Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with a fresh look at the rise of T shares and Clean shares, which emerged after the Department of Labor's fiduciary rule as a way to provide less conflicted mutual fund share class options for broker-dealers to make available on their platforms... though with the DoL fiduciary rule being struck down, T shares have vanished almost entirely and Clean shares are primarily surviving in their "semi-bundled" form that still permits at least some revenue-sharing payments to platforms. Though with the explosive growth of truly-no-revenue-sharing Clean shares in fiduciary retirement plans, the potential remains for a Clean shares resurgence amongst individual financial advisors as well... particularly if the regulators re-emerge with a new fiduciary rule in 2019.
From there, we have a number of retirement planning articles this week, including a look at how couples often benefit significantly from a financial perspective by not retiring at the same time (facilitating everything from delayed Social Security for the higher-earning spouse to employer-provided health insurance to bridge the gap from retirement to Medicare at age 65), the factors that drive when couples do (or don't) retire together, how Baby Boomers are emerging as the "loneliest" generation in retirement (due to lower rates of children and higher rates of divorce) with substantial loneliness-related health complications, and the rise of a new model for promoting social connectedness for seniors called the Villages (started with the Beacon Hill Village in Boston) that encourages "younger" senior citizens in their 50s, 60s, and 70s to support and interact with older seniors in their 80s and 90s with a social pay-it-forward ethos.
There are also a number of practice management articles, from rising fee pressure amongst asset managers driving them into the wealth management business where they're increasingly competing with financial advisors themselves, to some ideas about how advisors can better differentiate in an increasingly crowded advisor marketplace, the ways that advisors sometimes unwittingly negotiate "against themselves" on their advisory fees (conceding pricing discounts for all based on just a few outlier clients), and a look at how one advisory firm rolled out a "Milestone Rewards" loyalty program that discounts client fees if/when they stay with the firm for at least 3 years.
We wrap up with three interesting articles, all around the theme of advisor regulation in 2018 and 2019: the first looks at how tumultuous the changes in advisor regulation have been in Australia, which went through an even more extreme version of fiduciary rulemaking back in 2012 and is now struggling with the aftermath consequences of product manufacturing firms that employed their own advisors and continued to give conflicted advice anyway; the second explores how the regulatory shift in Australia is fundamentally shifting power away from investment product manufacturers and into the hands of advisors and clients themselves (which is good for advisors and consumers, but not something the industry is willing to let go of lightly!); and the last is a look at some of the issues that may play out with the SEC's own looming "Regulation Best Interest" proposal anticipated to be issued in revised form in 2019, which has already been under fire not only from fiduciary advocates but even the study that the SEC itself commissioned RAND to conduct, that found that the disclosure-based Form CRS only confuses consumers even more about the actual differences between the standards of care that apply to brokers versus investment advisers.
Enjoy the "light" reading!
T Shares Are Dead (Greg Iacurci, Investment News) - After the final version of the Department of Labor's fiduciary rule was issued in April of 2016, with its requirement that brokers should not be unduly incentivized to use one product over another (especially within the same product class), the industry coalesced around a new type of mutual fund share class called "T shares." The idea of the T share was that it would have a uniform 2.5% upfront commission, plus a 0.25% trailing 12b-1 fee and that it would kill A-class shares (and their varying upfront commissions) as broker-dealers standardized their product shelves by offering equal-compensation T shares from a wide range of mutual fund providers. In fact, in the year after the DoL fiduciary rule came out, nearly 20 major mutual fund companies filed with the SEC to launch T shares. But now that the DoL fiduciary rule is dead... so is any demand for T shares, and as a result, only 1/4th of the companies that filed to create T shares ever actually launched them, with only $145M of total AUM in all T shares combined (97% of which is in just one, the Blackstone Floating Rate Enhanced Income Fund). Similarly, the emergence of "clean shares," which were also created in response to the DoL fiduciary as an alternative share class with no conflicted compensation (i.e., no 12b-1 fees or sub-TA fees that may vary from one fund to the next or create conflicts for platforms), have seen only modest uptake as well, with just 20 fund companies that launched them and "only" about $95B in assets (far more than T shares, but still only a minuscule slice of the multi-trillion-dollar mutual fund marketplace), though there is an estimated $450B in "semi-bundled" clean shares that don't include revenue-sharing in the fund's expense ratio but do make payments for distribution to third-party platforms. Ultimately, though, it remains to be seen how the SEC's Regulation Best Interest requirements will play out, and whether higher standards enacted there could ultimately lead to a revival of T shares and/or clean shares again (especially since zero-revenue-share funds are flourishing in the retirement plan marketplace, up over 125% to nearly $1T in assets in just the past 2 years).
Why You Shouldn't Retire When Your Spouse Does (Anne Tergesen, Wall Street Journal) - The conventional view of retirement for couples is that it's only natural to retire at the same time, providing more time to be together as a couple and enjoy couples activities in retirement. Yet financially speaking, it's often far better to not retire at the same time, as one spouse continuing to work provides the potential for everything from higher Social Security checks (both because the still-working spouse can better afford to delay, and if it's the higher-income spouse that continues, will also generate higher Social Security survivor benefits as well), the working spouse may be able to access employer health insurance for the couple (often far cheaper than purchasing such coverage through a health insurance exchange for those who are not yet age 65 and eligible for Medicare), and of course there's just the outright financial benefit of having ongoing income to either bolster retirement savings or at least reduce the need for retirement withdrawals (allowing the retirement assets to grow further and reducing sequence of return risk as well). Although notably, from an economic perspective, women generally reach their peak earnings later (in their 50s) while the earning power of men is usually already on the decline by then... which means from a human capital perspective, it may be better to plan for wives to work longer than their husbands, as women retiring in their early 60s are often still close to their best earning years. Though notably, if couples do not retire at the same time, the personal dynamics of the couple may be more complex, as they adapt themselves to dissimilar daily routines between the working and non-working spouse and determine how to equitably redistribute household duties.
Why Couples Retire Together... Or Don't (Kim Blanton, Squared Away) - In a recent survey, Fidelity asked 1,600 people if they knew when their significant other planned to retire... and only 43% answered the question correctly. The results highlight how disconnected most couples actually are about their long-term goals and retirement plans. Of course, the plans for retirement do tend to come into sharper relief as retirement itself approaches, but still, even when they're on the same page about what the plan will be, only about half of couples actually retire together at the same time. For the rest, it's some combination of one spouse dialing down to part-time while the other still works, one spouse who stays working while the other retires, or a "retired" spouse who stays or goes back to work part-time while the other is fully retired. Recent research suggests that in practice, this is most commonly because couples are trying to balance the competing demands of a desire for more leisure time (i.e., semi-retirement or full retirement), and the financial demands of retirement and the need to save more first. However, health events, relative ages, and simply whether either/both spouses like their jobs or not, also plays a role. And one study finds that the marginal benefits of working a little longer - e.g., to push a lifetime pension or Social Security payments higher - really can have an impact on a couple's retirement timing as well. Though the gender effects vary; if wives were working longer for financial reasons, husbands were far more likely to work longer as well (even though they're typically older).
The Loneliest Generation: Americans, More Than Ever, Are Aging Alone (Janet Adamy & Paul Overberg, Wall Street Journal) - Baby Boomers are aging alone more than any generation in U.S. history, as a combination of rising longevity and shifting social trends has led about 1 in 11 Americans over age 50 (or nearly 8 million people) to have no spouse, partner, or living children (the most common companions in retirement). And the problem is actually more acute for Baby Boomers than their parents (the Silent Generation), as social trends for Boomers that prized individuality and led to higher divorce rates and fewer children are now reflected in the number of single senior citizens. Which is concerning not only for the emotional well-being of retirees, but their physical well-being as well, with researchers finding that loneliness is just as liked with early mortality as smoking up to 15 cigarettes a day or drinking more than 6 alcoholic beverages a day (and loneliness is even worse for longevity than being obese or physically inactive). And there are striking multiplier costs, as well; for instance, one study last year estimated that the mere fact that lonely people have no one else to rely upon and must therefore leverage nursing facilities and hospitals more heavily may be costing Medicare a whopping $6.7B per year. Accordingly, the Federal government is exploring some faith-based partnership programs, and the British government this year appointed its first "minister of loneliness" to combat the issue there. The problem is especially acute for Baby Boomer women, who were both more likely to never marry than prior generations, and are also more likely to be single as widows given their higher life expectancy than men. Though ultimately, the concern from the retirement context is that for at least most people, employment itself provides a broad social network to support having healthy social connections; thus, it's the transition to retirement in particular that risks cutting off social support and accelerating the concerning loneliness trend. Which in turn is also leading to a rise of new social programs for seniors designed to help re-create a deeper social network for them in retirement.
How A New Kind Of Community Is Creating A Better Aging Experience (Joseph Coughlin, TED) - In the community of Beacon Hill in Boston, local senior citizens have organized a membership group called the "Beacon Hill Village,” whose purported goal is to help facilitate a strong social network of seniors to make it easier for all of them collectively to remain in their homes longer in old age (as an alternative to going to an assisted living facility, a nursing home, or some other "country-club" retirement community). The starting point was simply to have the Village's members help each other out with small tasks (and help find assistance for big ones), but now in exchange for annual dues of $675/year, the Village offers help with everything from grocery shopping and pet care to light housework and small repairs (in addition to curating a list for greater challenges like health, caregiving, and financial needs, and providing vetted drivers to transport elderly people in need of special care). Though the core paid staff of the Villages tends to be small, as the majority of the services come from the "younger" members (healthy individuals in their 50s, 60s, and 70s) who follow the "pay-it-forward" ethos and provide support to those members in their 80s and 90s. In addition, the Village is also active socially, for everything from going to the movies or out for drinks or to see the Boston museums. And notably, while it's often difficult to sustain such altruistic collectives, in practice the Village is morphing into a "Village to Village Network" that's now spawned another 190 villages built on the Beacon Hill model across 46 states, with 150 more in development.
Fee Pressure Driving Asset Managers Into Wealth Management (Jeff Benjamin, Investment News) - As competition continues to rise in the mutual fund industry and expense ratios grind ever lower, asset management firms are increasingly branching out into creating portfolio models and otherwise "invading" the wealth management business. Examples of the trend including everything from companies like BlackRock, Legg Mason, and Invesco all acquiring "robo-advisor" platforms to provide turnkey model portfolios to advisors (that not surprisingly include many of their companies' own funds in the models), to companies like Schwab and Fidelity that have launched robo-advisors direct to consumers (with model portfolios that again include their own proprietary products). The "good" news for advisors is that thus far, asset managers are largely focusing on technology as a distribution channel for their products, as opposed to necessarily trying to compete with human advisors outright (thus why many asset managers have bought wealth management technology for advisors to bolster their distribution to/through them), and still leaving room for financial advisors to add value on top of basic portfolio asset allocation services (i.e., comprehensive financial planning). Though Cerulli predicts that as automation continues to compress the fees of asset managers, it may eventually come down the line and begin to compress the fees for at least some parts of wealth management as well... even as companies like Vanguard in turn look to move further up the line by providing not just technology that manages portfolio models but actual human CFP professionals providing even more advice through their Personal Advisor Services platform.
10 Ways Advisors Can Crush Their Competition (Allan Roth, Advisor Perspectives) - Competing in a commoditized business is doomed for failure for all but a small subset of the largest providers that can leverage their economies of scale to execute at the lowest cost... creating a growing pressure on financial advisors to find and create some kind of value-add beyond just the increasingly commoditized service of managing a diversified asset-allocated portfolio. Accordingly, Roth suggests a number of ways that advisors can try to differentiate their practices in the future to add value on top of what the technology will provide at an ever-lower cost: leverage the technology yourself to offer portfolio services at an ever-lower cost (if you can't beat 'em, join 'em?); try an alternative business model (e.g., hourly or retainers) that opens up segments of the market that aren't well served by the AUM model anyway; focus on the tax-planning opportunities in portfolios rather than just the investment management strategies (e.g., tax loss harvesting, or more complex needs like tax-efficient retirement withdrawal strategies); streamline your client acquisition process to make it easier for prospects to understand what you can/will do for your advisory fee (beyond the commoditized asset allocation part); and try reducing the "risk" of working with you by offering clients the option of not paying for the financial plan if they don't find it valuable in the end (which Roth notes that because he really does focus on creating valuable financial plans, not one client has ever actually taken him up on the guarantee, but it nonetheless reduces the barrier and risk for clients who may be anxious about whether the planning fee will be "worth it" upfront).
Are You Negotiating Against Yourself? (Mark Tibergien, Investment Adviser) - The average revenue being managed by a financial advisor (a classic measure of advisor productivity) has risen steadily in recent years, but Tibergien suggests that this may be more a function of rising markets (which naturally lift client portfolios and therefore the advisor's AUM fee) than pricing power for financial advisors. In fact, because advisory firm fee schedules are graduated, the rising affluence of clients - and their ability to hit higher breakpoints on advisor fee schedules - may actually be leading to a decrease in the average revenue yield of advisors (i.e., the total fees an advisor receives relative to the client's portfolio). Overall, the recent 2018 Investment News Study of Pricing & Profitability did find 28% of advisors are looking to change their fees, and of those more are likely to raise their fees than lower them. Yet the ongoing shift in advisory fees, coupled with advisory firms taking a hard look at what services exactly they're providing clients to justify their fees (or not), is putting a renewed focus on advisory firm pricing strategies. Accordingly, Tibergien cautions that for any firms considering whether to lower their fees in particular, they need to ask some hard and important questions, including: 1) are you over-extrapolating isolated conversations from a few difficult clients when the rest of your clients are actually quite fine with your current fee; 2) is it really your strategy to be a "low-cost provider" to grab market share; 3) do you really believe you're not worthy of what you're currently being paid relative to what you're currently delivering; and 4) are you actually responding to clients at all, or just the news headlines that suggest industry pricing pressure (but may not actually be relevant for your practice). Of course, with technology makes advisory firms more efficient than ever, some firms may choose to drop their fees simply because they can "afford" to be cost-competitive and still maintain their margins (which is more akin to fee-deflation than fee compression). But the core issue remains: are you just discounting your fees occasionally to avoid dealing with a challenging client situation, or do you really have a pricing strategy for how you price your services and what you offer?
The Big Jump (Josh Brown, Reformed Broker) - The average holding period for a mutual fund is only about 3 years, as investors often refuse to stick with something that appears to not be working for any appreciable length of time. Which can be a challenge both for advisors who are trying to get their clients to stick to their investment strategy, and in the aggregate can pose a risk for the advisor themselves potentially being fired or replaced if recent returns haven't been favorable. To address this challenge in their own firm, Brown created what they called their "Milestone Rewards" program for clients back in 2015, where client fees are reduced by 15% after their 36th month (i.e., 3 years) with the firm, roughly akin to how airlines and hotels also provide discounting programs for loyal customers who use their services on an ongoing basis. Since the firm had launched back in 2013, the first slate of clients (that were with the firm when it started) hit their Milestone Rewards threshold in 2016, and more have steadily been added to the rolls in recent years (based on the firm's growth of new clients in 2014 and 2015 who are now crossing their own 3-year marks). And thus far, a few notable trends are emerging. First and foremost, clients who have stuck with the firm tend to be more affluent than the rest of their clients (who haven't hit the 3-year mark yet), though because the program was so popular when it launched (about 3 years ago), in the coming year the number of eligible clients will experience a big jump (projected to more-than-double by the end of 2019). Which means, to say the least, that clients appear to be receptive to the approach and the opportunity to be recognized as long-term valued clients; though Brown notes that whether it ultimately really helps with their long-term retention remains to be seen (perhaps once they have 10 years of cumulative data!?).
2018: A Defining Year For Advice (Matthew Smith, Professional Planner) - Here in the U.S., 2018 was a major year for the advice industry, as the Department of Labor's fiduciary rule was struck down, the SEC proposed its own Regulation Best Interest, and in the meantime the broker-dealer community continues to convert itself from a product-based model to an advice-based model anyway (with firms like Commonwealth launching an RIA division and fee-based revenue passing commission-based revenue at the top 50 independent broker-dealers). But arguably, the change underway in the U.S. pales in comparison to what's been happening down under in the Australian advice industry, includes the Hayne Royal Commission (a regulatory inquiry into the Australian advice industry that found, despite having implemented a fiduciary rule nearly 5 years ago, that vertically integrated product manufacturing firms still controlled advisors in ways that led to severely conflicted advice), which in turn led to the launch of FASEA (the Financial Adviser Standards and Ethics Authority) that will dramatically lift the required competency standards to be an advisor in Australia (as even CFP certificants there will have to go back to school to meet higher educational requirements), and is leading to a major unwinding of the traditional product-distribution-based advice model as product firms spin off their advice divisions (under threat from regulators for their ongoing conflicts and infractions) and completely revisit how they create and distribute products to consumers. All of which raises interesting questions about whether or how much of the new Australian reforms - coming in the aftermath of their own "Future of Financial Advice" fiduciary rule nearly 5 years ago - could signal how the fiduciary rule might play out here in the U.S., and the potential second wave of U.S. regulation that might come later in the 2020s if the product manufacturing industry remains "too closely" tied to financial advisors themselves.
What's Really At Stake Post Justice Hayne's Royal Commission? (Jim Stackpool, Certainty Advice Group) - From the outsider's perspective, the big debate underway in Australia with their recent Hayne Royal Commission (a regulatory investigation into conflicted advice) is whether it's appropriate for investment product manufacturers to "own" their own financial advisor divisions, with the conflicted advice risks that come when the company's advice-givers are still also their product-distributors as well. But as Stackpool notes, what's really being fought over is the relative power of regulators versus the product manufacturers themselves, in terms of not just who sets the rules for advisors (where regulators have always had the power), but also in controlling the agenda and focus of financial advisor activities, and whether or to what extent product manufacturers are accepted as the leading powers that define the roles and channels of financial advisors. For instance, one of the more controversial issues that has arisen in Australia is the "Fee for No Service" Report, which fundamentally questions whether consumers are getting their money's worth by tying the advisor's fees to the amount of assets they have (or more generally, the amount of financial product they're buying) rather than setting pricing power in the hands of the consumer to determine what's a fair-value fee to them in their relationship with the advisor. In other words, as long as compensation for advisors was commission-based, neither the clients nor the advisors actually set the fees for their own relationship; instead, the fee was set by the product manufacturer, based on the amount of product that was sold, given product companies all the power and control over how advisors are compensated. Which means as advisors split out from product manufacturers in Australia, the financial services companies themselves may finally lose power over how advisors are compensated, allowing advisors for the first time to determine their own equitable pricing arrangements with their clients directly (akin to the creative pricing strategies emerging in the independent RIA community here in the US that similarly has control to set their own fees and compensation rather than having it dictated by product manufacturers).
Tomorrow's [Regulatory] Debate (Bob Veres, Inside Information) - After its initial proposal earlier this year, the SEC is expected to release an updated version of its Regulation Best Interest proposal in 2019, which may well set off yet another industry and media firestorm around financial advisor standards of care (as the Department of Labor's fiduciary rule did back in 2016). Though while the debate in 2016 was about whether it was too arduous for the brokerage industry to come up to the DoL's fiduciary standard, the debate in 2019 will be about whether the SEC's Regulation Best Interest is too watered down and accommodative to the brokerage industry and whether the SEC is just redefining suitability as a "best interests" standard without actually writing rules that would make it a true fiduciary-best-interests standard. However, the SEC's own efforts may be hampered by a recent RAND study, that the SEC itself commissioned to evaluate its proposed Form CRS disclosures about the new Best Interest standard... which found that consumers don't at all understand the SEC's own proposed language to explain the differences between the proposed Best Interest standard for brokers versus the fiduciary standard for RIAs, don't understand the SEC's jargon like "transaction-based fee" and "asset-based fee" and "discretionary account," and were in general so confused by the nature of the compensation disclosures that they thought fee-based accounts were going to be higher cost as they might be "fee'd to death," while finding that brokerage firms seems more honest because they were at least being candid about their conflicts (and discounting the actual weight and consequences of the conflicts themselves). Though as Veres notes, the problematic results of the RAND study will not only be a challenge to the SEC in deciding how to reform the language of Form CRS, but also clearly emphasizes the problematic nature of a disclosure-based approach to handling conflicts of interest, versus just requiring that those who give advice live up to certain (higher) standards in the first place so consumers can simply trust that the advisor will be acting in his/her best interests.
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.