Enjoy the current installment of "weekend reading for financial planners" – this week’s edition highlights an interesting interview with Geoff Davey of FinaMetrica about risk tolerance, some practice management issues on how economies of scale impact the client experience and moving your technology to the cloud, and a few articles exploring the big recent news from the Department of Labor regarding both finalized rules on 401(k) fee disclosure and new proposed rules about how (primarily immediate and longevity) annuities might be integrated into qualified plans. There’s also an interesting look by John Mauldin at some of the economic difficulties and choices the US faces in the coming years, and a fascinating look at the problems the US faces (and some of the causes that got us to where we are) by the brilliant Woody Brock. We finish with a controversial article by Blaine Aiken of Fi360 suggesting that advisors aren’t true professionals because they need a code of professional conduct similar to accountants, and a lighter piece by Angie Herbers about why a lack of confidence is not a career death knell but simply a challenge to overcome. Enjoy the reading!
Weekend reading for February 11th/12th:
Geoff Davey on Risk Tolerance, Risk Perception, and New Standards for the Future – This article from the "10 Questions" section of the February Journal of Financial Planning is an interview with Geoff Davey, co-founder of the FinaMetrica risk tolerance profiling system and an active researcher on how risk tolerance is being addressed globally. Davey highlights three metrics for risk – risk required (to get the return necessary to achieve goals), risk capacity (to withstand financial losses), and risk tolerance (the actual psychological comfort we have when taking risks). His software FinaMetrica is designed primarily to look at risk tolerance in particular, and research on the FinaMetrica results has revealed striking conclusions, including the fact that risk tolerance was actually stable through the financial crisis, and it was risk perception that changed (an issue that has been previously discussed on this blog). Davey also highlights the challenges that can arise when couples have different risk tolerances (which FinaMetrica’s data suggests is significant in a whopping 60 percent of cases); do you test your client couples individually to see if their attitudes about risk are consistent? Perhaps most notable is that Davey and FinaMetrica are working to set global standards around descriptions of risk and risk tolerance… at a time when regulators around the world are re-evaluating how risk tolerance fits into the process of financial advising and the distribution of financial products.
What Do Economies of Scale Look Like To Your Clients? – This article from the blog of Pinnacle Advisor Solutions explores the popular practice management issue of economies of scale from an intriguing angle – how do economies of scale of the firm change the client experience? As the article points out, we typically think of economies of scale as a benefit in terms of the profitability of the firm and the earnings available to owners, but it is also true that the opportunity for a firm to create internal specializations and division of labor (planning, client service, new business development, investments, compliance, etc.) impacts the client experience, too. A more robust offering creates a better first impression for clients, allows for a more in-depth and diverse array of products/services offered, and more specialized customer service. The implication here is essentially that firms with better economies of scale may not only generate more profits for owners, but may also be even better positioned for future growth, a scenario where the successful firms get more successful while the smaller firms struggle with being small. Is this an indirect driver of the increasing urge of firms to merge?
Embracing the Cloud – This article by Bill Winterberg from MorningstarAdvisor explores the trend of advisors to ditch their local servers in favor of moving their data and software to the cloud, both for the sake of reducing costs and for efficiency and fewer headaches. Winterberg highlights some providers, such as Right Size Solutions that allows you to connect remotely to their computers and servers, rather than using your own, as a much easier-to-manage ongoing cost than buying all the equipment yourself. And ironically, although most firms worry about data security on the cloud, Winterberg highlights one firm that moved to the cloud after criticism during an SEC audit that the firm’s in-office servers were actually at even more risk from a local break-in; the pressure on quality security for remote services used in the medical field, in particular, has upped the security standards for all. Although the ongoing costs aren’t cheap, in the long run cloud-based solutions are looking increasingly competitive.
Feds Disclose New 401(k) Rules – This article from the Wall Street Journal covers some big regulatory news – the Department of Labor has finalized its new rules for fee disclosure in 401(k) plans, with an effective date of July 1. The implementation date is a delay from the originally proposed April 1, but the DoL’s announcement affirms that July 1 is the final delay and that it will push forward with implementation despite some ongoing pushback from the industry. The new fee disclosure rules will require plans to fully disclose fees paid, including both direct and indirect compensation of administrators and underlying investment expenses, and are expected to cause significant turmoil for some 401(k) plans who may discover that their participants have been paying far more than they realized. To ensure compliance, the DoL rules require employers to fire firms who fail to provide the required fee disclosures. With $4.3 trillion in 401(k) plans involved, it will be an interesting plan renewal season this fall.
The Return Of Pensions? Treasury Backs Annuities In Retirement Plans – This article by Mary Beth Franklin in Investment News highlights a tie-in to last week’s Department of Labor announcement of new 401(k) rules, which is a fresh push by the government to increase direct availability of annuity offerings inside of 401(k) plans at the time of retirement. The proposals from DoL are being coordinated with the Treasury, which issued new proposed Regulations about how to handle some of the tax complexities that can arise, such as longevity annuities that aren’t designed to begin payments until age 80 or 85, even though required minimum distributions generally begin at age 70 1/2. Key changes from the proposed rules include: easier process for plans to offer combinations of annuity or other options, rather than "all-or-nothing" choices; clarify treatment of longevity annuities in retirement plans; clarify rules for plan rollovers to purchase annuities; and address coordination of 401(k) spousal protection rules with annuity purchases. In reality, plan participants can already roll money out of 401(k) plans into IRAs to buy annuities, but the focus of the new proposals is to allow those who are interested to expedite the process by buying (primarily immediate or longevity) annuities inside the plan and/or at the time of retirement. Proponents point to the benefits immediate and longevity annuities can provide for guaranteed lifetime income; opponents express concerns that the annuity industry will try to grab at money with opaque and/or expensive offerings. Time will tell.
American Gridlock: Why The "Left" And The "Right" Are Both Wrong (free registration required but worth it) – This article from John Mauldin’s "Outside the Box" column highlights an essay from economist Woody Brock of Strategic Economic Decisions. The column, essentially an excerpt from Brock’s new book by the same title, highlights several fascinating issues, from how to prevent future financial perfect storms like 2008, to why the US does such a poor job of bargaining with China, to what alternatives there are to capitalism given its current unpopularity, and what it means for everyone to pay their "fair shares" of income and wealth. Brock’s writing is fascinating, but covers too much ground to summarize; I encourage you to read it and judge for yourself!
Who Took My Easy Button? – This weekly installment from John Mauldin on Advisor Perspectives explores the current outlook for the US and the decisions that we face in the coming years. Mauldin notes that with unfunded liabilities of $50 to $80 trillion (with a T!) for Social Security and Medicare, the current system is simply unsustainable; we’ll either change it in 2013, or it’ll wait until the 2015 or 2017 elections. Every election cycle we wait will make the consequences dramatically worse. Mauldin also highlights some of the recent discussions about the employment numbers (bottom line: these are the best estimates the BLS can come up with, and they’re decent, but anyone who trades on the number is gambling), and presents an interesting discussion about how much of the coming job growth in the US is projected in low-skill low-wage jobs that don’t even require a college degree. Mauldin also notes that even within the US, we are experiencing some Europe-like "trade imbalances" – it costs almost half in employee costs to make a car in the South as it does with union labor in Detroit, and companies are moving production and jobs to take advantage of favorable business climate, costs, and taxes in all industries. Mauldin finishes with a discussion of reforms needed in the health care system, both to fix our fiscal problems, and simply to provide better and fairer care to our citizens.
Why Advisers Aren’t True Professionals – This article by Blaine Aiken of Fiduciary360 discusses the current state of financial advisor professionalism and compares to the world of accountants. Aiken notes that while financial advisors have grown fiduciary standards, they still do not place their professionalism in the context of their role in society and their obligations to fellow practitioners as well. Aiken seems to imply that one of the key missing pieces is the way bad financial advisors are allowed to continue to practice and are not effectively held accountable by their peers the way other professions do. In the end, Aiken’s primary point is that financial advisors need a more robust, society-centric code of conduct. Personally, I think Aiken has an interesting point, but the path to actually solving the contrast he draws between financial advisors and accountants is not well addressed; as a number of organizations have recently shown, just having a higher code of conducts doesn’t help if the organization or the professionals following the code aren’t capable of effectively enforcing it. On the other hand, perhaps this is an implication that the best way to higher standards for financial advisors is to be anchored to an existing professional standard like the other world of planners in the AICPA’s PFP section?
Why A Lack Of Confidence Is Not A Career Death Knell – This blog post by consultant Angie Herbers on AdvisorOne explores the all-to-common-but-rarely-discussed challenge that many advisors and employees lack personal confidence. And lacking confidence can be a significant block on career progression, especially for financial planners who may have trouble convincing clients to have confidence in them if they don’t have confidence in themselves. Herbers highlights the irrational fear that many of us have – called the impostor syndrome – where we are convinced that we don’t deserve our current role and/or live in fear that our boss will eventually discover this and fire us; the odd challenge, though, is that the impostor syndrome is equally common in successful people and unsuccessful ones! In other words, it’s all in our heads. Herbers recommends conquering this and our other confidence challenges by taking a realistic look around us, focusing on what it is we really do well; after all, if you weren’t doing something that helps your firm succeed, you wouldn’t have a job. Focus on the positives, build on them, do more of what makes you successful already, and over time you can build your confidence to take your career to the next level.
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!