Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with the latest on the prospective fifth round of economic stimulus in response to the coronavirus pandemic, with a formal legislative proposal delayed until next week, but the details starting to take shape, including another round of stimulus checks (similar to the March stimulus), and an extension for unemployment benefits (but likely at a lower level than the prior), while a proposed payroll tax cut through the end of the year appears to be off the table… with more details anticipated early next week as Congress aims to pass something by the end of next week (July 31st, when Congress goes back out on its August recess, and the current additional unemployment benefits would otherwise expire).
From there, we have a number of articles about the growing focus on business continuity for financial advisors, from a recent NASAA study raising the question of whether succession plans may need to become mandatory at some point as advisors age (and cognitive impairment and diminished mental capacity becomes a risk not just for clients, but for older advisors themselves), the rise of business continuity planning as a top concern for advisory firms themselves (in light of the pandemic), and the rise of “Sell And Stay” transactions where advisory firms choose to sell and harvest the economic value of their businesses, but then remain as employees with the acquirer for several years thereafter (decoupling the decision of when to sell and no longer have responsibility for business continuity, from the actual decision to exit the business and retire altogether).
We also have several articles on cash flow and budgeting, including a look at the “Values-Based” approach to budgeting, how the biggest driver of “super savers” is not scrimping on avocado toast and lattes but driven primarily by decisions about housing and automobiles, how the pandemics curtailment of travel may force major changes in ‘premium’ credit cards that offer no-longer-as-valued travel rewards, why having a “finhobby” to take your mind off financial stresses can help to come up with financial solutions, and why a growth mindset really can help one “think” their way to financial success.
We wrap up with three interesting articles, all around the theme of navigating one’s own career to success: the first explores how, despite the growing focus in modern society on the value of entrepreneurship, we may be underrating the value (and economic wealth-building potential) of the “traditional” career; the second explores the rise of coaching as a way to better navigate one’s career transitions (whether within their firm or when looking to make a change) to get the guidance needed to really find an ideal role and path for the future; and the last explores the “canvas strategy” for career-building, where the focus is simply on doing the work that has positive impact regardless of who gets the credit… recognizing that in the long run, deferring credit for one’s success often just builds compounding interest that makes it even more rewarding (and in the meantime, helping others along the way of your career just makes you indispensable in your current job, which isn’t a bad place to be in the current economic environment!).
Enjoy the ‘light’ reading!
Coronavirus Stimulus Plan Delayed To Next Week Over Disagreements (Andrew Restuccia & Andrew Duehren, Wall Street Journal) – The big buzz this week has been Congress working on the next (would-be 5th) round of economic stimulus in response to the coronavirus pandemic, which was anticipated to be unveiled on Thursday with a goal of passing the legislation by the end of next week (July 31st) before Congress goes back out for its August recess. However, ongoing disagreements between Senate Republicans and the White House delayed the finalization of any legislative proposal, estimated at approximately $1 trillion, until early next week. The legislation is expected to extend the ‘temporary’ increase of unemployment benefits through the end of the year (but potentially at a lower amount of just $100/week or $400/month, instead of the current $600/week will expire on July 31st, with an aim of replacing an average of 70% of a former worker’s wages), and is anticipated to include another round of stimulus checks (now likely to be a $1,200 payment with a $75,000 income cap, mirroring the provisions in the prior March pandemic legislation), though notably a widely discussed payroll tax cut previously advocated by President Trump appears to be off the table (largely out of concerns that it doesn’t effectively direct the dollars to the segments of the economy most in need of stimulus support, as businesses that are closed and workers that are unemployed due to the pandemic would not benefit). Other proposals on the table include additional funding for coronavirus testing, funding for schools and universities, and liability protection for businesses that reopen in the midst of the pandemic. Though ultimately, passage of the legislation – and in particular, overcoming the risk of a filibuster in the Senate – will require bipartisan support, and the question remains whether or how much negotiating will occur between the parties once the Republican proposal is announced… so stay tuned for a busy news cycle in the coming week as the active negotiations begin under a tight deadline.
NASAA Study On Aging Advisers Suggests Firms Consider Requiring Succession Plans (Investment News) – In recent years, both state and federal regulators have taken an increased focus on the issues of aging, cognitive impairment, and diminishing capacity of clients, and the role that financial advisors can play in spotting such issues (and even helping to protect against elder financial abuse). But now, a new report from the North American Securities Administrators Association (NASAA) finds that an emerging concern is how to deal with financial advisors themselves who may be aging to the point of diminishing mental capacity and cognitive decline (given that financial advice is a career that many advisors can and do remain active in well into their 70s and even 80s). Potential action items the report suggested include training for staff to recognize red flags of diminished capacity and cognitive impairment, setting more guidelines about where and how regulators might intervene, and the possibility that advisory firms might be required to establish a succession (or at least, continuity-and-exit) plan, regardless of the age of the advisor, to ensure that clients aren’t left hanging in the event that an advisor is determined to no longer be competency to serve as a financial advisor.
Business Continuity Planning Becoming Top Compliance Concern For Advisory Firms (Mark Schoeff, Investment News) – In the latest “2020 Investment Management Compliance Survey Survey” from the Investment Adviser Association, compliance officers from investment advisory firms are now reporting that business continuity planning is the #1 compliance concern. Fortunately, the news is generally good about how RIAs handled the pandemic itself – only 12% of firms reported a “material impact” due to the pandemic, despite 81% reporting that their entire staff was working from home, and while only 53% of firms had business continuity plans that included contagious diseases as a consideration, 96% of business continuity plans that didn’t specifically cover pandemics were still found to be operating effectively. Still, though, business continuity is now the top reported concern of RIAs (by 64% of firms), while cybersecurity fell to second at 57% (after having been the #1 concern for the past 6 consecutive years). Other (less-urgent) compliance concerns of note included advertising/marketing (25%), conflicts of interest (21%), and environmental, social, governance, and sustainability concerns (14%). Though notably, more than 2/3rds of the respondents were from RIAs with $1B+ in AUM, raising questions of whether the pandemic responsiveness may have been different amongst the typically-much-smaller independent RIA advisory firm.
Buyer Benefits Of A Sell-And-Stay Transaction (FP Transitions) – One of the biggest challenges for financial advisors considering whether to sell their firms is the typically all-or-none nature of the transaction, where the advisor either continues to be an advisor and own the business or sells and exits altogether as a hard-stop retirement. Yet the reality is that an increasing number of advisory firm transactions are of a new “Sell And Stay” variety, where the advisory firm owner sells their shares but remains on board with the acquiring firm for an extended (e.g., 3-5+ years) period of time in an employee advisor role before fully retiring and exiting. The appeal for the exiting advisor is relatively straightforward – not only does it allow the advisor to monetize the value of their firm, but also to continue to generate an income with ongoing engagement with clients as a financial advisor, effectively allowing the current owner to decouple when they capitalize on the enterprise value of the firm, versus when they actually stop working. From the acquirer’s perspective, though, Sell-And-Stay purchases can be more complicated, necessitating both finding a role for the seller in the new enterprise, and potentially altering the economics of the transaction with an obligation to pay the advisor for ongoing employment after the deal (in addition to purchasing the practice itself). However, the reality is that there can be a number of benefits for acquirers to facilitate Sell-And-Stay transactions as well, including: potential for better retention of the acquired clients, where the selling advisor remains involved and can more proactively help to ensure those clients are retained with a less abrupt and more gentle transition of the relationship; reduced training costs and the potential to increase the capacity of the acquirer with the sell-and-stay-firm’s existing infrastructure; new competencies for the firm brought by the expertise of the Stay advisor; and the opportunity for the experienced advisor being acquired to serve a role as talent trainer to help develop next-generation talent in the firm.
Struggling To Stick To A Financial Budget? Try A Values-Based Budget Instead! (Zack Hubbard, Greenspring Advisors) – The world of household budgeting is filled with a wide range of tips and tactics, from the 50/30/20 rule (spend 50% on housing/transportation/food, 30% on discretionary spending, leaving 20% for saving), to scrutinizing ‘non-essential’ purchases like avocado toast or $6 coffees. The caveat to these approaches, though, is that they’re all predicated around the idea of adjusting your lifestyle to the available dollars (e.g., “only” spend X% on lifestyle choice Y), as opposed to trying to adapt your money to what’s actually most important to you (which might entail very different weightings about what’s really important and essential, or not). Hubbard suggests that a better alternative is a “Values-Based” budgeting approach, that categorizes your spending based on your own Core Values (e.g., using tools like This One from Carnegie Mellon). Of course, some expenses remain ‘non-negotiable’ as essential – what Hubbard dubs “The Basics” – though even in this regard, the essential level of “Basic” shelter may vary quite a bit from one person to the next based on their values! The real key, though, is the spending that goes beyond the Basics, which is more flexible and discretionary… and more feasible to map directly to personal values. Notably, because Values vary, so too many categorization. For instance, one person might view $6 lattes as wasteful, while another with a Community core value who is a regular at their local coffee shop might view it as an opportunity to feel connected to their community; similarly, savings itself may fall under a Core Value for many (treating it less as an ‘obligation’ and more simply as an allocation of dollars towards a Core Value). In turn, by defining your Core Values, and tagging each of your expenses to which Core Value it’s associated with (or not), some will not be associated with any category – or what Hubbard defines as the “Expendables” category, as by definition they are expendable and don’t align to the Basics nor to Core Values. More generally, though, the point is simply that the exercise of mapping spending to one’s Core Values provides a straightforward framework to really see which aspects of spending are truly in alignment with what’s most important to you… or that aren’t, and can be cut.
The Top Two Things That People With Fat Savings Accounts Scrimp On (Catey Hill, Marketwatch) – Popular budgeting advice is replete with tips on how to scrimp and save, from the infamous Latte Factor (the path to retirement is paved with your daily Latte savings), to even more extreme frugality tips like making multiple cups of tea from one tea bag or diluting dish soap with water so it lasts longer. Yet recent research on “Super Savers” (who save 20%+ of their incomes) finds that the biggest difference between big savers and everyone else is the percentage of their budget spent on housing (at just 14%-of-income for Super Savers, compared to 23% for everyone else). Similarly, another recent study found that 40% of those who fully or nearly-fully funded their 401(k) plans cited living in a modest home as one of their key sacrifices (and that owning an older car was #2). Notably, though, the distinction doesn’t merely appear to be a function of big savers preferring to ‘sacrifice’ with smaller homes, but a mindset difference that expensive mortgage payments are seen as limiting their freedom (given that once a car or mortgage payment are committed to, they’re binding and often don’t change for many years). In addition, housing, in particular, is an infrequent ‘purchase’ – which means it’s mentally a lot easier to make a frugal decision once on a big transaction that matters and then save the cognitive load of not needing to sweat other smaller day-to-day purchases after all.
Travel Bans Take Shine Off Banks’ Premium Rewards Credit Cards (AnnaMaria Andriotis, Wall Street Journal) – In recent years, there has been an explosion of ‘premium’ credit cards, often carrying high annual fees, that can accumulate even-more-generous “points” rewards to be used on travel that makes it all worthwhile… at least, until the coronavirus pandemic largely shut down our ability to travel, and in the process largely eliminated the primary value of those high-fee premium credit cards. The end result is that sign-ups for those rewards cards is dropping precipitously, as big sign-up bonuses for airfare and hotel stays and restaurant meals (not to mention access to special airport lounges) no longer carry the appeal they once did… not to mention those who are outright dropping their rewards cards and the no-longer-perceived-to-be-worth-it annual fees (or at least are downgrading to lower-bonus-but-lower-fee alternatives), as credit card spending overall was down 21% in May (over May of 2019). To combat the effect, many premium credit card providers have been rapidly trying to restructure their benefits, from JPMorgan Chase offering extra points on grocery purchases, Citigroup similarly offering more online grocery and drugstore bonuses, and AmEx offering up to $320 in credits for those who buy streaming and wireless phone services. With the expectation that eventually a vaccine will allow life to return to ‘normal’, credit card companies thus far are largely framing their credit card rewards changes as “temporary”, but the longer the impact of the pandemic stretches, the more likely it seems that rewards cards may have to undergo more substantial and permanent changes to remain relevant?
How Your Hobbies Can Make You More Financially Fit (Rafael Bernard, In Good Company) – When times get stressful, we often look for a way to distract ourselves from the stress… a role which hobbies fill well, particularly ‘idling’ ones like knitting and crocheting (per Google headquarters’ own sponsored workplace knitting sessions!). And in reality, the tendency actually aligns with a growing base of psychology research, about what’s known as the brain’s “Default Mode Network” (DMN). The DMN is the part of the brain that connects parts of the brain with other parts of the brain, but generally only operates when at rest… e.g., when we’re daydreaming or otherwise ‘wondering’ about something, rather than being focused on certain tasks. Which is important, because it means a lot of our creativity and ability to get our modes off the pressures and distractions of work and life are predicated on literally being able to ‘get away’ from focused task work, and instead into something that allows our brains to idle… like hobbies. Notably, though, the DMN isn’t necessarily just about idle thinking… it not only stirs up memories but also activates to help us prepare ourselves for future conflicts and challenges as well. In other words, by quieting the brain and activating the DMN, we can become better prepared to deal with our challenges… including financial challenges. Which means one of the best ways to tackle financial challenges could actually be taking up a “finhobby”, one that allows us to be mindful of financial issues and consider problem-solving them, but not by trying to face the fear head-on, and instead trying to find a hobby that allows us to activate the DMN and process how to change and improve our financial lives while hobbying along the way?
Can You Think Your Way To Wealth? (Financial Living Blog, Advance Capital Management) – While Michael Jordan was clearly a naturally gifted athlete that brought great tools to the table, “His Airness” himself attributes his success largely to his mindset, stating “I’ve missed more than 9,000 shots in my career. I’ve lost almost 300 games. Twenty-six times, I’ve been trusted to take the game-winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed.” The significance of this in the financial context is that like athletic success, financial success may be less a matter of spending discipline and smart investing alone (the tools), and more a function of the growth mindset to be able to pursue, tackle, and overcome challenges that let us break through to the next level (e.g., of our careers and earning potential) in the first place. The essence of the Growth Mindset – as articulated by psychology researcher Carol Dweck in her book “Mindset: The New Psychology of Success” – is a mental approach that focuses on developing our abilities over simply how smart and capable we already are, a desire to learn new things over avoiding anything we’re not already good at, a willingness to embrace challenges and persist rather than avoid risks, and a view that failures are still a path to improvement which is success unto itself (rather than viewing failures as setbacks to avoid). In fact, a major study of the ultra-wealthy found that one of the most common traits amongst them was their optimism about their ability to be able to prevail, and more generally those with a growth mindset are more likely to adapt their behaviors and pursue upward mobility in their careers. Which raises the question: what is your mindset, do you view failures as setbacks or opportunities, and how might you try to change your mindset to focus more on the growth benefits of overcoming the inevitable challenges we all face?
There Is Nothing Wrong With A Traditional Career! (Nick Maggiulli, Of Dollars And Data) – Entrepreneurialism has long been celebrated in American culture, but in recent years it seems to have gone to new heights, with a growing number of prominent individuals suggesting that the best path to success is to eschew college altogether and simply pursue entrepreneurial business opportunities in the marketplace. Yet while it’s hard to argue that at some point, “ultra” wealth is not a function of college degrees alone – as Maggiulli puts it, “you cannot get a degree that will make you into a billionaire” – when it comes to being a ‘mere millionaire’, a college education and pursuing the traditional career ladder can still be remarkably effective. Of course, depending on one’s perspective, having “just” a million dollars may not be all that wealthy… yet in practice, having $2M of net worth still puts one in the top 10% of all households over age 55 (and even higher for those who reach that point earlier in life, as it takes an average of 32 years for the typical self-made millionaire to gain their wealth!). And while the famous Robert Kiyoasaki book “Rich Dad, Poor Dad” is premised on “poor” father working a 9-to-5 job while “rich” father owns businesses, arguably “poor” father might still have been more affluent over time if he had simply focused on investing his dollars into income-producing growth assets (e.g., stocks and bonds). In other words, for most people, the path to ‘meaningful’ wealth is less about ditching the traditional career track for entrepreneurship, and more about what you do with the income you do generate (and whether/how you save it). Not to mention that entrepreneurship itself is hard, has a high failure rate (half are gone within 5 years), and the typical age of an entrepreneur is actually 40 years old (after they build a ‘traditional’ career and gain experience and expertise). In the end, we all have different risk preferences, and some might want the entrepreneurial journey. The key point, though, is simply that there’s nothing wrong with pursuing the traditional career, which can still generate enough financial wealth to retire comfortably… or perhaps to take an entrepreneurial leap, after the first 10-20 years of experience and success?
The Most Overlooked Career Hack: Coaching (Leanna Orr, Institutional Investor) – When it comes to finding a new career opportunity to navigating a current career track, one of the greatest opportunities for personal leverage is to hire a coach to talk through your challenges. Because the reality is that we all can benefit from an outside perspective, someone who can help us address our own situation more objectively, commiserate with the challenges, but also call us out when the reality is that we are in the wrong and need our own attitude adjustment. At its core, coaching is simply about helping people figure out where they want to go, what they’re good at, how to reach those goals, and some guidance along the way to help stay on track. But coaching can be especially helpful when facing challenges or navigating for new opportunities, given that difficult situations tend to be emotional as well (compromising our objectivity to evaluate our own decisions and behavior), and it’s difficult to recognize what else may be out there when we only know the world we’ve seen (as compared to the coach that can expand our horizons and perspective). Coaching engagements themselves do vary, with some charging a few hundred dollars per session, and others charging thousands of dollars for multi-month engagements with bi-weekly meetings. Yet while the cost may seem expensive for some, in reality is only takes one meaningful career transition – in a current career track, or even shifting to a new one – to meaningfully change one’s entire life trajectory (and the financial growth that goes with it, and can more than pay for the cost of coaching!).
The Best Career Advice I’ve Ever Gotten (Ryan Holiday) – When famed football head coach Bill Belichick was starting his career during the economic recession in 1975, he wrote 250 letters trying to find a football coaching job, and ended out with an unpaid job doing one of the lowest grunt jobs that no one liked (which at the time was analyzing film footage). But instead of being unhappy with it, Belichick dove into it with full energy, learned as much as he could, shared his insights with others, and made his coaches and the players look better by sharing what he learned. Of course, in the end that meant the successful players who scored the touchdowns, and the coaches in charge, were the ones who got the credit… but Belichick forgot about trying to get the credit, and instead just focused on the work itself, because in the end making others more successful can still come back to you. Holiday has formulated this approach into what he now calls “the canvas strategy“, short for “finding canvases for other people to paint on”. In other words, if you want to learn and grow, get as close as you can to people and organizations that have grown and been successful, get as close to them as you can, learn and absorb everything you can by being near them, and use that to leverage yourself forward. And in the long-term, building a career of having made people more successful means you’ll have countless new relationships, a reputation for being indispensible, learn a great deal about solving problems, and may even have a big bank of favors to call in down the road. Or viewed another way, instead of trying to take the credit, let others take the credit because you can earn interest for deferring your own. Notably, this means the canvas strategy also requires a great deal of humility, recognizing that you may not always get the credit for your work. But if you attach your canvas strategy to those leaders that recognize and appreciate hard work and success, it may be the best path for it to come back to you in spades.
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, and Craig Iskowitz’s “Wealth Management Today” blog as well.