Enjoy the current installment of “weekend reading for financial planners” – this week’s reading kicks off with an interesting profile of online financial planning startup LearnVest, which just recently secured a fresh $16.5M round of venture capital funding to continue growing and scaling its business, along with announcing a prospective partnership with American Express and suggesting more partnerships with some large employers are in the works. Also in the news this week is a look at the recent 401(k) industry bombshell as Yale professor Ian Ayres sent controversial notices to 6,000 firms, threatening some of them that he will expose and highlight their above-average 401(k) plan costs (implying that the company could be breaching its fiduciary duties to plan participants).
From there, we have a number of practice management articles, including a look at Mark Hurley’s recent white paper and its perspective on why most advisor M&A deals fall through, a profile of a financial planning firm that uses mind mapping tools live in client meetings as part of its “wow” experience, a review of the online tool “Mention” (an alternative to Google Alerts) to monitor your online reputation, and some perspective on how to get more value out of your advisory firm website (and even better understand what you should realistically be trying to accomplish with it in the first place).
We also have several technical articles, including one on how to route college tuition payments through a 529 plan to save on state income taxes (with a few caveats), another on the complications that arise when trying to allocate assets from an estate between the bypass and marital trusts after death (especially when there has been a material change in value between the date of death and the date property is distributed to trusts), and a third looking at floating rate bank loans and whether they’re appropriate for client portfolios given the looming risk of a rising interest rate environment and the impact it could have on traditional bonds.
We wrap up with three interesting final articles: the first is from Texas Tech professor Michael Finke, looking at what factors are most predictive of which clients will “freak out” in the face of market declines (and some ideas of what to do about it); the second is a discussion from financial planner Dave Grant about what was most effective for him as he made a transition to going out on his own as a solo advisor; and the last is a discussion from Foundation Room Finance about how to find the balance as a new advisor between developing your technical skills and going out to build a client base, with some perspective on what it takes to build and refine a business model by applying the principles of Eric Ries’ “The Lean Startup”, that is equally relevant for both new and experience advisors and their firms. 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 3rd/4th:
A Start-Up Aims To Bring Financial Planning To The Masses – From the New York Times, this article highlights online financial planning startup LearnVest (previously profiled on this blog as well), which last week announced that it had raised another $16.5 million of venture capital to begin to grow and scale its fee-only financial-planning-to-the-masses offering, as it expands into a training and adviser hub in Phoenix and begins to hire more CFP certificants to deliver advice. LearnVest’s approach to gain volume appears to be through big partnerships, including American Express (which participated as an investor in the latest round of fundraising) and working with employers to reach 401(k) participants. The service costs $399 up front and $19/month for its comprehensive service, with lower cost alternatives if someone just wants help with a specific goal, but LearnVest’s primary aim appears to be providing its more comprehensive financial advice offering (unlike competitors Betterment and Wealthfront which generally just help manage low-cost investment portfolios, not provide true financial planning advice). And unlike similar competitors Personal Capital and NestWise, at this point LearnVest has eschewed providing any investment management offering at all. Instead, LearnVest is focusing solely on its recurring-retainer-style model, which it frames more like an ongoing gym membership to stay (financially) healthy, and LearnVest actually views Weight Watchers as a more comparable model, with a seven-step action plan to help clients get more financially fit. LearnVest is seeking efficiency to keep its costs low with a heavy focus on technology as well; clients connect their financial information to the LearnVest app (think: alternative to Mint), where clients can see their financial status and track their spending activity, and their LearnVest planner can, too. Planners “meet” with clients virtually and offer unlimited phone and e-mail chats, and planners are expected to make outbound “nudges” and give challenges to clients to help keep them on track with their goals, though it remains to be seen just how many clients each LearnVest planner can handle. Accordingly to the article, so far LearnVest has hired 25 CFP certificants (who are all salaried and receive bonuses based on customer satisfaction), with plans to hire about 10 more by the end of the year.
Letters About 401(k) Plan Costs Stir Tempest – The big news from last week was the revelation that Yale Law School professor Ian Ayres had sent a series of about 6,000 letters to various 401(k) plan sponsors, claiming that he would publicize results of the company’s 401(k) plan costs (through both newspapers like the NY Times and Wall Street Journal, as well as Twitter) in the spring of 2014, implicitly threatening to highlight that some companies may be failing in their fiduciary duty to plan participants by maintaining an (unreasonably) high cost plan. Ayres’ threat comes on the heels of ongoing pressure in the 401(k) industry after last year’s Department of Labor laws requiring greater fee disclosure went into effect. After what appears to have been some initial pushback, a Yale Law School spokeswoman stated that Ayres will not publicize any outdated company-specific details (Ayres’ original information was based on 2009 data), but still intends to publicize the aggregate results of his research on 401(k) plan costs, and there is still a possibility that Ayres will publicize more recent company-specific data. Critics have taken issue with Ayres’ use of 2009 data in particular (which was obtained from financial information firm BrightScope and public Department of Labor filings), noting that more thorough fee disclosures and details have already been implemented since 2009, and furthermore note that Ayres’ analysis does not appear to be focusing enough on the legitimate reasons that fees differ from one plan to another (from the size and scale of the plan, to the participant education and advice and supporting offerings of the plan provider, to any look at the actual performance results of the plan). Nonetheless, the letters appear to have generated a great deal of fresh focus and interest on 401(k) plan costs, and perhaps led some businesses to re-evaluate whether they’re getting good value for what’s being paid.
Let’s Make A Deal: Insights From Mark Hurley’s Latest, And Greatest – In Investment Advisor magazine, Bob Clark dives into Mark Hurley’s recent white paper on the future of the independent advisory industry, in particular regarding Hurley’s perspective on why so many advisory firm acquisitions go wrong, and what to do about it. Overall, Hurley is rather pessimistic regarding advisory firm Merger & Acquisition (M&A) activity, primarily because most firms that try to merge and acquire have little experience doing so, which Hurley suggests is analogous to two virgin porcupines trying to mate (“there are more than a few obstacles and risks in the way of a successful outcome”). In addition to inexperience, additional complications include a pervasive problem of aging advisory firm clientele (many baby boomer firms are over-concentrated with baby boomer clients who are increasingly in the distribution phase and not the accumulation phase, which results in a headwind to organic growth), the tendency of some firms to have revenue overly concentrated in a select group of big clients, and the general difficulty of transitioning clients that are so dependent on relationship connections. In addition, Hurley highlights four high-level economic factors that also heavily impact advisory firm M&A activity, including: 1) sellers have unrealistic expectations (they think their clientele are worth more than they are, and don’t appreciate that it’s a buyer’s market and that they have limited bargaining power); 2) buyers often have unrealistic expectations as well (they only want sellers with high growth potential, a similar client base to their own, top-tier professional employees, similar corporate culture, and an identical investment philosophy, yet few sellers are truly a perfect fit and some buyers get cold feet when they realize how much they would have to change as the acquirer); 3) material acquisitions require a material amount of capital, and few wealth managers have any experience raising capital and financing; and 4) buyers and sellers underestimate the degree to which wealth management deals are “three-handed” where the successor professionals of the seller have a key role to play (as their retention as staff is often crucial for retaining clients to ensure value in the deal).
At Wheaton Wealth Partners, ‘Mind Mapping’ The Clients – This Financial Planning magazine article is a profile of Rob O’Dell of Wheaton Wealth Partners, an advisory firm in Illinois that focuses heavily on the use of Mind Mapping to delve into client issues, particularly the non-financial personal, family, and goals discussions with clients. In O’Dell’s firm, before any numbers are crunched, clients meet in a conference room dominated by a big-screen TV with an initial mind map, centered around the clients’ names and with four starting branches: family matters, legacy preservation, investments, and planning. As the data gathering meeting occurs, O’Dell fills in the branches of the mind map live, on the spot (perhaps prepopulated with any background information the clients provided ahead of time), discussing everything from goals to family dynamics to personal family milestones, and then ultimately on to the more practical financial matters (budgeting, Social Security, retirement income expectations, etc.). O’Dell is an advocate of mind-mapping not just for the tool itself, but the fact that it’s a very visual process that gives clients an “Oh, wow” kind of experience – a necessity, as O’Dell and his partners were building the firm from scratch after going out on their own with a non-solicitation agreement barring contact with their former clients. The firm finds its approach particularly effective with Gen X and younger baby boomers, who tend to view planning more holistically. After three years, Wheaton has about 75 clients, including $130M of AUM and many who pay a flat fee for their planning (and mind mapping) services.
Quickview: Monitor Your Online Reputation – On Morningstar Advisor, advisor technology consultant Bill Winterberg reviews an online tool called Mention, which is essentially an alternative to Google Alerts – a service that monitors the web for new articles (and “mentions”) of your name, your business’ name, or whatever other key words and search terms you want to track. While Google Alerts have been popular with many advisors in the past, Winterberg notes that Google Alerts doesn’t always capture everything, particularly social-media-related mentions, while the new service “Mention” is specifically designed to be more thorough; in fact, Winterberg found almost immediately that Mention was tracking far more than Google Alerts was. The base version of the service is free, and advisors can get started by selecting the key words or phrases they want to track (for instance, their name, and the name of their firm); the more specific and unique the search term, the higher the quality of matches that Mention will deliver. As new hits are found, they are posted in real time to an online dashboard, where you can view your mentions chronologically, or sort/filter them based on particular social media sites or new sources; the service also includes an “anti-noise technology” that helps to cut down on unnecessary repeats of the same information/mention. If you want to search for a wide range of alerts or generate a high volume of mentions (more than the 250/month allowed in the free version), you can upgrade to a premium version of Mention for $6.99/month.
How to Make Your Website Work for You – From the Journal of Financial Planning, marketing consultant and financial planner Kristin Harad talks about how to get more value out of your advisory firm website; in an age where everything is online, too many advisor websites fail to effectively initiate and develop a prospective client relationship, and instead advisors waste time following up on ill-matched inquiries or miss out an opportunities they never knew existed (because the website visitor never contacts them). The key is to craft the website with an eye towards driving a response from the visitor, which in turn means you need a good “list” (are the list of people who visit your website actually the list of people you want to reach with your marketing?), you need to make an offer (what do you offer to people to encourage them to take an action step and engage with your website?), and you need to get creative (what is the look and feel of how you present your services, and does it differentiate you?). Harad notes that while many advisory firm websites do have an offer – contact us to request your free consultation – that the stakes are too high, and that’s more like an ultimatum of do business with me or do nothing; instead, your objective should simply be to get the visitor’s name and email address, perhaps by offering some relevant free content (or as Harad states, “freemium” contact since the premium for free is receiving a name and email address), and then build a relationship with that visitor over time through ongoing marketing. To maximize your website’s effectiveness, you need to have a clear understanding of your target audience and what their needs and issues are, so you can produce a site that resonates with them, make it easy for people to connect with you when they’re ready (whether by email or through social media), maintain some fresh content so it looks like the site is tended and cared for, show your affiliations to prominent organizations to bask in the “halo effect” of their positive brand, and don’t be afraid to brag a little (don’t go over the top, but people won’t know about your accomplishments either, unless you tell them!). In addition, Harad suggests making sure that your biography is relatable (i.e., show the human being that people will connect with, not just a dry professional paragraph).
A Quick 529 Tax Tip That Could Save You Big Money – From Morningstar, this article provides a nice reminder that since many states offer a state tax deduction for contributing to a 529 plan, it can make sense to contribute to one even for children already going off to college; contribute the money today for a state tax deduction, and withdraw it next week to cover the tuition bill. In some states this is a moot point, as there may not be any state tax deduction available, but the article notes that states like Illinois allow deductible contributions as high as $20,000 per year (for a married couple, $10,000 for an individual), which at a 5% state tax rate amounts to a $1,000 state tax loophole for clients to take advantage of. Be certain to check the details of your state, though, as some states that allow deductions do have a one-year waiting period, and some 529 plans may impose a briefer waiting period (days or a week or few) before distributions can occur (as the 529 plan wants to be certain the deposit check has cleared before allowing it to be withdrawn); in addition, some plans impose fees for creating accounts or closing them quickly, so be certain the costs don’t outweigh the benefits (depending on the state tax rate and the size of the deduction). It’s also notable that college expenses are not eligible for tax-free growth treatment from a 529 plan and eligibility for Federal tax benefits like the American Opportunity Tax Credit or the Lifetime Learning Credit, so this 529 strategy may be more appealing for either those whose income is too high to be eligible for the Federal college credits, or those whose tuition bill is large enough that part can be paid via the 529 plan and part can be paid directly by check (which allows the latter payment to still be eligible for the Federal tax benefits). On the other hand, if the withdrawal will be primarily basis from the 529 plan anyway – since the money wasn’t there long enough to generate any growth – expenses can simply be claimed for Federal college tax credits first (which is how they apply by default under IRC Section 529(c)(3)(B)(v) anyway)), as treating 529 plan distributions as qualified education expenses is unnecessary if there is no growth. And of course, be certain to keep the money invested into the money market or cash-equivalent investment option within the plan, so that the funds aren’t unwittingly subjected to investment risk during their short-term stay.
Allocating Assets Between A Bypass Trust And A Marital Trust – From the Journal of Financial Planning, estate planning attorney Jon Gallo looks at the challenging decision of allocating assets between a bypass and marital trust, which has been greatly changed in today’s environment due to the enactment of the American Taxpayer Relief Act of 2012 that made portability permanent. While in the past the estate tax exemption was a “use it or lose it” proposition, now portability allows the estate exemption to carry over to a surviving spouse, without a bypass trust. This may be especially appealing for some of the income tax benefits, including an additional step-up in basis (at the second death) and avoiding potentially unfavorable trust income tax brackets. Yet Gallo suggests that the popular discussion that bypass trusts are now dead is an exaggeration. Bypass trusts continue to be relevant for protecting assets for the surviving spouse in the event of bankruptcy or other creditors, or in remarriage situations. Bypass trusts also allow the first spouse to control where assets ultimately go, rather than leaving it up to the surviving spouse. However, for those who still want to use bypass trusts – especially in more complex high-net-worth situations – Gallo notes that advisors need to be more cognizant than ever to allocate assets appropriately between the marital and bypass trusts. The key issue is Revenue Procedure 64-19, and how to handle changes in the value of assets between the date of death and the date they are actually distributed/allocated into the trusts. If assets are divided on a fractional basis (e.g., 60% of my assets go to my bypass trust) there is no issue, but if assets are divided with a pecuniary clause (e.g., $5 million of my assets go to my bypass trust, and the remainder to my marital trust), then Rev Proc 64-19 requires that the assets be allocated based on their values on the date of allocation, or some other manner that properly allocates post-death appreciation (or depreciation) between the bypass and marital trusts; this can involve getting additional asset valuations, and even some income tax consequences, as allocating appreciated assets to satisfy a pecuniary bequest is treated as a sale of the asset. The good news of pecuniary bequests is that they’re easier to administer – with a fractional bequest, the trust may end out owning fractional interests in each and every asset – but planners should beware of the valuation and income tax complications.
Should You Consider Floating-Rate Bank Loans Today? – This article from Morningstar Advisor looks at Floating-Rate Bank Loans, and whether they’re an appropriate investment in today’s environment with the looming specter of rising interest rates. The appeal of floating-rate loans is clear; because their rates adjust with the general level of interest rates, their yields are flexible and can rise as rates increase, and as a result the bonds can pay above-average yields with a very low duration, and have historically shown a negative correlation to Treasury bonds while generating above-average returns in rising interest-rate environments (and due to their nature of being a bank loan, maintain lower default rates than high-yield bonds). But while these features of floating-rate bank loans remain valid to today, this segment of the fixed income market has seen money pouring in, and yields have in fact risen from about 1.7% to 2.5% on the 10-year Treasury over the past 9 months, so how do floating-rate bank loans look today? Over the past 9 months, performance has been strong; the largest bank-loan ETF is the PowerShares Senior Loan Portfolio (BKLN) returned 3.8% while the Vanguard Total Bond Market ETF declined by 1.8%, which means over this period of interest rate increases, BKLN performed exactly as expected with an ultra-low duration, and thanks to the strengthening economy also had a tiny 1.4% default rate (lower than the historical average of 3%). Of course, the strong performance has meant strong flows, and the past 5 months have been the 5 largest monthly inflows on record for bank loans, with $33 billion invested since just the end of June, with what appears to be retail investor buying while previously leveraged hedge funds are selling after overextending themselves. Notwithstanding the strong results, though, the article notes that the primary risk for bank loan funds – because they’re almost purely a credit play given the near-zero duration – is a potential U.S. recession, which would drive up the default rate (and potentially expand bank-loan risk spreads as well). A recession shouldn’t be cause for panic – bank loans have generally posted positive returns during recessions – though extreme volatility can occur, as the sector posted a whopping 29% decline in 2008. However, the author suggests that the 2013 market for bank loans is very different than 2008, as the prior losses stemmed in part from overissuance of new loans tying to overleveraged buying a hedge funds, which isn’t the case this time around.
Why Stock Investors Freak Out – In the latest issue of Research Magazine, Texas Tech professor Michael Finke highlights some recent research he has been working on, relating client answers on risk tolerance assessment tools with their actual behavior during the 2008-2009 financial crisis. Which aspects of a risk tolerance questionnaire actually helped to predict which clients would “freak out” in the midst of the market meltdown, potentially panicking out of stocks at the bottom and causing them to sit in cash during the recovery. The research shows that questions which measure loss aversion – for instance, whether someone tends to focus on possible losses or potential gains from a risky opportunity – were predictive, as those who dwell on the negative tend to react badly when those fears are realized. An even better predictor was simply asking people how much risk they’ve taken with investments in the past, implying that a significant increase/change in how much risk they’re taking is likely to end badly. At the same time, the research acknowledges that risk tolerance isn’t perfect, as our projections of how tolerant we think we’ll be of risky events is often different than how we turn out to act when faced with losses in real time; when asked in a cold, rational state of mind, we tend to project ourselves in that rational state of mind, even though in the moment we will likely be much more hot and emotional, at least until the investor has had the chance to practice. Accordingly, the research finds that investors who’ve experienced prior bear markets and subsequent recoveries do a better job of staying invested in the future. In addition, Finke’s research also finds that those who are losing their cognitive ability tend to bail out of markets; it seems that a decline in cognitive abilities is associated with less willingness to tolerate volatility. So what can be done? Research shows that when people know their needs are better protected, they’re less likely to bail on stocks (clients with health insurance and adequate emergency funds were less likely to freak out); other factors that help including talking through the stress/worry with someone else (a moment where having a financial advisor shines), and having a written financial plan (and going through the process of choosing and committing to an investment policy statement). Finke’s research found that the creation of a written plan made the client twice as likely to avoid equity market freak-out.
5 Rules For Going Solo – In Financial Planning magazine, advisor Dave Grant shares some of his insights and experience as he transitioned over the past few months from working within a larger advisory firm to going out on his own as a solo to launch his new practice Finance for Teachers. The five tips/strategies that Grant has found to be most helpful were: 1) develop a niche, and find one that you enjoy working in that is personally meaningful to you (Grant chose to specialize in teachers, both because he enjoys working with them, and because his wife and several family members are teachers as well); 2) choose vendors wisely, and in particular as a start-up try to find vendors who don’t just want to sell you products, but are willing to educate you and help you be more successful (e.g., Grant’s marketing company didn’t just help him make marketing materials, but the designer explained the logic behind what was designed and recommended to give him better marketing knowledge as well); 3) seek additional income to help smooth the financial transition (Grant got involved with a flexible on-demand advice initiative that let him replace 50% of his income while still having the time to launch and start growing the new business); 4) get a support network, particularly some other advisors who can share their own insights and experiences (Grant relied heavily on other Gen Y peers who had gone solo, and thus who had similar needs and concerns as he did); 5) mind the home front (launching a new business from scratch can be a full family affair, which presents unique stresses but also unique opportunities for everyone to work together for success).
4 Things Every Advisor Needs to Know Before They Call A Client – From the Foundation Room Finance blog, this article tackles the interesting question of how advisors should focus their efforts in their early career years. Is it better to spend time locked up in a room learning all there is to know about modern portfolio theory, insurance planning, gifting strategies, and other technical information? Or is it wiser for that person to get out there and pound the pavement, book as many meetings as possible, and try to get some clients? The author David Leszczynski suggests a balance is best; too much technical and the new advisor fails to learn and practice people skills, but too much time just trying to market and meet people without a solid technical foundation will just lead to a lot of meetings where the new advisor looks foolish and potentially burns the relationship. So how exactly does one find the right balance? Leszczynski looks to Eric Ries’ “The Lean Startup” for inspiration; the basic concept is to determine a Minimum Viable Product (MVP), get it functional and deployed into the hands of customers/users as quickly as possible, measure the results, and make adjustments as necessary. If you try to create the perfect product or solution right out of the gate, you risk ending out with a project or business that never gets off the ground in the first place. So what’s the MVP for an advisor? Leszczynski suggests that to be successful, a new advisor needs to effectively communicate exactly what they do for their clients, and have the foundation of technical knowledge necessary to execute on those promises. In turn, this means a new advisor should be able to explain who they serve, why they chose to serve that group, what problems they will solve, and how they will solve them, in addition to having examples and stories to convey the concepts, and be able to explain what resources will be used to substantiate that they’ll be able to deliver as a new advisor (and of course, proper licenses are important, too). Of course, the challenge in the advisory context is that, unlike many other “lean startups” most advisors can’t just offer a test version of their solution to a bunch of random “users” and see how it goes; instead, Leszczynski suggests that this is where an advisor’s natural market comes into play, as a group of people who have enough relationship trust with the new advisor to be the early adopters. But make sure you have at least a reasonably-well-defined MVP before you begin, or you’ll just be spinning your wheels.
And although it’s not specifically included here for Weekend Reading, I’d also highly recommend checking out Bill Winterberg’s “FPPad” blog on technology for advisors, including his weekly “FPPad Bits And Bytes” update on tech news and developments!
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!