Weekend Reading For Financial Planners (July 25–26)

Author: Adam Van Deusen, CFP®

Team Kitces

Adam Van Deusen, CFP®, is a Financial Planning Nerd at Kitces.com, where he hosts the Financial Advisor Technician podcast, writes articles for the Nerd’s Eye View blog (including the popular Weekend Reading for Financial Advisors), and regularly speaks at industry events on a range of technical and practice management topics. He previously worked at a financial planning firm in the Washington, D.C. area and as a journalist covering the banking and insurance industries. Outside of work, he serves as a volunteer financial planner and class instructor for local and national non-profits.

Read more of Adam’s articles here.

Treasury Officials Flag Concern Over Certain 'Tax Alpha' Strategies

(Justina Lee, Denitsa Tsekova, and Zachary Mider | Bloomberg News)

The ultimate return an investor receives from a particular investment isn't just a matter of its performance, but also accounts for taxes owed from dividend or coupon payments, capital gains, or other income generated from the asset. Which has led tax professionals and product manufacturers to explore various 'tax alpha' strategies that help reduce the tax burden for investors in particular situations (e.g., holding a concentrated position with large embedded capital gains).

This week, Treasury Department officials during an industry gathering expressed concern about several of these strategies that have risen in popularity, stopping short of announcing new guidelines (e.g., labeling a strategy as a "transaction of interest", a designation for deals with tax-avoidance potential that would require additional disclosure) but flagging their view that some run afoul of Congress' intent with certain tax laws and that "all tools are under consideration" for the transactions they discussed.

One of the strategies mentioned was Section 351 exchanges, where an investor can convert a portfolio of assets into an ETF to rebalance without realizing a capital gain. Other strategies mentioned by the Treasury officials included "box-spread ETFs" (the largest of which uses option trades to generate returns similar to Treasury bills but generate capital gains rather than interest income), funds designed to generate ordinary losses (e.g., by taking advantage of the tax rules for notional principal contracts, or swaps), and ETFs that trade in and out of other ETFs to avoid dividend distributions.

In sum, while none of the strategies discussed has been restricted by the Treasury Department (at least not yet), this week's comments are a sign of the cat and mouse game between tax strategy innovators and government agencies trying to limit transactions they believe run afoul of tax law. Which suggests that relatively newer structures that don't have the government's explicit blessing might be viewed as currently available products and opportunities, and not necessarily a tax planning strategy that could be relied on for years or decades to come?

Russell Investments Estimate Puts Lofty Value On Financial Advice

(Russell Investments)

While financial advisors are often confident in the many ways they add value for their clients, prospects and clients typically want to see a return for the fees they pay their advisor (though, as advisors might note, some of the potential benefits of working with an advisor [e.g., greater confidence and peace of mind] are hard to measure in dollar terms). With this in mind, various research efforts (e.g., Vanguard's "Advisor's Alpha" and Morningstar's "Gamma") have attempted to estimate the value of working with an advisor (though these estimates often cover different aspects of financial advice, come with built-in assumptions, and are necessarily averages, with individual clients' experiences varying).

In addition, Russell Investments conducts an annual estimate of advisor value, this year putting it at 4.92% (which would dramatically exceed standard industry fees, though, notably, is higher than most other estimates of advisor value, which have typically been in the 1%-3% range). Russell breaks its total value into four components.

First, it finds that an advisor's support in creating an appropriate asset allocation for a client can add 0.26% of value (e.g., by holding a smaller cash allocation than investors might hold on their own). Next, it estimates that behavioral coaching by an advisor can add 2.30% of value by helping clients stay the course during volatile periods. Third, customized family wealth planning that goes beyond investment management (e.g., retirement and estate planning) could add another 1.13% of value (though it's worth noting this was determined by subtracting an estimated 0.37% robo-advisor fee [representing the cost of investment management] from a 1.50% comprehensive planning fee). Finally, tax-aware portfolio management (e.g., strategic asset location and choosing tax-efficient investment vehicles) was estimated to offer 1.23% of value.

Ultimately, the key point is that while advisors (and consumers) might apply a healthy amount of skepticism towards research that purports to identify a precise value of financial planning, the reality is that advisors really do have many ways to offer hard-dollar (and more qualitative) value for their clients. The key, then, is to find ways to communicate that value to prospects and clients, such as by showing how they're 'different' instead of 'better', communicating the "how" of planning (and not just the "what"), and/or by creating a "jobs to be done" framework.

CFP Board Weighs Changes To How It Considers Expunged Convictions

(Patrick Donachie | Wealth Management)

In order to give the public greater confidence in professionals who hold the CFP marks, CFP Board evaluates a variety of factors when determining an individual's fitness for obtaining or maintaining them. Amongst others, these include criminal convictions, with felony convictions for a variety of crimes (e.g., fraud, theft, embezzlement) subjecting an applicant to an absolute bar on becoming a CFP professional.

However, sometimes individuals convicted of a crime have this conviction later expunged (with expungement laws varying widely by state), which raises the question of whether such an expungement might be considered when determining an individual's fitness to be a CFP professional.

This week, CFP Board announced that it is seeking public comment on proposed changes to its Fitness Standards, Procedural Rules, and Sanction Guidelines that would address this issue by clarifying that its Disciplinary and Ethics Commission (DEC) can (but isn't required to) consider expungement a "mitigating" factor when assessing an application for CFP certification. Under the proposal, the DEC would weigh an expungement more heavily if the conviction was expunged because the state court made positive findings about the applicant's rehabilitation, good moral character, or low risk of recidivism.

CFP Board said the changes would keep the organization's public-notice requirements, with the DEC applying its current standards to determine whether it would include the (expunged) felony conviction in CFP Board's record and in a press release the organization regularly publishes on public sanctions involving new or existing certificants (suggesting members of the public who do sufficient research could find that an advisor they're considering working with has an expunged conviction and could determine for themselves whether they want to enter or continue the relationship). Though notably, it appears that the CFP Board process would rely on consumers finding the CFP Board's press release about the (expunged) criminal conviction to be aware (and that the CFP professional would disclose it to clients), but may not necessarily post information about the criminal conviction on the CFP Board's own "Find A CFP Professional" website.

In the end, CFP Board's proposal appears to be an effort to give its DEC more clarity on how to handle expunged convictions, leaving room for DEC judgment into whether sufficient mitigating circumstances exist to allow an individual to serve as a CFP professional despite a previous criminal conviction that has been expunged (that would have otherwise served as an absolute bar). Though, at a time when some have criticized CFP Board for how thoroughly it vets candidates and certificants and publicizes indiscretions, and in the face of prior bad press from the Wall Street Journal over CFP Board's failure to notify consumers of CFP professionals with criminal records on its own website, the latest proposal (even if seemingly administrative in nature) puts the CFP Board in a different balancing act between supporting those who are genuinely rehabilitated after earlier-in-life criminal activity, and taking a path that leads to more individuals with (expunged) felony convictions (including for financial crimes) maintaining the marks (while still leaving a non-trivial burden on the consumer to learn about and discover the previous conviction themselves)?

For CFP professionals who want to share their own views on the issue, they can share comments directly through the CFP Board's Public Comment system, which will remain open until August 21^st of 2026.

Retiree Health Costs Spike 7.5% In Latest Estimate From Fidelity

(Suzanne Woolley | Bloomberg News)

Given that health tends to deteriorate with age (and that Medicare doesn't cover all medical bills), health care costs can end up being a major budget line item for retirees. Which suggests that trends in these costs could be instructive when calculating a retiree's 'personal' inflation rate (which could differ from the broader inflation rate).

According to Fidelity's latest annual estimate, a 65-year-old retiring in 2026 can expect to spend an average of $185,500 on healthcare and medical expenses (including Medicare premiums, copayments, and other out-of-pocket costs, but not long-term care) throughout retirement, up 7.5% from last year (and building on 5% and 4% increases in 2025 and 2024).

Notably, though, while the headline figures might be surprising to certain individuals (particularly amongst the 54% of pre-retirees surveyed by Fidelity who think Medicare will cover all of their health care expenses), in reality these costs are not due as a single lump sum, but rather are spread out over time (e.g., monthly premiums and copayments for regular doctor's visits), suggesting that these costs can be planned for as part of analyzing an individual's cash flow (and when planning for couples, the total medical costs will increase though if the individuals have different life expectancies, a portion of the costs will end at the death of the first spouse).

In sum, while many retirees will have six-figure total healthcare outlays in retirement, the fact they are spread out across multiple decades means they are less of an immediate pinch. That said, given that individual costs can vary (and Fidelity's estimate doesn't include potential long-term care costs), financial advisors can support clients by creating a plan to cover these costs, whether by estimating their potential expenses (given their choice of Medicare coverage and known medical history) or, for those still working, by contributing to Health Savings Accounts (HSAs) during their working years to build a strong balance to support these expenses later on.

The Retirement Expense You May Be Missing

(Christine Benz | Morningstar)

When it comes to health care expenses in retirement, doctor's visits, hospital procedures, and prescription costs are often top-of-mind. However, another cost, dental expenses (which, unlike the above, typically aren't covered by traditional Medicare) might fly under the radar, which could lead to expensive surprises.

Given that the costs of dental procedures can reach thousands of dollars, retirees might consider different ways to mitigate this expense. One option is to buy standalone dental insurance, which often comes with relatively low (perhaps $25-$50) monthly premiums. However, annual caps that can come with this coverage (e.g., with benefits maxing out between $1,000 and $2,500) mean that the cost of extensive procedures might only be partially defrayed. These plans also might impose waiting periods before being eligible for major procedures, which suggests that those interested might want to sign up for coverage well before they think they might have a serious issue. That said, the cost of the coverage often approximates the cost of preventative screenings (which are typically covered), so it could represent a relatively low-risk expenditure (particularly if an individual finds a plan accepted by their preferred dentist).

A second option is to obtain dental coverage under a Medicare Advantage plan that offers it as part of its benefits package. However, other considerations when deciding between traditional Medicare and Medicare Advantage (e.g., provider networks and out-of-pocket limits) could outweigh any cost savings from having this dental coverage.

Finally, retirees can choose to pay for dental care out of pocket. For those who can afford to do so, not only does this allow for the full range of providers, but they might also be able to negotiate lower costs based on the ease for providers of taking cash payments versus navigating the insurance bureaucracy. Such individuals could consider tax-friendly ways to cover these expenses as well, including paying from accumulated HSA balances (with dental expenses typically representing qualified expenses) or, if an individual has particularly high dental and medical expenses in a given year, taking advantage of the ability to deduct these costs in excess 7.5% of adjusted gross income if they itemize deductions.

Altogether, while dental expenses might not be as large of a budget line item as housing, food, or healthcare expenses in retirement, they could add up over time (particularly for those who have a history of extensive dental procedures). Which suggests that discussing potential dental costs (and how the client might cover them) could be a useful conversation topic for advisors in retirement planning meetings.

Estimating The Future Lifetime Cost Of Long-Term Care

(Giese, Gunnlaugsson, Pollock, and Brown | Milliman)

Long-term care can be a complicated topic for many clients, whether in terms of how it is paid for (e.g., assuming that Medicare will fully cover a long-term care event) or the length of average long-term care stays (e.g., assuming that most individuals will require many years of long-term care services). Amidst this backdrop, while an individual's future exact long-term care needs are unknowable, using population-wide experiences to create estimates of what long-term care burdens an individual might face could help ground planning conversations on this topic.

To this end, the authors created an index to provide a benchmark for expected lifetime long-term care costs using illustrative commercial payment rates, finding that $135,000 represents the projected amount a 65-year-old would need to set aside today to cover average, expected future lifetime costs of long-term care (assuming a 4.35% investment return rate).

Notably, long-term care experiences can vary significantly based on certain factors. For instance, the $135,000 estimate represents a composite figure, with the projected costs for females being higher at $171,000 (due to a greater likelihood of needing paid long-term care, longer life expectancies, and a longer average duration of need) and males lower at $98,000. Also, individuals might be surprised about the projected duration of long-term care needs, with 40% of females and 47% of males having no long-term care need and an additional 35% of females and 40% of males having a need of less than three years.

Ultimately, the key point is that while the cost of an extended long-term care event can be high, relatively few individuals end up needing care for more than a few years (if at all). That said, given the financial implications of long-term care costs (and depending on the financial resources available to a particular individual), creating a plan that balances estimated future long-term care costs (addressed through savings, standalone long-term care insurance, or other coverage options) with desired lifestyle spending could allow for a balance that allows an individual to spend today without worrying it will lead to financial catastrophe down the line.

How To Handle Client Requests For Unsuitable Investments (And Strengthen Trust In The Process)

(XY Planning Network Blog)

Many financial advisors have had the experience of meeting with a client who comes to the table with a 'hot' investment idea. While an advisor might internally balk at the client's idea (particularly if it seems to be a high-risk or even fraudulent strategy or investment), taking a more measured approach when responding to the client can lead to a conclusion that leaves both sides feeling satisfied.

A first step in this situation is to lead with curiosity rather than judgment or correction. For instance, an advisor might ask the client open-ended questions, such as where they heard about the idea or what parts of it are intriguing for them, to better understand where the client is coming from (and to inform how the advisor might respond). Next, with a better understanding, the advisor could put the investment idea in the context of the client's goals, investment policy statement, liquidity needs, and risk tolerance (suggesting the value of having these in place beforehand!). The advisor could also explore downside risk scenarios (particularly for seemingly 'too good to be true' ideas) and discuss other (perhaps less risky) options that might meet the client's objectives.

In some cases, a client might still want to move forward with the idea after getting more context from their advisor (e.g., they want to invest in a friend's or family member's new business). In this case, the advisor can play a valuable role by recommending guardrails (e.g., limiting the size of the investment to a certain percentage of their portfolio), building in a cooling-off period before investments are made (to reduce the chances of making major moves in the heat of the moment), and reviewing speculative positions on a regular schedule rather than reacting to market headlines. Also, a best practice for the advisor is to prepare proper documentation (including details such as the client's request and reasoning, the recommendation the advisor provided and alternatives discussed, and any agreed-upon updates to the client's investment policy statement) to protect themselves and their firm while creating a record of how the recommendation was made.

In the end, an advisor can play a valuable role not only in recommending investments that are appropriate for a client's unique situation but also by explaining why other investment options might not be a good fit. Nonetheless, given that clients might be 'invested' in the idea they bring to the table, handling such situations tactfully and with respect can lead to both better financial outcomes for the client and a stronger relationship between the two parties.

Discussing Portfolio Diversification With Different Types Of Clients

(Samantha Lamas | Morningstar)

Portfolio diversification is at the heart of many advisors' investment strategies, as it can offer the opportunity to meet clients' investment goals without taking the risk that can come with a more concentrated portfolio. However, advisors and their clients might not have a common understanding of what the term 'portfolio diversification' is, which suggests that taking time to ensure that clients understand what their advisor means by it (and that they agree with this approach) could help avoid misunderstandings down the line.

One common way to explain portfolio diversification is that it's best not to 'put all your eggs in one basket' as the saying goes. However, while an advisor might be thinking of spreading assets across asset classes, clients might have a different view of the 'eggs' and 'baskets'. For example, Morningstar found that, when presented with three ETFs that track the S&P 500 but have different fees, many investors put some assets in each option (despite them tracking an identical index) seemingly to 'diversify' their portfolio. With this in mind, advisors might explain portfolio diversification as combining assets in a portfolio that tend to behave differently while seeking to meet the client's return goals and risk tolerance.

Given that clients have different levels of risk tolerance and are in different stages of life, an advisor can tailor their explanation of portfolio diversification to a client's particular situation. For instance, a client who tends to worry about their investments might be heartened to hear that portfolio diversification can avoid being overexposed to one particular area, while a client nearing retirement might be glad to hear that diversification can 'smooth the ride' into retirement, and a client who seeks to maximize returns could be happy to hear that diversification allows them to expand on their opportunity set and avoid missing out on areas of the market that can enhance long-term returns.

In sum, while portfolio diversification is a core concept in investment management, clients might not share the same perspective as their advisor on the topic. Which suggests that taking time to explain what portfolio diversification means to the advisor and how incorporating it into their investment management approach can benefit the client could ensure all parties are on the same page (and understand both the upsides [e.g., exposure to a broader range of asset classes to reduce risk from any particular market segment] and limitations [e.g., diversification can't totally prevent declines in portfolio value] of the practice).

Crafting A Communications Matrix To Refine Client Investment Communications For Stronger Relationships

(Sean Brown | Nerd's Eye View)

While a significant amount of financial planning work goes on during formal client meetings or 'behind the scenes' (e.g., the analysis that goes into planning recommendations), a client might want to hear from their advisor throughout the year, for example during periods of market turbulence. However, given the number of responsibilities on an advisor's plate, offering frequent, one-to-one communication sometimes isn't feasible.

Accordingly, creating a communication strategy can be a helpful way to stay in touch with clients on a regular basis while leaving room for an advisor's other to-dos. A 2x2 Advisor-Client Communication Framework can organize communication efforts by cadence (scheduled and ad hoc) and by audience (narrowcast and broadcast), resulting in four 'quadrants' of communication style, each with a purpose that can apply to unique situations. These quadrants consist of "Broadcast/Scheduled" communication efforts that occur at regular intervals distributed to many (or all) clients (e.g., quarterly market perspectives), "Broadcast/Ad Hoc" communication initiated due to firm or market events and broadly distributed to clients (e.g., announcements regarding changes in firm personnel, or the firm's response to recent market events), "Narrowcast/Scheduled" communication that is more individualized and used for key accounts (e.g., monthly portfolio updates), and "Narrowcast/Ad Hoc" communication that is used primarily at important times in the advisor-client relationship (e.g., responses to client inquiries, notice of an asset allocation shift prior to a client's retirement).

This structure can help advisors identify what they may already be using on a regular basis, and other potentially useful practices they may not yet have leveraged. Furthermore, clients can be segmented into the framework by considering different factors such as their impact on the practice, portfolio strategy, life stage, and relationship status (e.g., new clients or clients at risk of moving elsewhere).

Ultimately, the key point is that an effective communication strategy can be helpful for financial advisors to stay connected with their clients on a regular basis. By assessing different communication strategies to use for their own unique client segments, advisors can strengthen relationships and, at the same time, add value to the lives of their clients.

The Potential Job Satisfaction And Productivity Benefits Of Matching Work Location To Individual Preferences

(Andrew Blackman | The Wall Street Journal)

While some companies operated on a remote or hybrid basis earlier, the sudden shift towards remote work during the pandemic was a shock to traditional policies. While workers have been returning to the office over the past several years, about a quarter of all U.S. workdays now occur at home, about 3X pre-pandemic levels of remote work, according to data from the Survey of Working Arrangements and Attitudes.

While many firms have now settled into a particular style – whether fully in-person, hybrid, or fully remote – thanks to more years of experience in this new environment, researchers are able to better look into how different work structures affect productivity and job satisfaction. In general, employees appear to appreciate the flexibility that comes with being able to work remotely during at least part of the week, with a study at one company finding that when randomized into either working full-time in the office or working two days a week from home, the hybrid workers experienced improved job satisfaction and quit rates dropped by a third (with the benefits being particularly strong for women and for those with longer commutes).

Hybrid work also appears to offer productivity benefits, as it allows time in the office, where creativity is more likely to occur (e.g., through chance encounters and casual discussions with colleagues), as well as time at home, where employees can perform focus work without office-based interruptions. Also, research findings that full-time remote work can be difficult for younger workers (who might have fewer networking and mentorship opportunities) and those who live alone (who might miss the social aspects of getting out into the office) do suggest value from at least some time in the office as well.

In sum, hybrid work environments appear to offer the best of both worlds for both companies and their employees, combining the focus and time flexibility that comes from working at home with the camaraderie and knowledge-sharing benefits that can occur in the office. Nonetheless, given the varying experiences of different types of employees, companies might consider asking employees directly about their preferences for work location to better understand what policies would serve the company best in terms of employee productivity, development, and retention.

Why Are So Many People Waiting In Lines?

(Hanna Horvath | Your Brain On Money)

In the past, a 'hot' new restaurant, store, or experience might have gained popularity through word of mouth, passing amongst friends and family before gaining notoriety in the media (perhaps taking a long time to gain attention outside the local area). In the modern era of algorithmically curated social media feeds and media platforms, though, it's never been easier to be aware of the latest 'viral' trend or good.

This phenomenon can have downsides, however. For instance, if many social media users are seeing similar recommendations, they might flock at once to the restaurant or event at the center of the trend. Which could contribute to why there has been a seeming rebirth of 'line culture' in many cities, where individuals are willing to wait for hours to experience something as small as a cup of coffee (possibly more so to create social media content themselves than to enjoy the actual product the waited for?). Further, because companies themselves can put their thumb on the scales of what becomes popular (e.g., through their own content creation or paid promotions) some trends that seem organic might have been influenced heavily by those standing to profit from them.

Which suggests that individuals who might be tempted to wait in a multi-hour line or spend hours trying to get a reservation at the 'hot' restaurant (rather than deciding to pop in to the local [line-free] coffee shop on a whim) might consider whether they truly want to make these sacrifices to obtain the product or experience at hand or whether part of their motivation is to show others that they did, as the former could be much more fulfilling while the other could lead to more ephemeral satisfaction (that only lasts until the next 'hot' trend emerges).

"Skill Nostalgia" In A World Of Technological Progress

(Joshua Habgood-Coote | Aeon)

The world has experienced incredible technological progress over the centuries and millennia, with shifts from hunting and gathering to agriculture to industrial production to the current digital era. While technological innovations certain can make life more palatable (thank you indoor plumbing!), it can also lead to the reduction or disappearance of occupations that are replaced by a certain technology. Which leads some individuals to experience a concept Habgood-Coote refers to as "skill nostalgia", or longing for the past when a particular skill was more common as an occupation (rather than as a hobby).

While there are no doubt ways individuals are experiencing "skill nostalgia" today (with popular competition reality shows covering everything from glassblowing to blacksmithing), this feeling is by no means a modern phenomenon. For instance, in the late 1700s, individuals who then had access to more plentiful factory-produced clothing mourned the decline of skilled weavers. Looking even further back, Plato in approximately 370 BCE related an Egyptian story lamenting the introduction of writing (with an Egyptian king worrying that the ability to write would lead to a decline in memory).

That said, while those experiencing "skill nostalgia" can rightfully cite benefits that came from the skills relied on in the former era (e.g., the level of craftsmanship), there were likely also negative effects associated with it (e.g., dangerous work conditions or a relative scarcity and/or high price of the good being produced), suggesting that while fondness for the past is natural, in many cases a particular technological advancement is a net positive for the broader public.

At a time when some believe artificial intelligence has the potential to reduce the demand for skills that have been important in recent years (from writing to coding), it's possible to imagine what those in the future might look back on longingly. Which perhaps suggests that adaptability and a desire for continuous learning are valuable traits to maintain to be able to adjust to (not easily predictable) technological changes over time.

We hope you enjoyed the reading! Please leave a comment below to share your thoughts, or send an email to [email protected] to suggest any articles you think would be a good fit for a future column!

In the meantime, if you're interested in more news and information regarding advisor technology, we'd highly recommend checking out Craig Iskowitz's "WealthTech Today" blog.