Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the interesting news that a growing number of states are trying to limit the use of the terms "certified" or "registered" to only those who are actually certified or registered by a state agency or certifying body... raising the concern that "Certified" Financial Planning professionals might someday be prevented from using the term, and leading the FPA and CFP Board to join a multi-organization coalition called the "Professional Certification Coalition" fighting to differentiate bona fide certification credentials from the rest of the specious designations (in financial services and other industries) that state legislators are really trying to crack down on.
Also in the news this week is a brief look at the recent "FINRA Industry Snapshot" (a first-ever report from FINRA on the state of the brokerage industry, which finds that the number of broker-dealer firms and registered representatives has been declining steadily for 10 years... but revenue and profits continue to grow and hit record highs!), and a discussion of some of the public comment letters that came out earlier this month against the SEC's Regulation Best Interest and new Form CRS proposals (including a stringent objection from a group of 17 state attorneys general that could form the basis of a legal challenge against the rule if the SEC decides to move forward).
From there, we have several advisor technology articles this week, from a look at how "robo" tools aren't replacing advisory firms, but instead are allowing smaller advisory firms to run more efficiently than ever with the use of technology to automate away expensive back-office staff and administrative tasks, to tips on how to conduct third-party vendor due diligence for cybersecurity purposes, and why both advisors and their clients should be talking more about using Password Managers.
We also have a few retirement articles, including: the role that uncertainty (especially sequence of return risk, but also simply the changing nature of our lives over time) has in determining whether portfolios are depleted in retirement or not (which goes far beyond just investing for a sufficient long-term return); perspective on how economists that study lifecycle finance view traditional financial planning topics and strategies differently; and why a goals-based retirement planning approach is very problematic because, in the real world, most people don't actually know what their goals are, and even if they think they do, the goals often change by the time the client gets closer to achieving it!
We wrap up with three interesting articles, all around the importance of habits (both breaking bad habits and improving good ones): the first looks at a number of recent books that highlight the latest research in how we form habits, change habits, and improve our willpower and self control; the second is a fascinating study at how we can improve our own self-confidence in our ability to control our behavior and break our bad habits (by adopting seemingly mindless rituals); and the last is a fascinating look at how even the most brilliant creatives still struggle, often for years, with a vision of what they want to achieve and knowing that their current work isn't up to their own tastes, but that the key is maintaining the habit of continuing to do the work anyway with a focus on self-improvement, and it's the repeated habit of practice combined with the vision of what your work can be that ultimately makes it great and successful!
Enjoy the "light" reading!
CFPs Can't Call Themselves 'Certified' If [Certain] States Get Their Way (Karen Demasters, Financial Advisor) - In recent months, the states of Louisiana and Missouri have been considering legislation that would bar professionals (from any industry) from using the word "certified" or "registered" in their titles unless it was a certification or registration conveyed directly by a state-sanctioned board or agency... which, if passed, would effectively ban "Certified Financial Planner" professionals from holding out as such in those states. The issue has raised concerns for the (non-governmental) certifying bodies and membership associations of many different industries, and has led to the creation of the "Professional Certification Coalition" (formed jointly between the Institute for Credentialing Excellence [ICE] and the National Commission for Certifying Agencies, along with the American Society of Association Executives [ASAE]), and this month the Financial Planning Association (FPA), which has been active in lobbying on this issue on behalf of CFP professionals (and against states that would limit the use of the CFP marks), along with the CFP Board, joined the new Professional Certification Coalition (PCC) on behalf of the financial planning community (along with several dozen other associations in various industries representing their respective professional credentials). The core focus of the PCC is simply to preserve the word "certification" for use by "legitimate" private organizations that confer credentials, recognizing that the intent of the legislation was to limit the use of entirely specious or very low-quality designations and "credentialing" programs, not bona fide accredited organizations. Nonetheless, with a whopping 184 "professional" designations in use amongst financial advisors according to FINRA's website, the fact is that (state) regulators are now getting involved in the rise of specious designations as well... though as with all regulation, the goal (and struggle) is figuring out how to limit bad actors without harming legitimate providers (for which the PCC hopes to advocate a reasonable path forward).
Brokerage Industry Profits Soar Despite Drop In Firms And Headcount (Lee Conrad & Tobias Salinger, Financial Planning) - For the first time ever, FINRA has published its own version of a 2018 "Industry Snapshot" of what's happening in the world of broker-dealers, as the organization that regulates them (and ostensibly has the best data on them). Overall, the FINRA Industry Snapshot shows that the number of registered representatives of broker-dealers has fallen by 2% over the past two years, down to 630,132, and is down 7% from a high of 672,688 registered representatives back in 2007, though the number of broker-dealers themselves is declining more rapidly, down to 3,726 firms in 2017 from 4,285 in 2012 (a 13% decline in 5 years), and off more than 25% from 5,012 broker-dealers in 2007. Notwithstanding the declining firm count and headcount, though, the FINRA snapshot also shows that top-line revenue amongst broker-dealers rose a solid 14% industry-wide to $309B in 2017, up from just $271B in 2015, and that margins are actually improving, as expenses rose "just" 9% (leading to a 69% increase in pretax net income to $38B last year). Other notable data points from the FINRA Industry Snapshot included: the number of registered reps who changed firms in the past year was 26,908, a turnover rate of just 4.3%, and down significantly from the 69,000+ who switched firms in 2009 as the financial crises rolled through; 45% of registered representatives with broker-dealers are dually registered with RIAs as well (and only 8% of total registered individuals are RIA-only); and while 90% of all broker-dealers are small firms and only 5% are "large" broker-dealers, 81% of registered reps work for the large firms and only 11% work for small firms (and the rest are mid-sized broker-dealers).
Posse Of Top Cops [State Regulators] From 17 States Dresses Down SEC's Regulation Best Interest Proposal (Keith Girard, RIABiz) - Earlier this month on August 7th, the public comment period for the SEC's proposals on Regulation Best Interest and the new Form CRS closed, and now that "the comments are in," it's possible to go and view all the submissions and see what positions various organizations have taken with respect to the proposed rule. Of particular note was the public comment letter submitted by a coalition of 17 state Attorneys General, citing "egregious" deficiencies to the proposal, particularly that it imposes a "Best Interests" requirement but stops short of actually applying a true fiduciary standard that would require broker-dealers to actually act in their clients' best interests when giving advice, in what is not only a challenge for the SEC to consider (as a public comment letter), but may actually set the groundwork for a legal challenge from the states if the SEC moves forward with the current version of its rule. The state attorney general movement is being led by New York's Attorney General Barbara Underwood, but includes support from state attorneys general ranging from Maine to California, and Minnesota to Hawaii. Similarly, the Investment Adviser Association also raised "significant concerns" that the proposed Form CRS disclosures would exacerbate investor confusion about the differences between broker-dealers and investment advisers. And several organizations and commentators, including yours truly, raised the question of whether broker-dealers should be subject to a fiduciary standard at all, or if the better approach would simply be to reassert the bright line separation between brokers and investment advisers, and require each to use clear titles to convey the difference between sales and advice. Still, though, with authorization under Section 913 of the Dodd-Frank legislation to at least consider a uniform fiduciary standard for brokers and investment advisers, it remains to be seen whether or how the SEC will continue forward with its proposal, and whether it will continue trying to unify the standards for brokers and investment advisers, or simply to more clearly separate them in the future.
Running Leaner And Meaner With Tech (Eric Rasmussen, Financial Advisor) - The rise of the robo-advisor in recent years has raised questions about whether or how much human financial advice may someday be replaced by computers, but in practice the major shift in recent years has been advisors adopting better "robo" technology tools to make their own practices more efficient, increasing the efficiency and scalability of the financial advisor's firm while reducing their need to hire as much back-office support. For instance, the use of scheduling software for client meetings, and then conducting those meetings virtually using video conferencing tools, reduces any need for a front-office receptionist (or having as much office space), while the rise of e-signature tools reduces the need for as much back-office client service administrative staff. Other popular software tools for efficiency, particularly for solo advisors to avoid the need to hire more staff at all, include: secure document sharing tools using a landing page/portal via the firm's website or a full-scale "client vault" to share everything from quarterly reports to automate the aggregation of financial information; portal performance and reporting solutions that include rebalancing tools; and leveraging CRM systems with robust workflow tracking capabilities to ensure all (automated) tasks are on track. Of course, the software tools themselves aren't cheap, but the reality is that the cost of software tools to improve advisor efficiency are still a fraction of the cost of full-time staff members, making software that costs hundreds of dollars but saves the advisor just "minutes a day" still remarkably cost effective and allowing solo and small firm advisors to better compete with larger advisory firms!
Vendor Management And Cybersecurity Compliance For RIAs (Pat Cleary, Alpha Architect) - The Maginot Line was a famous heavily fortified line of nearly 5,000 watchposts that France built in the 1930s across the entire length of its shared eastern border with Germany to discourage the Germans from ever invading directly; the problem, however, was that in the end, the Germans simply sidestepped the Maginot Line by invading France's northeastern neighbor Belgium first, and then turning south to invade France around the edge of the Maginot Line along its unprotected northeastern border instead. The history lesson provides a good metaphor for the most common risk that advisors face in cybersecurity, which is that hackers and thieves today rarely try to conduct a frontal assault on an advisor's main cyber defenses, and instead more commonly try to sidestep that path and attack by more indirect means instead - such as weak points in third-party vendors that advisors use (which similarly was how Home Depot, Target, and Best Buy all experienced their cyber breaches), from financial planning software and account aggregation tools to other portals or vaults that may collect (important and private) client information. The vector of attacking third-party vendors is also appealing for hackers because, if successful, they may be able to get at the client data of multiple advisors all at once, rather than "just" hacking one advisor at a time. In recognition of this growing challenge, a number of regulators (including, likely, the SEC and FINRA in coming years) are placing more scrutiny than ever on advisors' due-diligence processes in evaluating the cybersecurity of their third-party vendors (rather than just their own cybersecurity defenses). The starting point is simply to take a good inventory of all the different systems your advisory firm touches, and which ones actually have particularly sensitive client data (a good starting point to do this is to use FINRA's Small Firm Cybersecurity Checklist), and then begin to do due diligence on each vendor using the SEC's 2015 Cybersecurity Examination Initiative for guidance on what to ask and look for. Except of course mega vendors that you do business with (e.g., Google) may not actually respond to your due diligence requests... for which Cleary suggests checking our FedRamp, a system that multiple Federal agencies use to evaluate their own vendor management cybersecurity, that includes a marketplace of vendors that have already been scrutinized and approved (particularly large vendors like Google and Amazon). In the case of mid-sized vendors, there may be more due diligence to conduct, but such firms have often already done their own homework in preparing for due diligence, and can provide cybersecurity certifications like a completed SOC II audit. When it comes to smaller start-up vendors, though, it may still be necessary to refer back to the aformentioned cybersecurity questionnaires to ask important due diligence questions and ensure that the startup vendor's potential cybersecurity breach doesn't become your problem as well!
The Benefits Of Incorporating Password Management Into Financial Planning (Helen Modly, Morningstar) - In the modern digital world, where more and more of our finances are online, good password management isn't just about protecting your online photos and social media accounts, but a financial planning imperative as well. For which Modly suggests that the best path forward is to get clients to adopt a "password manager" system - a centralized piece of software like LastPass or DashLane that's designed for the sole purpose of securely storing and managing usernames and passwords to various online accounts, and more importantly also aid by automating generating long, random, varied passwords (much, much harder to hack than what individuals typically come up with on their own), and then automatically populating those highly secure passwords into the appropriate website (based on whether you are logged into with the "master" password to your password manager account system). Modern password managers are designed to work across multiple operating systems (mobile and desktop, Mac or PC), and premium versions also make it possible to share login credentials securely with other contacts, which is valuable both for clients to share passwords with family members securely (rather than writing down a password for everyone to use which risks having someone steal the piece of paper), and similarly provides a means for small business owners to let employees have "access" to their accounts without actually giving away their passwords and other login credentials to employees. Modly notes that password managers can also fulfill a client estate planning function, as most password managers have a separate "emergency contact" feature that can be activated as well to allow key family members to gain access in the event of incapacitation (or grant access to an executor in the event of death), or even grant selective access to certain key secured documents online to certain people (e.g., medical records stored online via the password manager can be shared immediately to an emergency contact upon request). And of course, there's simply the time savings of not needing to help clients through the stress and work of remediating an incident of identity theft by having more secure passwords in the first place!
The Critical Factors Of Portfolio Ruin Aren't Predictable (Dirk Cotton, Retirement Cafe) - There has been increasing awareness in recent years to the potential impact that "sequence of returns risk" can have on the sustainability of a retirement portfolio, with a common focus on taking steps to reduce sequence of return risk as a means of reducing the retirees probability of "ruin" (i.e., probability of depleting their retirement assets). However, as Cotton notes, the risks that can cause portfolio ruin go far beyond just the portfolio's market returns and their sequence itself - for instance, how long we expect to live (longevity) is also a key factor, as is what we choose to spend/withdraw, and whether those amounts might changed in expected (e.g., a plan to travel more for a few years and then decrease) or unexpected ways (e.g., health shocks). In fact, because many of those factors will themselves change over time, it means the probability of success or ruin itself is not static but dynamic and changing over time, both due to the path of the portfolio itself (a good start on returns in the early years gets the portfolio far enough ahead that subsequent sequence of return risk is diminished), and changes in our personal/life circumstances and goals/desires that may not have been anticipated in the first place. Still, though, Cotton notes that sequence risk doesn't necessarily ever vanish in full, especially as our spending and longevity factors may change as we age (e.g., we adopt a healthier lifestyle in retirement and now anticipate living longer, or we have a good market return to get ahead but then lift up our spending and are no longer so far "ahead" on a relative basis anymore!). Nonetheless, sequence risk still remains a major driver, albeit one that may have a varying impact depending on where someone is in their retirement time horizon, and whether/how it has changed from the goals and assets that were in place at the start of retirement.
Retirement Insights From Life-Cycle Financial Planning (Joe Tomlinson, Advisor Perspectives) - While most financial advisors learn about financial planning through the CFP Board's curriculum and topic list, traditional economics has its own body of knowledge around financial planning and household personal finance topics, generally known as "life-cycle finance". The foundational concept with the life-cycle economics approach is "consumption smoothing" - the idea that households will generally prefer to maintain a steady standard of living throughout their lifetimes... which then leads them to save the "excess" during their working years in order to fund the deficits (i.e., retirement spending after there's no more work income) in the later years. The significance of this shift is that lifecycle finance focuses far more on the amount of life-time spending that can be sustained at any particular point, as opposed to focusing on more "conventional" measures like account balances/growth or Monte Carlo probabilities of failure. In addition, consumption smoothing is also much more complex in practice than "just" traditional approaches like saving a percentage of income in your working years to fund retirement, recognizing that income and the ability to save itself may be volatile over time (e.g., as kids are added to the household and constrain available dollars to save, and then eventually leave as parents transition to an empty nest stage with more disposable cash flow to save), and necessitating its own software tools (e.g., Larry Kotlikoff's ESPlanner software or his more recent MaxiFiPlanner solution). Other notable distinctions to the lifecycle finance approach in practice with clients includes: risk capacity is measured not just by the ability to withstand a market decline, but how much "excess" the client can afford to invest above-and-beyond what it would take to simply buy a secure guaranteed income stream (e.g., via an inflation-adjusted annuity or a laddered TIPS bond portfolio); retirement projections similarly tend to be built from a base of what it takes to secure income, and then adds a "risk premium" for investing over and above that amount (if clients want to take that risk); insurance needs (both life and disability insurance) take on added importance by calculating exactly what is needed not just to "replace" income, per se, but ensure that it can still be effectively smoothed over life; and annuities tend to be more about the trade-off between secure retirement income and bequest motives, as opposed to just a psychological alternative for risk-averse clients who don't want to invest in markets.
The Problem With [Retirement] Goals (Joe Duran, Investment News) - Over the past decade, there's been a substantial shift from cash-flow-based to "goals-based" financial planning software solutions, which is appealing for most advisors because it's far more straightforward to just target a goal, and identify the specific cash flows that can be saved (and assets that can be allocated) towards that goal, rather than trying to detail every cash flow in the household. The caveat, however, is that goals-based planning presumes that clients know exactly what their goals are in the first place, and that those goals will remain stable and won't change to something else by the time the client actually approaches the original goal being pursued. And the problem is that in the real world, that often is not the case; goals do change over time as our own preferences and circumstances change, life itself often turns in unpredictable ways, and often we don't even know what our goals should or can be until we better explore the possibilities first. This doesn't necessarily mean that financial planning is useless, just because our goals may be unknown, unknowable, or unstable, but Duran emphasizes that if you assume those goals are more ephemeral from the start, it leads you instead to: 1) focus more on intentions and values than specific goals (which means helping clients prioritize where to allocate their spending and assets as they grow may be more important than working towards any particular spending or accumulation goal); 2) monitoring and being prepared to adapt the plan over time becomes far more important than just doing the "right" plan with the "right" recommendations in the first place; and 3) often the best thing we can do as advisors is help them identify the blind spots that may be preventing them from realizing what goals are possible that they could be pursuing successfully in the first place!
5 Fascinating Books On How To Break Bad Habits (Eric Barker, Barking Up The Wrong Tree) - Notwithstanding the fact that as human beings, we overestimate our capabilities in every arena (ironically, we even overestimate our own modesty in assessing our own capabilities!), if there's one thing that virtually everyone admits to struggling with, it's self-control, and breaking our own bad habits. Fortunately, though, there's a growing base of research and content on how to improve our self-control, particularly with respect to improving good habits and/or breaking bad habits. Accordingly, Barker recommends 5 god books on the topic, including: "The Power of Habit" by Charles Duhigg, which finds that a whopping 40% of our daily "choices" aren't actually choices but habits, how habits are created and remain in place, and how to change the course of your own habits; "Willpower" by Roy Baumeister and John Tierney, which as the name implies explores the research on our personal willpower, why we never seem to have as much as we wish we did, and what research has found actually increases our willpower; "The Craving Mind" by Judson Brewer, which examines how certain meditation and mindfulness techniques can help people change their habits (with the mindfulness approach validated in a high-profile controlled study that was found to be twice as effective at getting people to give up cigarettes that traditional interventions); "Irresistible" by Adam Alter, that specifically studies how to break our smartphone habits (in light of a recent study where 46% of people said they'd rather suffer from a broken bone than a broken phone!); and "Hooked" by Nir Eyal, which examines how various products and services are created to be habit-forming, which can both help you break the habit that they may be trying to lure you in with... and perhaps provides some ideas about how to make your own services for clients more "habit-forming" and harder for them to break (and fire you!).
Performing Meaningless Rituals Boosts Our Self-Control (Tomasz Witkowski, British Psychological Society Research Digest) - Figuring out how to improve our self-control is the "holy grail" of psychology research, and a recent paper in the Journal of Personality and Social Psychology finds that because one of the biggest drivers of our self-control is our own self-confidence that we can control our outcomes, that people who create their own habits or rituals - even if they're otherwise meaningless - actually can improve their self-control but increasing their own self-efficacy that they're able to better control themselves! The researchers tested this by telling half the study participants (women who were trying to lose weight) to be more "mindful" about their food consumption, while the other half were taught a three-step pre-eating ritual or cutting their food into pieces first, rearranging the pieces sot hey were perfectly symmetric on the plate, and then pressing their eating utensils against the top of the food three times (just to emphasize how arbitrary and meaningless the intended "rituals" were!). Yet despite the practical irrelevance of those food rituals, those who engaged in the rituals managed to better change their eating habits and eat significantly fewer calories in the end! In a subsequent series of study extensions, the researchers find a wide range of similar rituals were remarkably effective at helping people achieve their desired change outcomes, as those who were able to successfully control their rituals first were far more effective at also self-controlling the harder-to-break habits that came next!
What Every Successful Person Knows But Never Says (James Clear) - Ira Glass is the host and executive producer of the wildly popular National Public Radio show "This American Life", but Clear notes that Glass simply started out decades ago as a 19-year-old intern at NPR, and he spent his first full decade doing a lot of hard work with very little payoff as a reporter, and it wasn't 15 years into his career before he finally began co-hosting his first show. Even then, the content wasn't actually that great - Glass says he managed to at least produce two "decent" shows for each horrible one! - and it was only successful enough to get meager funding for This American Life when Glass first pitched it two years later. The key point, though, as Glass notes, is that it's actually normal for people in the early years, especially creatives, to not be very good at what they do. The distinction is that the people who are best at it have a certain "taste" for what it should be, and are able to figure out how to keep iterating and improving on that path over time, and eventually making something that is objectively great. Most people, though, tend to give up while they're still mired in the difficult phase, and ironically their good taste and vision of what they want to achieve often makes them even harder on themselves because they know they're not (yet) achieving their vision. Nonetheless, it's crucial to understand that everyone, even those who ultimately go on to do great things, still have to spend an often-long period of time in that difficult phase; the key is knowing that it's normal, that you will have to do a huge volume of work to really get good at your craft, and that success is much more about the repeated effort of learning and getting good because you have the "taste" to know what good is... even if you also still know you're not producing up to the standard you want to produce... yet. Or stated more simply, if you're still feeling like you're stuck in the difficult phase and your work isn't yet what you want it to be... stay focused on the things that got you into the game in the first place, look at others who you think already do it better than you, and try to emulate and adopt best practices for yourself as you make a habit of practicing and honing your skills, moving inexorably towards your destiny of achieving the vision you have set for yourself.
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.