Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with the announcement that the CFP Board is gearing up for a new round of advertising campaigns as part of its ongoing public awareness campaign, this time focusing on the emotional and psychological benefits of working with a financial advisor, including feeling more “confident, optimistic, secure, and at ease” with one’s finances.
Also in the news this week is a controversial court ruling in Georgia that allowed an RIA to enforce an employment agreement that required its departing advisors to give 60-90 days notice in advance of leaving the firm (where the RIA sued after the advisors departed the firm abruptly to join Morgan Stanley under the terms of the Broker Protocol), raising the question of whether broker-dealers in turn might try to add similar “garden leave” requirements to their employment contracts as a way to subvert the Broker Protocol for departing brokers. And there was also a big announcement from Vanguard, just in time for “Independence Day”, that starting in August it will begin to offer nearly 1,800 ETFs on an expanded no-transaction-fee ETF platform… and in the process, declaring war on other custodian’s existing back-end revenue-sharing or shelf-space distribution agreements required to get onto their NTF ETF platforms (from which Vanguard has increasingly been booted in recent years for being unwilling to pay to play).
From there, we have a number of retirement-oriented articles, from a look at the rise of the FIRE (Financial Independence, Retire Early) movement, to a discussion from a longevity researcher about whether it would be more appropriate for people to spend their 20s and 30s “just” being trainees/apprentices and raising families and not starting full-time jobs until their 40s (given our increasing capability to remain productive well into our 70s thanks to medical advances), and an examination of whether advisors may be overestimating health care costs in retirement as recent studies have shown that beyond Medicare premiums themselves the medical expenses of retirees are actually remarkably moderate and stable (especially for those who have at least a “mass affluent” level of wealth).
We also have several practice management articles, including: an analysis of why the greatest challenge for advisory firm business owners to manage is the potential gap between workload obligations to clients and the staff resources necessary to deliver promised services; why especially in the early years of an advisory firm, 5-year (or even 3-year) business plans are largely useless; and how to demonstrate the ongoing value of a financial advisor by creating a “Client Confidence Index” that periodically surveys clients on their feelings of financial confidence, control, and clarity… and then reflecting those results back to them to show progress and the advisor’s value-add over time.
We wrap up with three interesting articles, all around the theme of taking vacations to better maximize health and productivity: the first looks at the growing trend of workers not taking vacations, even when they’re otherwise available, due to both the workaholic culture of many firms, and often simply a lack of systems to make them feel safe and comfortable to take a vacation; the second examines how even amongst the most productive people, there’s often little more than 3-4 hours of “real” work that gets done in a day, suggesting that instead of trying to push employees to work harder throughout an 8-hour workday that it may be better to embrace taking breaks instead; and the last provides a remarkably simple and effective system to handle the pain of “digging out” from the email backlog after a long vacation… by simply creating an autoresponder to tell people to email you again if they feel it’s necessary after you’re back, and then just delete all the email in your Inbox on your first day back at work!?
Enjoy the “light” reading!
CFP Board’s New Ad Campaign To Target Client Emotional Well-Being (Kenneth Corbin, Financial Planning) – The CFP Board is gearing up for the next phase of its public awareness marketing campaign, with a new wave of advertisements coming this fall that will tout the CFP designation as the “gold standard” of financial advice, and highlight how working with a planner leads to clients feeling more “confident, optimistic, secure, and at ease” (as the CFP Board learned in its consumer sentiment focus group research). The new campaign is going into production this summer, and will run via radio, print, and online publications after Labor Day. To date, the CFP Board has spent nearly $73 million on the campaign (and has currently budgeted about $12M/year), after implementing a dues increase to pay for it back in 2010. Of course, relative to the broad world of advertising, even $73M is just a “drop in the bucket”, and CFP certificants themselves have expressed skepticism about the public awareness campaign over the years, but the CFP Board has been able to show a material lift in consumer awareness amongst the typical prospective clientele of advisors since the campaign launched. In fact, with its demonstrated success from the awareness initiative, the CFP Board is now amplifying other awareness initiatives, including a diversity effort to promote awareness of financial planning as a profession to women and minorities, after recent studies showed that one of the biggest blocking points to the industry attracting talent is simply making young people aware of financial planning (as distinct from the industry’s stereotype of financial salespeople) in the first place.
Georgia Court Dilutes Protocol Protection For Brokers (AdvisorHub) – In Georgia this week, a court ruled in favor of an RIA, Aprio Wealth Management, and against several of its (now-former) advisors who abruptly left the firm to join Morgan Stanley under the terms of the Broker Protocol. The issue at hand was not the fact that the advisors took certain client information with them – as the Broker Protocol permits – but instead that they failed to give advance 60 days’ notice to Aprio under the terms of their employment agreement that they intended to leave in the first place (as the court noted that the Broker Protocol does nothing to absolve brokers of their other obligations under their employment agreements). And while the case was actually one where advisors left an RIA (Aprio) to join a wirehouse (Morgan Stanley), the ruling raises the question of whether broker-dealers might use the approach to further undermine the Broker Protocol in reverse, by requiring brokers to file notice in advance of leaving (which, of course, would give the firm leeway to take action to retain clients and make it more difficult for brokers to leave). At this point, it’s not entirely clear whether FINRA would actually allow or enforce such advance-notice provisions in a broker-dealer context, and not all states are willing to enforce such restrictive employment agreements either. Nonetheless, some securities attorneys note that such “garden leave” policies (where employees remain on the payroll but with so few duties “they might as well spend their time gardening”) have become more common in other parts of the money management industry, raising the question of whether they will at least become more common in other RIAs in the future (if not broker-dealers as well).
Vanguard Declares War Against Custodial Platform Shelf-Space Distribution Agreements (Michael Kitces, Nerd’s Eye View) – Earlier this week, Vanguard announced that it will begin offering commission-free ETF trading through its Investor.Vanguard.com website on not just its own ETFs, but a whopping 1,800 ETFs from nearly all providers, including major competitors like Blackrock, State Street, and Schwab. The move has been hailed as a new salvo in the battle to bring down ETF trading costs, in a world where most no-transaction-fee (NTF) ETF platforms only offer a list of 100 to 300 ETFs without trading fees, and continue to charge $4.95/trade to $9.95/trade or more on the rest. Yet in reality, the reason why competitors “only” offer 100 to 300 ETFs without trading costs is because the fund companies that manufacture those ETFs are required to pay back-end revenue-sharing or similar shelf-space distribution agreement to the custodians to get onto those NTF ETF lists, effectively re-creating the equivalent of 12b-1 and sub-TA fee revenue for the platforms, and pushing up ETF expense ratios in the process. The issue came to a head last fall, when TD Ameritrade abruptly removed Vanguard’s ETFs from its NTF ETF platform, and introduced State Street’s new Portfolio ETFs instead, for which State Street paid an undisclosed amount for access to participate on the platform. With the launch of Vanguard’s new platform, which appears to eschew similar back-end pay-to-play agreements from asset managers, the company not only is undercutting the other pay-to-play platforms, but puts pressure on asset managers themselves to potentially create new alternative “share classes” of their ETFs that remove those other-platform distribution costs to make their ETFs more competitive. While Vanguard itself can still profit by identifying what non-Vanguard funds its investors are holding on the platform and then launching less expensive alternatives to compete, or simply encouraging their investors to hire a financial advisor through their Vanguard Personal Advisor Services platform, on which Vanguard generates a 0.30% AUM fee that is far greater than the revenue-on-assets it gets from most of its ETFs and mutual funds anyway!
Understanding FIRE: A Philosophy For Financial Independence And Retiring Early (Khe Hy, Quartz) – The acronym “FIRE” is short for “Financial Independence, Retire Early”, a movement born largely online with a focus on spending less, saving more, and harnessing the power of compounding to retire early. But as Hy notes, the FIRE movement (as embodied by the massive nearly-400,000 participants in its active sub-reddit) arguably goes even further, embodying a broader life philosophy that combines personal finance with “a DIY work ethic, opportunistic side hustles, life hacking, and the tenets of anti-consumerism” (i.e., spending less by not buying into tradition consumer buying trends). As those who pursue the FIRE movement typically try to save extreme percentages of income (e.g., more than 50%/year) to accelerate the path of achieving financial independence, which notably comes from not only trying to reduce spending (often by living a deliberately “simplified” more frugal lifestyle, from biking to work to save on commuting expenses and learning to cook to save on eating out, which also have personal health and family bonding benefits), but also increasing income (through a primary job or side hustles) to generate excess dollars that can be saved. Many members of the FIRE community then go even further to “hack” the consumerist world, such as proactively rotating credit cards to capture bonuses (but only hitting the minimum spend requirement and then cancelling before the annual fee must be paid), and leveraging credit cards points systems to save aggressively on travel expenses as well. The ultimate goal is to save enough to reach 25X annual spending (which correlates to a 4% safe withdrawal rate), albeit while recognizing that the actual amount of savings that will entail varies greatly by geographic location (with city-dwellers aiming to “FatFIRE” with $2M+ in cities like New York, while others “leanFIRE” in low cost of living areas where less than $40,000/year may be completely viable in the long run).
Stanford Researcher Says We Shouldn’t Start Working Full Time Until Age 40 (Corinne Purtill, Quartz) – Today’s 40-year-olds can expect to live another 40-45 years on average, with nearly 5% anticipated to see their 100th birthday, and the ongoing progress of medical advances suggests that most of those years will be healthy enough to be able to continue to work (especially as more and more jobs don’t require intensive physical labor). Which raises an interesting question: why do we still (disproportionately?) cram so many of our career and family obligations into the decades of our 20s and 30s (and more generally, try to fit everything into “a four-decade professional sprint that ends abruptly at age 65”)? Instead, Laura Cartensen of the Stanford Center on Longevity suggests that it’s time for a new model around work and career pacing, ideally one that better recognizes our need to balance the demands of raising child, working and career-building, and the need to take breaks and refresh… by stretching them out over our longer life expectancies. And arguably, the issue isn’t just one of trying to cram “too much” into the (artificially constrained?) available working years, but also that a growing base of research also shows that it’s not very healthy (psychologically and even physically) to stop working cold turkey in your mid-60s either, given the loss of status, social interaction, and purpose that can follow retirement (especially when retiring from an otherwise-valued career). So what’s the alternative? Education and apprenticeships might stretch longer in the early years, making it more feasible to cover basic needs while starting a family, with full-time work and career-building not beginning until around the age of 40 instead, which in turn would blossom into a career that might still stretch 40+ years into a transition into part-time work and semi-retirement around age 80. Of course, such an approach would entail tradeoffs – from more years of living the lean life of a student or trainee, to the fact that there might be less time for grandkids with more people working in their 60s and 70s. On the other hand, given the challenges that are already happening in today’s workplace, from an overly burdened sandwich generation struggling with young children, aging parents, and growing their careers, while more and more seniors are finding they want to go back to work anyway… perhaps Cartensen’s tradeoffs would still be more appealing than the ones we’ve already implicitly accepted with the current model?
Are You Overestimating Clients’ Health Care Costs In Retirement? (Dave Grant, Financial Planning) – While most advisors have seen the annual Fidelity study that predicts individual retirees may need as much as $133,000 to $147,000 to cover health care costs in retirement, a recent EBRI study finds that after Medicare premiums, actual retirees are self-reporting the median spending on health care services is actually “just” $27,000, which averages out to barely more than $1,000/year or $100/month of out-of-pocket expenses over 25+ years of retirement, while total spending on all out-of-pocket medical expenses after Medicare premiums was under $2,000/year. In other words, beyond the ongoing cost of Medicare premiums themselves, the range of medical expenses in retirement may actually be much narrower, and much less uncertain, than is commonly suggested. Of course, there is still the challenge that medical expenses have, for decades, been inflating at a higher pace than the general level of inflation, leading many advisors to create entirely separate “goals” just for health care expenses in retirement. And the cost of long-term care expenses in particular still remain a substantial wild card. Nonetheless, the EBRI survey shows that even those who die at age 95 or later and experience the most expensive (95th percentile) of costs, cumulative medical expenses are “just” $269,000 (effectively producing a range of medical expenses in retirement from $27,000 to $269,000). Which suggests in the end that the bulk of medical expenses may actually be more “plannable” and stable than commonly conveyed, and the real issue is how to plan for (or insure) long-term care expenses or the risk of a serious terminal illness that could rack up substantial medical bills in retirement.
How The Workload-Capacity Gap Controls A Financial Planning Business (Sarah Dale & Krista Sheets, FPA Practice Management Blog) – Twenty years ago, it was common for a financial advisor to operate on their own or with just a single assistant to meet with new clients and help them implement; now, however, in the world of ongoing financial planning with ongoing clients, it is increasingly necessary to build out entire teams to serve an ever-growing client base where there are more and more ongoing administrative, client-servicing, and financial planning tasks to complete. In fact, Dale and Sheets suggests that managing the gap between the necessary workload to service clients, and the staff capacity to deliver, is one of the biggest and most fundamental challenges that advisory firm business owners must manage… and explains why so many advisory firms end out plateauing at a certain size and stage, as the firm reaches capacity and can’t handle more clients, or worse misjudges its capacity and ends out underserving existing clients (leading to client turnover and attrition, such that even new clients who come on board merely offset the ones that are being lost due to the workload-capacity gap). Notably, though, the solution to this workload-capacity gap isn’t just about hiring more staff to increase capacity to deliver more, but also leveraging technology to streamline processes (increasing capacity), and taking a hard look at what is being done for clients and whether they really value it (i.e., whether it’s something that really needs to be done in the first place). The situation is often further compounded by the fact that most advisors say “yes” to any/every new client who comes in the door in the early years, producing a broadly varied client base that doesn’t even have consistent needs to begin with. Which means often the best way to solve the workload-capacity gap is to actually deliberately “allow” some clients to turn over, replacing them over time with different clients who are a better fit (and easier to service efficiently) with where the advisory firm intends to build in the future.
Why I Ditched My Bogus 5-Year Business Plan (Carolyn McClanahan, Financial Planning) – Business plans are important for guiding a business, yet the irony is that looking back, they are often off-track at best, and at worst turn out to have been entirely misguided. Not that it’s bad to try to set a vision for where the business is going to go, but especially in the early years, you may have a plan for who you want to serve, what you want to do for them, and how you will charge… but that plan often has to be adjusted quickly once the advisor sees what clients they’re actually attracting, what services they actually want, and what they’re willing to pay (or by what business model it makes sense to charge them). In McClanahan’s own case, she had initially decided that she would adopt the popular AUM model with a 3-year goal of reaching 20 doctors (as a former doctor herself), managing $20M in AUM, and generating $200,000/year in revenue; yet within 2 years, she had realized that some clients had a lot of money to manage but easy planning, while others had little to manage but hard complex planning, leading her to explore retainer models and shift instead to a complexity-based retainer fee structure. Other “unexpected” challenges that cropped up and led the business astray for her original business plan: inbound referrals by being one of only two NAPFA members in Jacksonville (a city of a million people!) led to more-rapid-than-anticipated growth, which forced her to lease an office space sooner than anticipated, and hire help, which ironically meant that even though her revenue grew faster than the original business plan projected, take-home pay grew far slower. Ultimately, McClanahan hired business coach Tracy Beckes to gain further focus, and adopted her “one-page business plan” approach, which shifted the process from an Excel-heavy financial projection kind of business plan, into setting a higher level mission and vision to the practice and then committing to simply build in that direction (and adapt as necessary to the actual needs of the business). In fact, as the vision solidified, McClanahan found that it was less necessary to project multi-year business planning details, and as a result now simply constructs a 12-month business plan that is updated annually.
Create Your Own (Simple) Client Confidence Index (Julie Littlechild, Absolute Engagement) – While sometimes it’s clear that clients are making progress towards their financial goals, as income and wealth increase, in many situations it’s far less clear, especially when many of the benefits of financial planning are more psychological (making “progress” on self-confidence, and a feeling of financial control and clarity). Which raises the question of how to help clients understand the less-obvious ways that they may be making (psychological) progress in their finances? Littlechild suggests creating a “Client Confidence Index”, simply asking clients to rate on a 1-10 scale three core factors: Confidence (How confident are you that you will reach your primary financial goals); Control (How confident are you that you can positively impact your own financial future?); and Clarity (How clear are you about your plans for retirement?). The 3-question polling survey can then be sent out to clients using simply survey tools like SurveyMonkey, with results tracked in a spreadsheet showing each clients name, date, and responses. And then clients can be asked to update the poll in advance of each annual review meeting (or every 2-3 years if you prefer), providing an opportunity to discuss any differences (changes since the last meeting) with clients in their upcoming meeting. At the least, to the extent that clients actually do feel improving levels of confidence, control, and clarity in their ongoing financial planning work, the Client Confidence Index becomes a(nother) way to give clients a sense of progress in working with the advisor. And at best, it’s a way to show them how far they’ve come since they started the journey with you as their advisor, demonstrate positive impact beyond just the portfolio, and have a new means to engage with existing clients as well.
No-Vacation Nation: Why Americans Aren’t Taking Vacations (Jake Richardson, Big Think) – The big summer vacation was once a great American tradition (and the subject of many television shows and classic movies), but a recent study of nearly 1,200 full-time employees working for companies offering paid vacation showed that a whopping 47% had not used their ful vacation time last year, and over 20% had more than 5 days of vacation banked. For those who weren’t taking their vacations, the reported reasons included a feeling of having too much work to complete to take time off in the first place, feeling pressured by an employer or manager not to take the time, or simply fearing there would be too much work to do after returning. And even amongst those who did take some vacation time, almost half said they were checking in on work while on vacation, with nearly 20% doing so every day of vacation (generally out of a fear that taking time off entirely would not be good for their careers, and/or that giving up vacation time would help them get a promotion). More generally, the researchers found that often it’s the company’s culture itself that creates an environment where employees don’t feel it’s safe or appropriate to take the time off that is made available to them, despite research showing that vacations can have both psychological and even physical health benefits (at least as long as we don’t eat too much while we’re there!). On the plus side, that means it may be feasible to put into place better systems and processes that help make it clearer that it is safe for employees to take vacation, including solutions as simple as reminding employees to set up email auto-responders announcing that they’re on vacation and offering another contact for urgent inquiries (to make them feel less stressed about the need to check in while on vacation), or establishing former protocols to recognize that emails on vacation are “OK” but will only be infrequent (while business texting on vacation isn’t permitted at all).
Why You Should Slack Off To Get Some Work Done (Clive Thompson, Wired) – A somewhat controversial 2015 survey by a UK firm asked nearly 2,000 office workers how many hours per day they spent “productively working”, and found that the average in an otherwise-8-hour full-time working day was just 2 hours and 53 minutes of productivity, with the rest lost to some combination of checking social media, reading news, talking to friends, and other distractions. Yet as author Alex Pang has found in his book “Rest: Why You Get More Done When You Work Less“, it turns out many of history’s most accomplished people actually only spend about 4 hours a day in productive work, from Darwin only working for a few hours in the morning and then again for 90 minutes in the late afternoon (spending the rest of the time taking a stroll or writing some letters), and a 1951 study of scientists and technologists found the most productive ones “only” worked 10 to 20 hours per week in the office (though they also worked some at home). And as the research is increasingly finding, those “slacking off” times aren’t just about slacking off, but actually help us to gather our resources and refresh our focus, spurring bouts of great productivity and creativity. Notably, though, building in more “leisure” time doesn’t necessarily mean just flipping through social media or watching Netflix; instead, the most productive individuals historically tended to fill that “idle” time with activities (from hiking to playing instruments or painting) or social time with friends, or what Pang calls “active rest”. The bottom line, though, is simply to understand that being productive for 8 hours a day with someone’s butt in the chair throughout is not only unrealistic and not representative of reality, but may actually be more harmful for those who try to enforce such policies in contravention to how our brains actually appear to engage most productively.
How To Deal With Email After A Vacation (Brad Feld, Feld Thoughts) – One of the most daunting challenges for ‘busy people’ (including busy financial advisors) when taking a vacation is the thought of dealing with the onslaught of missed emails that have to be slogged through after returning from vacation, from various newsletters to client correspondence and intra-office emails. To address the issue, Feld suggests a surprisingly simple solution that he adopted himself when he took a one-month sabbatical back in 2014 – he simply set up an auto-responder that said: “I’m checking out for a vacation until [date]. I’ll be completely off the grid. When I return, I’m going to archive my inbox so I’ll never see this email. If you’d like me to read it, please resend it after [date]+1. If you need something urgently, please email [my_assistants_email_address] and she’ll either help you or get you to the right person at [firm_name] to give you a hand.” And upon returning from vacation… simply selected everything in his Inbox, and deleted it. Ultimately, Feld that by employing this approach (which he still uses when he goes off the grid one week per quarter), about 50 “extra” emails would show up (i.e., get re-sent) after he returned from vacation… but that meant only 50 extra emails to actually deal with, instead of the 3,000+ that might otherwise accumulated in his Inbox in a week. Of course, the idea of “digging out” after a vacation is so entrenched in society, that it may feel alien to even consider such an approach. Yet arguably, in a world where it’s often just not feasible to truly catch up and dig out from every email anyway – some will inevitably get missed – arguably Feld’s simple system is a much more efficient way to acknowledge reality, and move on quickly and efficiently… while still ensuring that those who actually need your response after you return from vacation know when and how to reach you once you’re back.
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.