lease employees back to the original professional services firm). The proposed regulations also provide additional clarity about what constitutes a “specified service business” subject to the most stringent phaseout of the deduction, including notably that insurance agents and brokers are not subject to the limitation but securities brokers are, and small businesses (under $25M of revenue) without only a small portion of specified service income may avoid the caps as well. (Michael’s Note: Stay tuned for a full-length analysis of the new Section 199A regulations here on Nerd’s Eye View in the coming weeks!)
Custodians Ponder Charging RIAs Asset-Based Fees (Jeff Benjamin, Investment News) – For the past 20 years of the rapid growth of the RIA channel, the RIA custodians that serve them have increasingly offered more and more technology capabilities in exchange for generating profits from advisors’ clients through a combination of money market spreads, trading commissions, and back-end shelf-space and servicing agreements with asset managers and fund providers (e.g., 12b-1 and/or sub-TA fees). The virtue of this model is that RIA firms effectively get custody services “for free”, in exchange for the opportunity of the RIA custodians to make money directly from RIAs’ clients. The problem with the arrangement is that it increasingly misaligns the costs and value of RIA custodians from their pricing model. As a result, RIA custodians are now reportedly considering whether to start charging a basis point custody fee instead – not necessarily to increase costs (as the fee could simply be set at the same level as what custodians already earn as a percentage of assets on platform), but simply to better align their incentives with the RIAs they serve. After all, the RIA model itself has succeeded in large part on the effective alignment of interests it creates with its clients, along with increased transparency and reduced conflicts of interest… even as the RIA custodians that serve those RIAs and their clients maintain the “old” conflicted transactional model. In fact, a notable benefit of the approach is that, relieved of the need to make profits on underlying products, RIA custodians might be able to offer lower-cost mutual funds and ETFs, along with significantly higher yielding money market or cash sweep options. The caveat, however, is that the most diligent advisory firms that were already efficient at “gaming” the existing system to minimize costs to clients (and minimize profits to their RIA custodians) may be at most risk for a fee increase (since their efficiencies already made them below-average-profitability firms for their custodians), which means RIA custodians may have painted themselves into a corner in figuring out how to make the shift in a manner that gets buy-in from their leading firms to go along with the change.
Describing Life After Career: Demographic Differences In The Language & Imagery Of Retirement (Chaiwoo Lee & Joseph Coughlin, Journal of Financial Planning) – The very concept of “retirement” is different for different people, often a combination of both our own backgrounds (and what we saw as “retirement” in our own families and communities), and an expression of our own hopes and desires once we reach the point of financial independence from needing to work. To evaluate this, Lee and Coughlin asked nearly 1,000 consumers to share the words that they think of and associate with retirement, and evaluated how positive and negative they were, and the values they espoused. And perhaps not surprisingly, the researchers did in fact find that not everyone approaches retirement with the same positive attitude that conventional marketing about retirement would suggest. In particular, those with lower socioeconomic status (especially those with household income under $25,000/year) were less likely to be positive about retirement, as were single individuals (as opposed to those who are married). Different groups also used different types of words to describe retirement – in particular, older individuals (and also single individuals, and those in rural areas) were more likely to talk about the physical aspects of retirement (e.g., being healthy or not) as opposed to financial, emotional, or social values. Other notable results included: when thinking about life after career, higher-income and married individuals were more likely to have positive thoughts about retirement, younger individuals were more likely to be focused on financial issues but older generations were more focused on the social (family/friend) dynamics of retirement and more focused on travel and hobbies, women and lower-income individuals had more emotional imagery of retirement, and while an interest in retirement travel was more likely to be associated with older and higher-income individuals, those were the groups least likely to express interest in the conventional view of retirement on the beach/at the ocean!
Four Ways To Prevent Loneliness From Wrecking Your Retirement (Chris Taylor, Reuters) – Last month, a study from Cigna health services found that nearly half of Americans report feeling lonely sometimes or always, a situation that is especially concerning for retirees, where there is often less social interaction and greater risk of isolation without a job to go to every day. And given that loneliness can also lead to substantial health complications – with one study finding that “loneliness is comparable to smoking 15 cigarettes a day” – it’s increasingly important to have to a plan about how to combat loneliness in retirement. Potential options include: moving to a retirement community (not just to have other seniors as neighbors, but because many have various group activities scheduled nearly every hour of every day, providing ample options to connect socially and reduce loneliness); volunteering, which not only expands social circles and maintains engagement, but research shows volunteerism has an even greater positive impact on well-being than factors like income, education, or marriage; creating your own “social checks and balances” by proactively expanding your social circles locally (e.g., childhood friends, extended family, volunteering friends, church friends, etc.), which also helps to cut down on the risk of senior financial abuse; and simply choosing to keep working despite being able to retire, which not only maintains your social circles at work, but helps to keep the brain active, and can go a long way towards easing the financial transition into retirement anyway!
Is Meaningful Part-Time Work In Retirement A Myth? (Gail Marks-Jarvis, Reuters) – While more and more baby boomers are expressing an interesting in a phased retirement and finding part-time “meaningful” work, many are struggling to actually find those job opportunities when the time comes. In fact, despite the popularity of books like “Do What You Love and the Money Will Follow“, in practice, a 2017 GAO study found only 11% of those aged 61 to 66 actually found part-time jobs as they transitioned into retirement, as the number of employers offered phased retirement options has essentially remained flat for a decade. Nonetheless, it’s worth asking anyway, especially since (ironically) the demand of even Millennials to have more flexible work schedules is forcing employers to figure out how to handle part-time workers more effectively anyway (a major logistical challenge to supporting phased retirees). On the other hand, sometimes the best approach to part-time work in retirement is to assume it will be temporary – encouraging prospective retirees to anticipate consulting or other short-term gigs that will change over time. Or alternatively, just start an “encore business” instead, as for those who are ready and able to overcome the start-up costs and challenge of attracting new/initial customers, it may be easier to start your own new job in retirement than find one.
How To Blend Work And Retirement (Mark Miller, Morningstar) – For some workers, especially in professional services, there may be a desire to not completely retire at 60-something, and instead continue to work at least part-time in fulfilling work. The challenge, however, is that corporate restructurings often lay off the most costly (and often most-tenured and oldest) employees, who may have difficulty finding a new role; and more generally, many older workers report more difficulty finding work as companies themselves have hesitancy to hire older workers they believe may not stick around for long. To help fill the void, services like Flex Professionals, YourEncore, RetirementJobs, RetiredBrains, and more, are cropping up specifically to help match experienced professional workers with companies that need at least part-time help. Which is important because, for many workers at least approaching retirement, part-time work is often more than sufficient both to find personal challenge and fulfillment (especially once turning age 65 when Medicare becomes available and health insurance is no longer a concern), not to mention a non-trivial amount of extra income that may itself be crucial to making retirement “work”. In fact, a recent Transamerica Center for Retirement Studies report found that a whopping 64% of workers (of all ages) would prefer a phased retirement of continued work with reduced hours (with as many reporting the goal simply out of a desire to “stay involved” as those with outright “financial need”). Still, with few large firms currently offering phased retirement options, workers increasingly have to negotiate and navigate the pathway for themselves – an area where financial advisors may be especially helpful as a coach and navigator, and which is becoming increasingly feasible anyway in a tight labor market where firms are getting more flexible in order to attract and retain talent.
What’s Really Important To New Advisors (Angie Herbers, Investment Adviser) – Advisory firms often struggle to hire next-generation advisors, so Herbers conducted a “Financial Services Job Candidate Survey” to better understand what real job seekers actually want. And the results from over 300 job seekers who have applied for advisory firm opportunities with New Planner Recruiting show that 78% of respondents are primarily interested in comprehensive financial planning… while only 2% want anything to do with sales and marketing. In addition, only 51% of those who wanted to do financial planning actually want to do it directly with clients; of the remainder, 21% would prefer to “help clients behind the scenes” and 23% want to “help manage the business” of advice. These distinctions are important, as it means there’s even more pressure on advisory firms to ensure they’re hiring the right candidates for the right track in their firms. Though, at this point, candidates appear to be struggling with even knowing what realistic expectations are for client work, with 51% stating that they believed they’re already ready to work with clients now (for context, 51% already had 4+ years of experience as well), while 34% stated it would be another 1-2 years, and 16% anticipated 3 or more years. In terms of what job seekers actually want, though, Herbers found that the most important factor was actually the firm’s culture (64%) and how clients are served (61%), while 53% cared about a career track for advancement, only 44% wanted a flexible work schedule, and only 24% cared about employee benefits. In other words, job seekers are more focused on what their time in the office will be like, and their career trajectory, than immediate rewards. Other notable findings included: “only” 52% of job seekers wanted $65,000/year or more (the current average rate for young advisors); for those who cared about employee benefits, “flexible” hours was the most important (which even beat retirement savings and medical insurance); and only 20% stated that compensation was the top reason they’d leave an advisory firm (while culture and how clients were being served ranked far higher).
How To Speed Up The Training Of New Advisors (Caleb Brown, ThinkAdvisor) – As a recruiter of next-generation financial advisors, Brown finds that one of the most common things that new advisors seek from entry-level advisory firm job opportunities is mentorship. The good news of this desire is that it signals an intent from next-generation advisors to gain more knowledge, wisdom, and experience from veteran advisors, and is an implicit acknowledgment that they realize there is much left to learn. The bad news, however, is that few advisory firms are actually structured with formal mentoring or other training programs. For those that want to try, though, Brown offers several suggestions on how to better mentor next-generation advisors, including: share the good, bad, and ugly of your own career, as it’s a good way to both make them aware of the rewards and opportunities but also recognize the real challenges and difficulties they will face; show a genuine interest in their career and life outside of work (as employees are more likely to go the extra mile for you when they know that you care); listen to employees/mentees the way you listen to clients (because the reality is that everyone wants to be heard and understood!); and be ready to invest some time, as good mentoring does take time… but the good news is that a successfully mentored advisor who can grow and develop in the business will ultimately save your far more time than the initial mentoring will cost you!
Millennial Advisors Want Family Leave But Are RIAs Ready To Offer It? (Andrew Welsch, Financial Planning) – As financial advisory firms try to become more gender-diversified, and more generally to attract Millennial talent at a time when they’re most likely to be starting a family, the employee benefit of “family leave” is becoming an increasingly hot topic. And, ironically, the situation is becoming even more challenging as advisors shift to independent RIA and broker-dealer channels that are less likely to have any kind of family leave options (as the advisors work for themselves, and the higher payouts in independent channels occur in part because their parent firms/platforms don’t provide such employee benefits), even as wirehouses like Merrill Lynch have reportedly been expanding their family leave/maternity benefits (up to 16 weeks of paid leave and an additional 10 weeks of unpaid leave). Unfortunately, there’s no good data on the availability of such benefits at independent firms, but nationally only 15% of all U.S. workers have access to paid leave, which for small businesses often isn’t just a cost issue but a logistics issue of how to manage the work of employees while they’re gone for extended periods of time. On the plus side, the increasing shift of advisory firms large and small towards team-based models will make it easier over time to handle the logistical challenges of employee time off… ostensibly making family leave policies more likely to become available in independent firms in the coming years?
Your Brain On Reading: Why Your Brain Needs You To Read Every Day (Thomas Oppong, The Startup) – Reading is to the mind what exercise is to the body, helping your brain to make new connections, which in turn sparks more ideas and growth and change. And the analogy isn’t just metaphorical; brain research finds that it really is our brain’s ability to make new connections and restructure that makes it possible for us to read and understand (turning abstract symbols on a page into words and concepts we can understand). In fact, research finds that reading not only increases our fluid intelligence (i.e., our ability to solve problems, understand things, and detect patterns), but also our emotional intelligence (especially when reading fiction books, as the process of mentally imagining the situation improves emotional awareness and empathy), and reading facilitates its own improvements in reading comprehension and concentration (as reading a book that captures your attention actually helps to hone your focused attention span). Which is why reading is such a valuable and important habit for continuous improvement!
Real World Vs. Book Knowledge (Morgan Housel, Collaborative Fund) – Archibald Hill won a Nobel Prize for his discovery that the human body has physiological limitations that can predict our maximum expenditure of energy and physical performance in sports events; yet ironically, in practice, those models of human capability do a poor job at actually predicting which athlete will won any particular sports competition, because especially at the top levels of competition, sports is a mental game as much as a physical one, and our brains limit our output in most situations to keep us safe but relax those limits when the stakes are high (thus the crazy stories about people lifting up cars when someone’s life is in jeopardy). Or stated more simply, there’s “book knowledge” about how things should work, and real-world knowledge about how things actually work (or can be anticipated to work). Which is important, because knowledge of both is necessary for optimal outcomes; book knowledge is valuable because it helps give us a framework to identify and understand patterns that might not be intuitively obvious, while real-world knowledge is our brains identifying phenomena that is more nuanced or that book knowledge hasn’t figured out yet. These lessons are relevant in the financial domain in particular, as book knowledge may tell you that more volatile higher-risk assets produce greater returns but not how you will handle your spouse’s glare when you lose half the retirement fund in a bear market, while real-world knowledge alone may miss that long periods of market stability aren’t necessarily a positive for long-term growth and can actually lead to the complacency that precipitates the next disaster. So how should the two be balanced? Housel offers several suggestions, including the importance of learning the rules but then spending as much time observing how people use and abuse those rules (to understand where book knowledge will likely go astray), and reading outside your field to gain better perspective that may be missed within the narrow domain of book knowledge in your studied field alone.
Four Books That Will Change Your Professional Life As A Financial Advisor (Bob Veres, Advisor Perspectives) – While there’s a wide range of popular new fiction books and business books, sometimes the best way to advance knowledge is a deep read of a new book specific to the profession of financial planning. Accordingly, Veres suggests his top four industry books for (late) summer reading, including: Successful Hiring for Financial Planners by Caleb Brown, which is a deep dive into how to attract and retain talent in your advisory firm (especially when hiring ‘next-generation’ talent with college degrees in financial planning), which now necessitates far more than just posting a job listing to be competitive; G2: Building The Next Generation by Philip Palaveev, designed to both help advisory firm owners better understand how to develop their next-generation leaders and formulate an effective career track, and serves as a handbook for next-generation “G2” advisors about how to succeed on the track to partnership and put themselves in the best position to succeed; Stop Asking For Referrals by Steve Wershing, which challenges the conventional approach of saying “I get paid in two ways… the fees you pay, and the new business you refer to me…” and instead advocates that the best way to get more referrals is to make yourself more referrable in the first place by identifying the problems you solve (so when someone says they have that problem, your clients and centers of influence naturally think of you as the solution!); and The Enduring Advisory Firm by Mark Tibergien and Kim Dellarocca, which delves into how to create a sustainable advisory firm that endures beyond its founding owner(s). (Michael’s Note: For advisors who want additional book recommendations, see our own Summer Reading For Financial Advisors list as well!)
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.
Disclosure: Michael Kitces is a co-founder of New Planner Recruiting, which was mentioned in this article.