Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with the big news that President Trump has just issued a Memorandum to the incoming (but not yet confirmed) Secretary of Labor in an attempt to delay to the DoL fiduciary rule, with guidance to “consider whether to rescind or revise” it… though it still remains unclear whether the rule can actually be stopped without taking effect for at least some period of time, given the requirements for Notice and Comment periods before a new-new rule could be issued. Also in the news this week was the announcement that the original robo-advisor Betterment is raising fees substantially (by 67%) on its larger accounts over $100,000, and rolling out a series of human advisor service models (at even higher price points), as the robo-advisor definitively pivots away from its “pure” robo roots; and an announcement from TD Ameritrade that its new Veo One platform is live, along with a new iRebal Model Marketplace that could substantially shake up the landscape of current “robo” and TAMP providers.
From there, we have a few technical planning articles, including a new retirement study from Wade Pfau comparing the equity risk premium to annuity risk pooling as a means to fund retirement, another new retirement study from the UK finding that the “U-shaped” retirement spending path (where retirees spend more on active lifestyle in their early years, and more on medical/long-term care expenses in their later years) isn’t substantiated by the actual data on retirees (which shows that real retirement spending just flat-out declines every year throughout retirement), and a look at a new approach to helping parents plan for college expenses by determining an amount that the child is “pre-approved” to spend on college before even beginning the process (which avoids awkward situations where the family tries to figure out how to afford an unaffordable college after already being accepted, when it’s hard to back out).
There are also a couple of practice management articles this week, from a look at why just delivering great service isn’t enough to get client referrals and good client satisfaction (and why your “great” service has to be articulated in a client service standard), to a discussion of all the ways that advisors lose out on prospects before ever having a chance to meet with them, and an exploration of the different ways advisory firms are beginning to shift towards a younger generation of clientele (from forming full-family teams, to cultivating “intrapreneurs” that create a firm-within-a-firm to serve younger clientele).
We wrap up with three interesting articles: the first is a fascinating look at what exactly causes us to procrastinate, and what the behavioral research says are the best techniques to overcome it; the second provides tips on how to be (and remain) productive in what is often an unproductive work/office environment; and the last is a great reminder of how the path of success can actually be the very thing that causes us to lose focus on what made us successful, and how to take a pause and re-set what your focus should be (and what you want it to be), both in your work and in your life.
Enjoy the “light” reading!
Weekend reading for February 4th/5th:
DoL Fiduciary Rule Delayed 180 Days To Be Studied Again Under Trump Directive (Investment News) – The big news today is that President Trump issued a Memorandum (notably, NOT an Executive Order) that will reportedly delay the applicability date of the Department of Labor’s fiduciary rule by 180 days (although the Memorandum does not actually specify it, nor even indicate how a delay is possible), and directs the DoL to conduct a new “economic and legal analysis” to determine whether the rule is likely to harm investors and potentially increase the price of advice, ostensibly so that subsequently the DoL can propose a new rule to “rescind or revise” the regulation after that point. Notably, so far President Trump’s Labor Secretary nominee, Andrew Puzder, has yet to even be confirmed by Congress, though his approval is ultimately anticipated to occur sometime later this month. For those who have been lobbying against the fiduciary rule, President Trump’s order is being hailed as a victory, though notably the directive is merely to “study” the rule again, and it’s not even clear whether/how it will be delayed, much less whether anti-fiduciary lobbyists will manage to push hard for a total repeal or elimination in the meantime. Especially since at this point, substantively altering the rule would still require going through a new rule proposal with a new Notice & Comment period, which means the “old” (about-to-be-implemented) rule could still take effect in the interim (later this year or in 2018), before a subsequent new-new rule might be issued. An attempted delay also provides the opportunity for the SEC to get involved with its own rule, or for Congress to act with a new law that could “kill” the DoL fiduciary rule as well; however, at this point the SEC is only operating with 2 out of 5 SEC Commissions, while the Democrats still holding enough votes in the Senate for a filibuster and Senator Warren just issued an updated report this week detailed the “salacious” sales incentives/prizes offered to annuity agents selling into retirement accounts (which means the Democrats are clearly still looking to fight to save the rule). Similarly, groups like the Consumer Federation of America, and the Financial Planning Coalition, are gearing up to defend the rule, even as Senator Warren’s office is calling on major financial institutions that have already prepared for the rule to step up and declare whether they would support it at this point (given that the substantive compliance work has already been done), and major firms like Merrill Lynch and Ameriprise have already said they’ll stick with their DoL fiduciary changes even if the rule is altered from here. Which means, in the end, it’s still not clear if the rule is even going to be delayed now, much less whether the fiduciary rule is really going away, or whether this will simply be a path to alter the rule that remains on the books (perhaps with slight amendments to defang its most “dangerous” provisions, like the class action lawsuit requirement). (Michael’s Note: An earlier version of this summary reported a 180-day delay to the fiduciary rule. However, later this afternoon the actual Memorandum was released on Whitehouse.gov, and it does not actually include any guidance on a 180-day delay!)
Betterment Raises Fees And Pivots To Platform Offering Human Advisors (Michael Kitces, Nerd’s Eye View) – This week, the original robo-advisor Betterment announced substantial changes to its platform. Specifically, the retail robo-advisor fee is being changed to a flat 0.25%, which represents a 10bps fee cut for accounts under $10,000 (which were previously charged 0.35% or a $3/month flat fee if there were no ongoing contributions), but is a whopping 67% fee increase to large accounts over $100,000 (which were previously paying just 0.15%). In addition, and perhaps even more significant given the “robo” trend, Betterment also announced the release of Betterment Plus which for 0.40%/year (and a $100k account minimum) will once-per-year offer access to a CFP professional, Betterment Premium which for 0.50%/year (and a $250k minimum) will provide year-round access to a team of CFP professionals, and the Betterment Advisor Network which will introduce Betterment retail customers to independent RIAs using the Betterment For Advisors platform. In other words, the leading robo-advisor just pivoted to offering human financial advice, at a higher price point, for all its mass affluent investors. Notably, though, the pivot to digital advice comes at an awkward time for Betterment, as it not only capitulates to offering the exact human financial advisors it once claimed it would disrupt, but also faces the rapid growth of Vanguard Personal Advisor Services providing a similar solution with human CFP professionals for only 0.30%/year and a $50,000 minimum, and the recently announced Schwab Intelligent Advisory which will also offer 24/7 access to CFP professionals for 0.28%/year and a $25,000 minimum; in other words, Betterment originally set out to disrupt financial advisors and Financial Institutions with low-cost robo advice, and now finds itself offering those same financial advisors itself, while charging almost double the advisory fees with 5X to 10X the account minimums as existing incumbents! More broadly, though, the Betterment shift isn’t really about shifting from being a robo-advice competitor to a hybrid digital advice competitor instead; it’s actually about pivoting to a platform business, where Betterment aims to simply collect a net 0.25%/year regardless of whether the consumer chooses Betterment Digital, Plus, Premium, or Advisor Network – akin to companies like Charles Schwab, which also offer a “robo” managed account, Financial Consultants, Private Client, and an Advisor Network. Nonetheless, Betterment’s challenge going forward will still be the same as it always has been – figuring out how to acquire a high volume of clients, without being buried by client acquisition costs, particularly as it now has to compete head-to-head with less expensive incumbents that already have bigger brands and more marketing clout.
TD Ameritrade Institutional Makes Splash With Revamped Veo One, New iRebal Model Marketplace (Joel Bruckenstein, Financial Planning) – At their national financial advisor conference this week, TD Ameritrade formally rolled out its new Veo One platform into general release, after months of private beta testing. At launch, Veo One includes integrations with 14 major integration partners, including CRM providers Junxure, Redtail, and Salesforce, financial planning software solutions MoneyGuidePro and Envestnet/FinanceLogix, portfolio management solutions Black Diamond, Morningstar, and Orion, and digital document management solutions DocuSign, LaserApp, and Laserfiche; ultimately, the more-than-100 current Veo integration partners are expected to transition to Veo One over the next few quarters. The biggest change in Veo One is an improvement in capabilities for bi-directional data – in other words, pulling in data from third-party providers, and pushing data out to them as well, which makes it more feasible to truly use Veo One as a central dashboard, and still have the Veo-based data populate other software solutions as necessary (e.g., an address update in Veo can populate and push to CRM, and financial planning software, and portfolio management software). The Veo One dashboard will also centralize a lot of operational workflows, with easier capabilities to track all open case files in one place, and get overall analytics (e.g., tracking on how often NIGOs occur). Also announced with the new Veo One enhancements is a new iRebal Model Market center – in essence, a supermarket of model portfolios constructed by well-known asset managers, that can be populated directly into iRebal and run by the advisor directly; this will still require the advisor to actually execute the trades (using iRebal), but conversely means the advisor isn’t forced to give up control to the TAMP itself (which may be appealing for some). Initially, TD Ameritrade will offer some free third-party models, and ultimately asset managers will be able to offer their own third-party models, and charge a (small?) fee for their intellectual property; in essence, the advisor can run the equivalent of an SMA strategy, but using their own rebalancing software with control.
Retirement Income Showdown: Risk Pooling Versus Risk Premium (Wade Pfau, Journal of Financial Planning) – In the past, Pfau has framed two philosophies of retirement income planning: the ‘probability-based’ approach that relies on the upside potential of a stock portfolio, and the ‘safety-first’ approach using the contractual guarantees of income annuities. In essence, the difference is whether the individual wants to retain the risk (and reward potential) of the equity risk premium, or instead transfer that risk and rely on the benefits of risk pooling instead. According, Pfau compares the relative benefits of annuity risk pooling and mortality credits vs relying on the upside of the equity risk premium, as measured by both the ability to fund retirement spending, maintain liquidity to cover contingencies and support further lifestyle enhancements, and provide a legacy to the next generation. Notably, with an acknowledgment of at least some goal of lifestyle enhancements and legacy, annuitizing 100% of the available assets clearly won’t be feasible; as a result, Pfau effectively compares a pure portfolio approach to a combination of a portfolio plus partial annuitization. On this basis, Pfau finds that annuity solutions clearly dominate a pure bond portfolio, due both to the upside potential of mortality credits on top of just bond principal and interest alone, and the assuredness that the retiree cannot outlive a lifetime annuity the way a bond ladder time horizon can be outlived. In the case of comparing the annuity to an equity portfolio, not surprisingly, the portfolio provides a far wider dispersion of potential results (given the volatility of equity returns), but Pfau notes that the need for retirees to withdrawal a more modest amount to protect against this uncertainty (i.e., a low safe withdrawal rate to defend against sequence-of-return risk) means the portfolio effectively has less liquidity, because so much has to be held in reserve “just in case”; by contrast, partial annuitization actually reduces the need to have a large contingency set-aside in the portfolio to preserve against sequence risk. Overall, this suggests that partial annuitization can actually allow for more “true” liquidity and freedom to use more of the retiree’s available assets than a pure portfolio, while still securing spending goals, though Pfau’s results do find that the portfolio provides a greater legacy value on average (though for retirees that live well beyond life expectancy, eventually the partial annuitization and its mortality credits can yield enough to secure more of a legacy value, too).
Busting The Myth Of “U-Shaped” Retirement Spending (Abraham Okusanya, Finalytiq) – The conventional view of retirement spending is that it follows a “U-shaped” path throughout retirement, with higher spending in the early retirement years due to an active lifestyle, declining in the middle years as travel slows down, and then rising up again at the end with the onset of medical expenses. Instead, recent research in the UK finds that retirement spending just continuously declines in real dollar terms throughout retirement (and research in the US has found similar results!), and as a result retirement assets actually tend to grow throughout retirement, as retirees tend not to dip into principal in the early years and then reduce their spending so much they don’t dip into their assets in the later years, either! And notably, the phenomenon is not unique to just “average” households; in fact, amongst higher-income households, the decline in spending actually tends to be more dramatic, as ostensibly there are even more discretionary expenses that can be reduced in the later years. And amongst those who tend to spend more frugally in the first place, their spending just trails their available retirement income throughout retirement. Of course, some individual households may still be at risk for an uptick in spending in the later years due to long-term care needs, but the available data suggests the effect is either short enough, mild enough, or uncommon enough, that when analyzed across broad slices of the retiree marketplace, the evidence still finds that on average retirement spending just keeps declining (in real terms) straight through to the end of retirement! Which suggests that the original approach in the safe withdrawal rate research – that spending remains level (with inflation) throughout retirement, may be overstating actual retirement spending needs, which in turn implies the initial safe withdrawal rate could actually be higher than commonly presumed!
Changing The Approach To College Funding Advice (Joe Messinger, Journal of Financial Planning) – In just the past 13 years, outstanding student loan debt has grown by more than a trillion dollars, from just $240B in 2003 to $1.3T by early 2016, and it’s projected to grow by another $100B in 2017 alone, with almost 7-in-10 students from public and non-profit colleges graduating with debt (at an average of $30,100 per borrower). The four-year sticker price for college today varies from $100,000 for in-state schools, to $250,000 for elite/private colleges. Fortunately, the median earnings of young adults with a bachelor’s degree is just $49,990, which is 66% higher than the median earnings of young adults who only completed high school; nonetheless, with an income differential of “just” about $20,000/year, it’s still important not to “overpay” for college – a decision that’s difficult in real time when a student is getting college acceptance letters and trying to make a decision. Accordingly, Messinger suggests the approach that parents think in advance about what the family can realistically afford, and consider it a “College Pre-Approval” spending amount; in other words, just as you might get pre-approved for a mortgage loan (and then constrain your house-shopping to the ones you can afford based on that pre-approval), so too can families first figure out what the child should be “pre-approved” to spend, and can then use that as an upfront constraint in the college shopping process. And figuring out the Pre-Approved College spend doesn’t have to be overly complex. It starts with simply determining available resources, which include both savings (from investment accounts to 529 plans), available cash flow (from parents’ income, or even the child’s earnings), and available tax benefits (e.g., the American Opportunity Tax Credit at $2,500/year)); next, consider what an “acceptable” maximum student loan would be for the student to graduate with; and finally, add the planned loan plus the available resources together to determine the reasonable spending budget for college. The key point – it’s a lot easier to constrain the college search up front by what’s already determined to be affordable, than to apply and figure it out later (which often causes families to stretch beyond what they can really afford, because it’s hard to say no to an expensive college after the acceptance letter has already arrived!).
Why Delivering Great Service Isn’t Enough (Julie Littlechild, Absolute Engagement) – When it comes to generating referrals, it’s not enough anymore to just provide good service; instead, it’s crucial to proactively manage service expectations as well. For instance, Littlechild did a survey of investors and found that clients are materially more likely to provide a referral if their advisor has outlined the services a new client can expect to receive in the first 12 months; similarly, the most satisfied clients themselves were also most likely to be the ones for whom service expectations had been outlined, ensuring that the clients had appropriate expectations that the advisor could meet. Unfortunately, though, many advisors don’t necessarily manage those client expectations effectively. Accordingly, Littlechild outlines a straightforward four-step process to address this: 1) Make a clear commitment regarding your client service standards in the first place (that is communicated to the client); 2) be prepared to exceed the expectation once you’ve set it (which means you should be certain to set an expectation you can achieve!); 3) explain the process of the service, not its outcome (e.g., don’t say “satisfaction guaranteed” when you can’t actually be certain they will be satisfied, but you can say “we’ll get back to you in 24 hours about this issue” and then respond even faster); and 4) when a problem arises, communicate proactively throughout, so clients know where they stand. Notably, to deliver on this, it’s necessary to actually define what your “client service standards” actually are in the first place (and ideally, … which itself can be an excellent exercise in thinking through what, exactly, you will do to give clients a good experience. In the end, Littlechild also provides a sample Client Service Agreement that you can use as a template for your own advisory firm.
Why Your Potential Client Went MIA (Craig Faulkner, Financial Planning) – Trust is the essential core of the advisor-client relationship, yet the challenge is that it’s hard to effectively convey to prospective clients that you’re trustworthy in the first place… since, unfortunately, just saying “you can trust me” rarely accomplishes the desired outcome, and in an increasingly digital world, you may not even have the opportunity to meet with the prospect face-to-face to make your case! Accordingly, Faulkner suggests four tips that can help to enhance trust with prospects (or alternatively, that can undermine trust if done poorly): 1) Have a professional photo on your website, since the reality is that human beings are visual creatures (and ideally, not just a professional headshot on your bio page, but pictures of you and your team throughout the website); 2) be certain that your website itself is up to date, as the reality in today’s landscape is that a website isn’t just a digital marketing brochure, but a way that consumers do “due diligence” to validate that you’re a bona fide professional (and a low-quality or outdated website may make them question whether you really take your business seriously); 3) Be certain you’re “findable” online in the first place, as the reality is that even having a good website doesn’t count if the website doesn’t come up in the search results when your client Googles you (which is why “SEO”, or Search Engine Optimization, matters); 4) Ensure that all of your online business information is accurate and update-to-date (including not only your own site, but other professional business listings, like a Yelp page or Google Business page); and 5) have an array of “Call To Action” opportunities on your website, such as a newsletter sign-up, because the reality is that not every prospect is really to call you and have a meeting after the first visit!
The Transition To Serving Multiple Generations: 3 Ways To Get There (Missy Pohlig, SEI Practically Speaking) – In many advisory firms, there’s a growing awareness of the importance of serving multiple generations beyond just baby boomers, but a lingering question of how, exactly, to expand the practice to serve those multiple generations. Pohlig suggests three potential paths: 1) the “conventional” route, where an advisor team that includes a lead advisor and a younger associate or paraplanner has the younger advisor work with younger clients, which is both a good learning opportunity, and a better likelihood that the younger advisor can effectively relate to the younger client… and as both the advisor and young client grow older, and experience and wealth accumulate, the relationship can mature as well; 2) developing an “intrapreneur”, a young advisor who has more substantive planning experience and entrepreneurial drive but doesn’t necessarily want to go out entirely on his/her own, who can built a “firm-within-a-firm” structure to serve younger clients within the four walls of the existing firm (while giving him/her the latitude and autonomy to build the client base themselves); or 3) becoming a family practice, where the firm deliberately expands and deepens its team structure to serve multiple generations of the same client family, including an ‘older’ and ‘younger’ advisor who see all the client families together to maintain rapport up and down the generations of the family tree. Perhaps not surprising, the first option seems to be the most popular, as it fits most easily into existing advisory firm infrastructures, while the second is highly dependent on finding the “right” intraprenreur in the first place, and the last requires a real commitment from the firm to operate in a true team structure to serve the entire family… though notably, it’s the latter two options that may have the most upside potential if they’re executed successfully as well.
Procrastination: A Scientific Guide On How To Stop Procrastinating (James Clear) – Procrastination is a challenge that virtually everyone faces at some point or another, and has been recognized all the way back to the ancient Greek philosophers (who called it “akrasia”, or the state of acting against your better judgment); it seems to draw from the fact that our brains overweight the value of immediate rewards to future rewards, and thus we constantly are succumbing to near-term desires and opportunities. In turn, this means that the way to work through procrastination is to turn more distant goals and future rewards (or potential punishments) into something more immediate and present; in fact, it’s some near-term tangible realization that often drives us over the procrastination action line as is. Which means we can actually push ourselves through procrastination by trying to create more near-term tangible outcomes that help to move us forward. For instance, one strategy is “temptation bundling”, where you pair together something you “need” to do (but procrastinate on) with something else you already do and enjoy, such as “reading” by listening to podcasts or audiobooks while you’re exercising (or alternatively, exercising while you were going to be listening to a podcast or audiobook anyway), or getting a pedicure while processing overdue work emails. Alternatively, you can also make the consequences of procrastination more immediate – for instance, exercising can be easy to procrastinate on, but exercising with a buddy makes it harder to procrastinate because now you’re not just ditching the exercise, but also face the social awkwardness of ditching your exercise buddy! Another approach is to create a “commitment device” – a strategy that makes it easier up front to follow through in a good way later, such as curbing an overeating habit by delivering purchasing food in smaller individual packages, or deleting tempting games or apps from your smartphone so they’re not there to be distracted by. Or alternatively, you can simply try to break down big challenges into smaller ones, to make the goal feel more achievable in the first place; for instance, one famous author published an astonishing 47 novels with the remarkably simple goal of just trying to write 250 words every 15 minutes and repeating that for a few hours each day, and cumulatively achieved an incredible outcome. Perhaps most important, though, is to ensure that when you’re finally getting stuff done, you focus on what really matters most; accordingly, Clear recommends the “Ivy Lee Method“, which entails writing down at the end of the day the 6 (but only 6) most important things to accomplish tomorrow, prioritize them, and when you arrive tomorrow, work on each task in order (and don’t move on to the next until the prior is done)… and by definition, you’ll ensure you’re always doing the most important things that need to be done each day!
How To Be Productive In An Unproductive Work Environment (Nicole Lipkin, Think Growth) – One of the benefits of working in an office environment is the opportunity to interact with co-workers, both to expedite the process of getting work done for clients, and also to form social relationships. The bad news is that all those co-worker interactions can impair work productivity! To help combat the challenges of a distracting workplace, Lipkin provides several suggestions about how to maintain/improve productivity, including: get a pair of noise-cancelling headphones (ideally playing some white noise or light background music) to proactively eliminate the noise distractions; set boundaries with your time (e.g., 1-2 hour blocks where you state that you’re not to be interrupted, even putting a sign on your door or on your desk to signal when you’re not available) so you can have a block of time to focus and get big tasks done; chunk your time so you’re not switching tasks as much (e.g., set an hour to knock through all your email in the morning at once, then an hour to do various phone calls one after another, etc.), as task-switching and “multi-tasking” is actually a big productivity reducer, and ideally create further separations in your day for “creative” work (focused projects) vs “reactive” work (responding to calls/emails); don’t go to every meeting if you don’t really have to go; recognize what’s really a fire to put out, and what’s not (as you don’t have to try to solve every problem yourself!); if you’re drowning in work, pull your boss aside and have him/her go through the list with you to more clearly prioritize what needs to be done first (and if your boss is inconsistent, ask for confirmation); and if co-workers aren’t carrying their weight, communicate about it – not by being a ‘tattletale’, but perhaps by sending an email to the boss, cc’ed to everyone in the group, asking for “confirmation” of who’s responsible for what (so the response will be clear and in writing). But the bottom line is simply this: the only reliable way to get different results is to change your own behavior, so recognize where your blocking points are that hurt your productivity and make a change!
Don’t Let Success Interfere With Your Work (Ross Levin, Financial Advisor) – For many financial advisors, we start a business to help our clients and see them served in a particular way. The challenge, though, is that as the advisory firm grows and success emerges, it can be difficult to keep focused; as a result, it’s sometimes necessary to be proactive in (re-)setting your focus. Levin cites the book “Designing Your Life: How To Build A Well-Lived, Joyful Life” as one way to do this – the book advocates creating a “work manifesto” and a “life manifesto” of how exactly you want to live each, and how they should intersect. For Levin, the work manifesto is to focus on improving the lives of the firm’s clients, in a way that goes beyond “just” the technical information and involves helping connect them with their money so they can be more productive in other aspects of their lives… which entails the “slow work” of really going deep with clients. Yet again, if the firm doesn’t re-affirm its focus on that goal, it’s possible to quickly get swept up in the growth and business metrics of the firm, and lose sight of what once mattered that made it possible to be successful in the first place. Which raises the question: do you feel like your advisory firm has lost its original purpose, and that you need to take the time to reset its focus again?
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.