Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with a summary of the key details of President Obama’s newly proposed “MyRA” accounts, a new form of “starter IRA” account for those who may only be able to save small dollar amounts. In addition, there’s also some coverage of the latest AALTCI survey on long-term care insurance showing that premiums are up by 12% for females in 2014 but actually down almost 10% for males as gender-based LTC insurance pricing has taken effect. And an interesting survey of advisors in the UK after the first year of their RDR reforms – which banned commissions for advisors – finding that in fact the transition to a commission-free world has gone more smoothly than many first feared.
From there, we have a few practice management articles, including a look at how advisory firms are onboarding and training new advisors, new research on what generates referrals finding that the greatest predictor of whether clients refer may simply be that some are more “hard-wired” to do so that others, and the last a summary of advisor tech guru Bill Winterberg’s keynote session at this week’s TD Ameritrade conference on how advisors need to focus more on their digital presence and the first impression it may be making on prospective clients.
We also have a number of more technically-oriented articles this week. There’s one that looks at how the world of estate planning is changing now that no more than 3,000 – 4,000 Americans each year are actually passing away subject to Federal estate taxes, a second that provides an interesting rebuttal to the recent criticisms about the Shiller CAPE ratio and suggesting it may still be more valid than many give it credit for, and the last is the latest for investment guru James Montier of GMO that seeks to critically debunk several recent new investment trends, from “smart beta” to “risk parity” strategies to investing in real assets.
We wrap up with three interesting articles: the first is an insightful article about blogging itself by advisor and blogger Josh Brown, who makes the important point that advisors shouldn’t worry about being the first to cover breaking news and that instead trying to be last – giving the ultimate and final word on an issue – may actually be the better (and less pressured) way to go; the second is a predictive look from industry commentator Bob Veres at the advisory profession in 20 years, noting that the changes we witness may be far more dramatic than what anyone has been predicting so far (remember, 20 years ago the “internet” was little more than dialing up to America Online or CompuServe!); and the last explores whether the financial planning profession – and the regulators who oversee it – still has too much “marketing myopia” with a nearsighted focus on products and not enough on recognizing that advice itself is our primary value proposition. Enjoy the reading!
Weekend reading for February 1st/2nd:
Nine Things to Know About Obama’s myRA Accounts – During this week’s State of the Union address, President Obama announced a new retirement savings initiative, called the “MyRA”. Expect to hear a lot more information coming out about these accounts in the coming weeks and months, but this article provides a good scoop on the key details: accounts are intended primarily for those who don’t have access to an employer retirement plan; the accounts will function like a Roth IRA (tax-free growth) and without any penalties if withdrawn; investments will be directed into a government bond fund (the “G” fund from the government’s Thrift Savings Plan), providing bond-like returns but with the principal protection guarantee that the government applies to the G fund; there will be an initial pilot program for companies that enroll by the end of the year, with wider rollout next year; workers can invest if they make less than $191,000/year, with an initial investment as low as $25 and subsequent investments as low as $5/month; contributions are intended to be funded via payroll deductions (and businesses will not otherwise be required to administer them); accounts can be rolled over into an individual Roth, and once the account balance grows to $15,000 the MyRA must be rolled over. For further detail, see the MyRA White House Fact Sheet.
2014 Long-Term Care Insurance Price Index Published – The annual survey of Long-Term Care Insurance (LTCI) prices from the American Association for Long-Term Care Insurance (AALTCI) is out, and the results show that the average cost of LTCI in 2014 is up just 3% over last year (after rising about 1.8% the year before). However, given that last fall witnessed the first-time rollout of gender-specific LTC pricing, the overall 3% increase in the cost for a couple masks what was a significant gender divergence: the price of coverage for a 55-year-old male actually declined more than 10%, while the cost for a single woman is up an average of 12%, such that the cost of coverage for single males is now approximately 25% cheaper than for single females. The AALTCI study also found significant differences across companies, where for the same coverage level the cost might vary anywhere from 31% to as much as 114% between companies, depending on the exact policy type, features and benefits, and ages of the insured individuals; overall, the results found that no one company is ever always the least or most expensive, so getting multiple quotes for LTC coverage from different carriers is as crucial as ever.
Former RDR Sceptics Report Shiny Happy Clients – In the UK, 2013 marked a massive turning point for financial advisors, as their Retail Distribution Review (RDR) rules took effect that banned most forms of commissions and ‘instantly’ forced all advisors to operate on a fee-only basis as of January 1st of 2013. Now, a year later, the UK financial services industry begins to look back on the aftermath of the RDR transition, where many had been issuing grave predictions of the disruption to consumers. And the results seem rather favorable; less than 10% of all advisors said they had lost clients in the process of transitioning to a fee-based remuneration model, while 35% said the move to fees simply had no impact on clients, and even among the 25% of advisors who stated their clients were happier with the original commission arrangement, the clients still agreed to the change. At this point, a whopping 2/3rds of UK advisors surveyed are optimistic about their prospects over the next 12 months, while only 10% are expecting business to decline, despite a pre-RDR survey where 40% of advisors believed RDR would impact them negatively. On the other hand, it’s notable that advisors are still skeptical about whether the message is really reaching consumers yet, as just 37% of advisors believe consumers will have better access to advice, 60% of advisors feel clients still don’t really understand RDR and why changes were made, and 75% feel there’s been no change to consumer confidence towards the financial services industry after a year. Nonetheless, RDR advocates suggest that in the coming year(s) consumer confidence will improve as the effects of higher professionalism tied to the new RDR standards (which included more than just compensation changes) begin to have an impact.
How to Train New Advisors – Given that the “old” advisor training model – bring them in, give them a phone book, and let them generate 100% of their own business from the outset – no longer works, firms are working to figure out how to get productive value out of new advisors to enhance the profitability of the firm. The initial step is utilizing new advisors to help leverage the time of existing experienced advisors, taking on perhaps some administrative tasks, along with conducting investment research, helping to prepare plans, and sitting in on client meetings to take notes and capture action items, in what is essentially an ‘apprenticeship’ kind of model. As the new advisor skillset improves (and they earn their CFP certification if they haven’t already), firms look to hand off a small number of existing clients (perhaps smaller clients that the firm wishes to retain but no longer meet current minimums), so the advisor can continue to develop his/her skills. In practice, if the newer planner has been working on all of the service needs for those clients anyway – in a support role – the transition becomes more natural for the client. While these roles are purely support and not business development, New Planner Recruiter Caleb Brown notes that ultimately new planners should still expect to eventually be responsible for some business development activity to continue to increase their income, and some firms note that even if business development isn’t required initially, top candidates should have a ‘business development mentality’ (which should help them to being gathering referrals from those initial clients the advisor begins to work with).
New Research: The Unexpected Variable that Leads to Referrals – There’s a wide range of writing out there about better ways to get referrals, from coaching clients to better understand your value to focusing on a niche or creating “raving fans” based on an outstanding client experience. In this article from Advisor Perspectives, practice management consultant Dan Richards suggests that the real factor that drives which clients refer and which don’t may be far simpler: that some client have more of a mindset and predisposition towards referrals, or what Richards calls the client’s “referral DNA”. To evaluate this, Richards conducted his own research study on referrals, working with an MBA faculty member from the University of Toronto, where they had advisors survey their clients with a confidential, in-depth questionnaire immediately following a face-to-face client meeting (and advisors had their own survey to report their perspective on the meeting). While the advisors involved admittedly were not necessarily a representative sample of all advisors, the survey found that in general, about half the clients had recommended the advisor at least once in the past year, and half of those had done so two or more times; perhaps more important, though, the survey found that the percentage of clients whose advisors had directly raised the topic of referrals was not materially different. In other words, the clients who didn’t actually refer anyone were asked about the same frequency as those who were referring 2+ clients per year, and notably the results found little difference in terms of client satisfaction amongst those who didn’t refer and those who did. However, what was highly correlated with the frequency that the advisor was recommended: how often that client had referred other professionals in other contexts as well. In other words, clients who tended to refer in general tended to refer their advisor as well, and those who didn’t, didn’t. Accordingly, Richards suggests that rather than trying to convert more/all clients to referrers, advisors should focus more on those already inclined to refer, ranking them higher in client segmentation, and giving them more/better referral recognition.
What Story Bill Winterberg told TD Ameritrade Attendees That Encapsulates The New RIA Technology And Marketing Realities – On RIABiz, this article reviews the keynote session from advisor tech guru Bill Winterberg at the TD Ameritrade national conference, which was focused on how to build trust online with prospective clients. Winterberg started by telling his own story of relocating from Dallas to Atlanta, and his search for an accountant. Winterberg started by searching for “Atlanta CPA” but that generated a uselessly-large 3.3 million results, so he then went to Yelp with the same search, and started calling some of the top results of the “only” 140 matches there. However, an approach with one of the top-reviewed CPAs ended quickly when the CPA suggested that Winterberg email the last few years’ of tax returns, as any firm suggesting clients send private documents with Social Security numbers over e-mail “clearly didn’t have the commitment to good security practices.” So Winterberg then turned to YouTube, and ultimately found a two-minute introductory video from a CPA, who in a two-minute video quickly toured the firm’s capabilities and established credibility and confidence; the deal was sealed when Winterberg visited the firm’s website and found a link designed to quickly and securely upload documents for the firm’s employees to review. Winterberg now works with the CPA – who he has still never met in person – because the firm’s digital presence had built so much trust before the first phone call ever even occurred. Ultimately, the key takeaway from Winterberg is that increasingly, your online presence is your digital first impression with clients, who can evaluate and vet an advisor with Google searches, online ADVs, and glancing at Yelp reviews, long before the first meeting or even phone call ever occurs (so advisors may not even realize how many prospects are never contacting them in the first place!). Accordingly, Winterberg recommends five key steps: revisit the firm’s website and move it beyond being “just” a brochure; use video to help prospective clients create a positive impression of the firm; get active on social media to help prospects see you’re an active thinker about your profession; give prospective clients a way to learn more about your firm over time; and upgrade your firm’s technology to ensure you’re appealing to a more tech-savvy prospective clientele.
Does Estate Planning Still Matter? – In Financial Planning magazine, estate planning guru Marty Shenkman explores the plight of estate planning in today’s world. As it turns out, commoditization is not only a force and risk in the world of financial planning; it’s impacting estate planners as well in their own way. Driving this trend has been the rising estate tax exemption over the past decade, combined with last year’s permanence of the portability rules, which have dramatically simplified estate planning for most Americans, and the preparation and filing of estate tax returns – if necessary at all – is greatly simplified and commoditized for those who are just filing to claim portability itself. More generally, while estate attorneys have thrived for a decade on bypass trusts, QTIP marital trusts, and ILITs, in a world where there may only be 3,000 – 4,000 estates per year actually paying (Federal) estate taxes, it’s hard to see how one lawyer can establish his/her approach is materially better than anyone else’s to win business. While this isn’t necessarily the end of estate planners altogether – many of those who sought out estate planners in the past aren’t likely to opt for impersonal generic online services anytime soon – but even with wealthier clients, Shenkman notes that services like LegalZoom are changing client perceptions around estate planning documents, and while estate planning itself might be too personal for an online meeting, a document draft review meeting could be done in a web-conference follow-up. Ultimately, Shenkman advocates that a team approach will be crucial from the estate planner’s perspective – in part because the lack of estate tax exposure for most means estate planners can no longer be as demanding or inefficient as they once were – but also because this new world where estate planning is more than ever about coordinating between asset accumulation and spending, and income tax planning in life and at death, as well as estate taxes (at least for some), a team approach is crucial to effective implementation.
Does The CAPE Still Work? – In recent months, the Cyclically Adjusted P/E (CAPE) ratio, which compares the S&P 500 index to the 10-year average of inflation-adjusted earnings, has gained significant prominence, in no small part due to the fact that its developer Robert Shiller won a Nobel Prize in economics last October for his work showing that stocks displayed “excess volatility” (stock prices are more volatile than the changes in their discounted cash flows would suggest). Yet the CAPE ratio has also been under attack lately, with questions either to its validity or whether it needs some further adjusting, especially given that it currently suggests stocks are significantly overvalued. The core issue focuses on the earnings that are using to calculate the CAPE ratio. CAPE itself is based on Reported Earnings (following Generally Accepted Accounting Principles or GAAP), with data from S&P going back to 1936 and Shiller having done work to extend the data back to 1871; by contrast, Operating (also known as “Pro-Forma”) earnings are a newer invention, adjusted primary for gains and losses that were “extraordinary” and outside a company’s operating business (though there is no standard GAAP-style definition for these adjustments, so they vary slightly from one provider and/or business cycle to the next). But even GAAP rules and accounting standards do shift over time, and as a result some have argued (as discussed previously in Weekend Reading) that the CAPE ratio is broken and comparisons to prior periods are invalid, and especially that more recent FASB changes force more aggressive write-downs of losses that lead to more severe earnings declines during recessions and as a result bias CAPE ratios higher (suggesting markets aren’t as overvalued as CAPE implies). However, the article notes that adjusting to using an operating data series – in an attempt to better characterize ‘unique’ and ‘extraordinary’ write-downs like the 2008 financial crisis, isn’t a solution, given the inconsistency of operating earnings and the fact that they tend to be higher overall which may bias CAPE ratios lower (favorable CAPE ratios using today’s operating earnings are not comparable to historical CAPE ratios using reported earnings). The article also notes that NIPA profits (sometimes suggested as an alternative to reported earnings) have their own flaws, and in general that CAPE critics should be cautious not to cherry-pick adjustments that would make CAPE ratios more favorable without considering adjustments that could make them more extreme as well (for instance, unusually high profit margins that tend to mean-revert suggest CAPE could actually still be understating how extreme the markets actually are). Ultimately, the article does acknowledge that earnings are more volatile in the past two decades than they used to be – though in theory 10-year averaging helps to smooth this – but notes that ultimately the problem may be less a matter of the accounting changes and such, and more a matter of how executive compensation has changed to be more equity centric (7% of executive compensation in the 1950s-1960s, 47% in the 1990s, and 60% by last decade!) and that it may in turn be causing companies to be managed in a more short-term profit-centric manner (big up years are big bonuses, and big down years reset option strike prices for future big up years). Ultimately, though, the article notes that when looking at the historical record – even through recent years – CAPE continues to be a very strong predictor of 10-year returns, and ironically the greatest “misses” are primarily because of how extremely high or low market valuations can revert by the end of a 10-year period (not how extreme the results were at the beginning).
No Silver Bullets In Investing – This recent GMO white paper from investment guru James Montier takes a harsh look at some of the recently popular strategies of the investment world, noting consumers seem to just keep fooling themselves about some new ‘financial alchemy’ solution to turn low returns into high ones, which always ends the same sad way. For instance, Montier suggests that the rise of “Smart Beta” strategies represents little more than the same old “dumb” beta plus some smart marketing. When digging deeper, Montier finds that virtually every equal-weighting-style smart beta strategy available today has a material small and value tilt – two factors known to produce higher long-term returns – and that once the small and value exposure is controlled for, none of the strategies are statistically significant outperformers; in other words, Montier suggests smart beta is little more than another way to package and sell small and value tilts in a portfolio. And even this approach is concerning, as Montier notes that all of these strategies are indifferent to price, even though the reality is that small and value are both at above-average P/E ratios and profit margins right now, suggesting that although their returns have been favorable historically, they may be especially unfavorable from here (similarly, investing in “quality” stocks may be popular and might even do better, but only because quality stocks have been dull and therefore become somewhat underpriced lately). Similarly, Montier notes that investing for “risk factors” amounts to little more than pairing together various long/short trades (e.g., the carry trade is long high-interest-rate currencies and short low-rate currencies, momentum is long stocks that are up and short stocks that recently did badly, value is long cheap stocks and short expensive stocks, etc.), which is concerning because that ultimately involves some form of leverage that has cost and can elevate risk by introducing path dependency to the investment outcome. Montier is also critical of the trend towards risk parity investing as well, for many of the same reasons, including its volatility-centric view of risk, its typical leverage, and its indifference to price and valuation, and that in the end its results are still unlikely to differ materially from a typical 60/40 portfolio (but may entail greater risk of something unexpected due to the leverage). And the situation isn’t much better for investing in “real assets” as a hedge, which again share many of the same problems. The bottom line is that there are no silver bullets, but Montier urges investors to remember the golden rule of investing (which all these strategies ignore): no asset is so good that you should invest irrespective of the price paid.
Timing Your Blog Post To Have Maximum Punch – In Investment News, financial advisor Josh Brown and popular finance blogger at The Reformed Broker provides some great advice for those who are blogging (or looking to do more) about how to time when to write and publish your blog posts. As Brown notes, while you don’t have to comment and have an opinion on every possible issue out there, you will likely want to at least make mention of major events if you’re ever going to establish yourself and gain a following. Yet when everyone is doing that – from other advisors and bloggers to a wide range of professional journalists – how do you stand out? Brown suggests that rather than trying to always be the first with news or be the most knowledgeable about every development, try instead to be last, the concluding author that hits topics “with such force that no one else will bother to opine in your wake.” The distinction is that those journalists trying to be first may have speed, but they lack the depth and context that you bring to the table. For instance, when the May 2010 “flash crash” happened, Brown didn’t write about it immediately (in part because he was handling client phone calls instead!), but at the end of the day what he wrote wasn’t first but was widely popular; similarly, Brown recently wrote a review of “The Wolf of Wall Street” a full two weeks after the movie had come out, but by culling together the reviews of others and his own perspective, he put together a review that was widely read and referenced by thousands. In the end, Brown notes that getting the timing on waiting right is still an art – it is clearly possible to wait “too long” in this age of the 12-hour news cycle. Nonetheless, the bottom line is that you only really need to “own” a story once or twice to cement your place as a recognized writer in the blogosphere, so don’t feel compelled to race against every media/news organization to be first/fastest all the time. Instead, take your time and do it right.
Looking Back at the Advisory Profession 20 Years from Now – On Advisor Perspectives, Bob Veres takes a look at how the advisory profession may change 20 years from now. He starts by criticizing a recent article from Financial Advisor magazine that looked at the advisory world in 20 years (reviewed in last week’s Weekend Reading) and notes that the predictions like more videoconferencing with clients, electronic documents, and a fiduciary trend look more like predictions of 2016 than 2034, overly focusing on trends that are actually already visible and underway today. After all, 20 years really is a long time; realize that ‘just’ 20 years ago, it was 1994, and CompuServe and America Online were “the Internet”, people didn’t communicate by email, Morningstar had just introduced the style box, and Schwab had not yet launched its first full institutional platform. Accordingly, Veres tries to look really far into the future, framed as a phone call from an advisor in 2034 calling back to an advisor of today and reflecting on the differences. Key aspects of Veres’ vision of the future include: with medical science advances people are living longer, which means a surprising number of ‘older’ baby boomer advisors are still active and attending industry conferences (it’s won’t all just be Gen X and Gen Y, even 20 years from now); advisors are interacting entirely virtually with their clients, where the advisor’s “avatar” communicates with the client’s “avatar” on important issues, especially those beyond purely information questions that require a human touch and intervention; portfolios are customized and specific to their clients, and built to match not only their goals but also to diversify against their career and human capital while mutual fund managers now all run subscription services that just provide the investment recommendations that advisors can choose whether to implement; there is no more portfolio reporting, as people can track their progress continually in real time anyway; crowdsourcing has revolutionized investing, and most clients own investments in companies directly (through a bidding process facilitated by their advisors) rather than going through the (expensive) Wall Street mechanisms; accountants now spend less time being paid to audit companies (with the inherent conflicts of interest), and instead are paid by advisors to audit those companies as a research service instead; small advisors still exist, but most advisors work in a multi-partner multi-office organization where young advisors compete to climb the company ladder for the privilege to make partner (and those who don’t make it transition to going solo after having started their career there); and although fiduciary regulation never got passed, the financial planners created their own professional regulatory organization to do it instead, with a minimum standard of the CFP or PFS, two years of experience, a fiduciary standard, and a bi-annual peer review process, and the public distinguishes between real advisors and salespeople simply based on who is and isn’t a member of the professional organization.
Do Financial Planners Suffer From Marketing Myopia? – This article from the blog of advisor marketing consultant Allan Ward makes an interesting point about the challenges of marketing myopia. For example, the railroads of a century ago suffered from this kind of nearsightedness, where they viewed themselves as being in the railroad business, when in truth they were in the transportation business, and as a result eventually lost their market share to other modes of transportation (cars, trucks, airplanes, etc.); the key distinction is that they were too product-oriented (the railroad) and not customer-oriented (it’s about transportation). Of course, the challenge is not unique; the music industry was overly focused on thinking it was in the business of selling records/CDs, not a listening experience (and was almost destroyed by digital music); Kodak though it was in the business of printing photos, rather than capturing important moments, and similarly almost succumbed to the digital threat. Ward suggests that the financial planning world suffers from a similar challenge, as we are still too focused on the products we provide, and not what our clients truly value; in Australia (where Ward is based), this myopia is being exacerbated by the fact that their Future of Financial Advice (FOFA) reforms have banned most product commissions, forcing advisors to revisit what kind of business they’re really in. So what business as financial planners really in? Ward suggests that first and foremost, we need to recognize we’re truly in the advice and problem-solving business, for which a product might be the solution, but that’s only incidental. In turn, this requires a realignment of business model; if your business is in ongoing advice and not products, you need to be paid for ongoing advice and not for products. Unfortunately, regulation has complicated the matter; because we’re regulated like product-pushers and not advisors, we have an immense amount of paperwork to document everything; by contrast, when we go to the doctor, we have a conversation, diagnose problems, and get a (prescribed) solution, and the only thing that’s written out is perhaps the prescription itself or other instructions at the end. While the article doesn’t necessarily come up with full solutions to these challenges, it nonetheless makes the good point that as an entire industry we still often act, are regulated as, and are perceived as, product-pushers where the product is our value; when we truly recognize that our value proposition is advice, and we’re regulated and publicly perceived as such, the world starts to look very different.
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!
In the meantime, if you’re interested in more news and information regarding advisor technology I’d highly recommend checking out Bill Winterberg’s “FPPad” blog on technology for advisors. You can see below his latest Bits & Bytes weekly video update on the latest tech news and developments, or read “FPPad Bits And Bytes” on his blog!