Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with a deeper look at the SIFMA lawsuit against the Department of Labor’s fiduciary rule, which is looking more and more like an Alamo-style futile last stand, as the details of their legal complaint appear to be little more than rehashing the same arguments they have already presented and lost at each prior step of the rulemaking process.
We also have a few technical planning articles this week, from strategies to plan around maximizing step-up in basis (and especially avoiding a step-down in basis) at death and the new Form 8971 cost basis reporting rules, to tactics that advisors should consider when helping younger clients make good student loan decisions, and a review of a newer company called Vest Financial that is providing an outsourced options overlay service to help design risk management strategies for client portfolios.
From there, we also have several practice management articles, including: looming anti-money-laundering (AML) rules that could hit later this year and put significant new compliance burdens on SEC-registered investment advisers; a list of 13 “true” differentiators that advisors can use to think about what really differentiates their own client services; how to reframe your value proposition to clients by shifting from just talking about your job title and what you do to helping clients understand how you’ll actually improve their situation; a review of “startup friendly” RIA custodians TradePMR and Scottrade Advisor Services, which have actually been cracking down a bit on the smallest “hobbyist” RIA firms; and a look at how you can improve your engagement with clients over the next 2 months by taking a one-week-at-a-time fresh look at key aspects of your advisory firm and how your clients experience it.
We wrap up with three interesting articles: the first raises the question of whether our current ‘obsession’ with the philosophy of “always be your authentic self” may be going too far, because in the end people may care more than we’re sincere and do what we say, than whether we authentically share every last thought in our heads; the second is a great reminder that while we’re often told to “follow our passion”, most of us aren’t actually sure what our “passion” really is, and in most cases really understanding that takes years or even decades of a career to find, so the better approach is to try to “foster your passion” and just keep moving in the direction of the work that most inspires you; and the last is an interesting look at how the media views financial advisors and recommends that consumers find an advisor, where consumers are recommended to look at everything from how the advisor is compensated, to whether the advisor has “humility in large doses” when it comes to describing their own abilities.
And be certain to check out Bill Winterberg’s “Bits & Bytes” video on the latest in advisor tech news at the end, which this week includes interviews from the recent Envestnet Advisor Summit on the latest Envestnet Advisor Portal technology developments with Tamarac and Yodlee, along with the new Open ENV initiative!
Enjoy the “light” reading!
Weekend reading for June 11th/12th:
Why SIFMA & Co’s Trip To A Friendly North Texas Court To Upend DoL Fiduciary Rule Looks More Like Its Alamo (Lisa Shidler, RIABiz) – A coalition of organizations fighting the DoL fiduciary rule, including SIFMA representing Wall Street firms, the Financial Services Institute representing broker-dealers, and the U.S. Chamber of Commerce, have sued the DoL in a north Texas court that has been favorable in the last to anti-DoL plaintiffs, in a “last stand” effort to stop the rule from being implemented. The lawsuit focuses on three primary issues: that the DoL exceeded its authority by forcing firms to allow investors to file class-action lawsuits; that the DoL misjudged the costs and benefits of the rule such that it will harm retirement savers and small businesses; and that the DoL has inappropriately redefined and ‘stretched’ the term fiduciary itself. Yet fiduciary advocates point out that these are substantively the same arguments and complaints that the anti-DoL fiduciary lobby has alleged throughout, was already voiced during the open comment period, and the industry was already granted concessions on many of these points in the final version of the DoL fiduciary rule. Which means the odds are not in favor of those suing the DoL, as the DoL really does have authority to define fiduciary, it did publish a cost-benefit analysis, and in general courts give a lot of latitude to regulators that follow a thorough public input process. In addition, because the rule is so complex and a court decision could take time, there’s a possibility that even if victorious, the rule would already be implemented before it could be overturned, and it’s not clear that the courts will grant an injunction to further delay the implementation period (as that requires the plaintiffs to also prove that any failure to delay the rule would cause “irreparable harm”). Alternatively, even if the courts do acquiesce in the lawsuit, experts suggest it’s more likely that they might just push back on certain elements of the rule, rather than vacating it entirely and forcing the DoL back to the drawing board. But again, the fact that their arguments weren’t persuasive to the DoL in the first place, nor to Congress (which has not managed to muster enough votes to prevent the rule and/or to override the President’s veto against any legislation to block it), suggests that the odds are not good for the anti-fiduciary lawsuit. And the situation only worsened later in the week, as Dealbook took a deeper dive into the Chamber of Commerce’s “business owners” who were objecting to the fiduciary rule and discovered that nearly half either weren’t actually against the rule or weren’t even business owners being impacted in the first place!
Near-Death Planning And The Zero Basis Rule (Randy Gardner Vincent & Leslie Daff, Journal of Financial Planning) – Last year, the IRS and Treasury put forth new rules that will require anyone above the estate tax filing limit to file not only a Form 706 estate tax return, but also a new Form 8971 that reports the step-up-in-basis-at-death valuation to the beneficiary that inherits the asset (with another Form 8971 filed if the inherited asset is re-gifted in the future). The primary purpose of the rule is to ensure that valuation is reported consistently on the estate tax return and by the subsequent beneficiaries for the cost basis of the inherited asset, and to ensure that the beneficiary knows the inherited cost basis. However, the new regulations placed harsh consequences on those who fail to file: if a Form 706 is supposed to be filed and is not, the IRS will “assume” that the cost basis was zero, effectively losing the step-up in basis if proper filing is not done. Those who do properly file Form 706 and the new Form 8971 won’t have to worry about this draconian punishment, but the newfound IRS focus to the income tax consequences associated with inheritances emphasizes the ongoing shift of estate planning from being estate tax centric to more income tax centric instead. Accordingly, strategies to maximize the income tax planning opportunities at death are likely to be more and more popular in the coming years, which includes not only maximizing step-up in basis but also avoiding a step-down in basis for assets that have a loss. Alternative strategies include gifting away the loss asset before death (thanks to the carryover basis rules for gifts), selling the investment at a loss to a family member (which produces a similar result due to the rules limiting tax loss deductions for related-party sales), or simply harvesting the tax loss by selling to a third party (though if the losses can’t otherwise be used against available capital gains, the carryforward remainder will expire unused at death).
How To Help Younger Clients With Student Loan Debt (Olivia Zaiya, Commonwealth Independent Advisor) – While we’ve “all” heard about how medical expenses are rising faster than the general level of inflation, over the past 30 years the cost of college tuition has grown at nearly double the rate of health care expenses. Which in turn has led to an explosive level of student loan debt, rapidly rising default rates (last year the student loan default rate was 11.8%; by contrast, even in the aftermath of the financial crisis, the mortgage default rate was “just” 11.3%), and a growing opportunity to do student loan planning. The first strategy for student loans is to determine if the student might actually be eligible for any forgiveness or cancellation programs; there are many available for teachers, those who work in government or for a non-profit, or medical professionals, and can even allow hundreds of thousands of dollars in student loan debt to be forgiven. Another alternative is to take advantage of an income-based repayment plan, such as the Pay As You Earn (PAYE) program which caps monthly payments at 10% of discretionary income for 20 years (with the remaining balance forgiven thereafter) for those facing financial hardship, and the Revised Pay As You Earn (REPAYE) program which has similar terms but is easier to qualify for (no financial hardship requirement). The Office of Federal Student Aid now offers a Repayment Estimator that can help students sort out the various options and the payments that would be due for each. Another option is to refinance the student loans through a private lender, which works best for those with high income (where income-based repayment plans weren’t relevant) and great credit (such that they can qualify for favorable terms); however, be certain that the student isn’t eligible for forgiveness or income-based repayment now or in the future, as once the student debt is refinanced out of public programs through a private lender, the opportunity for government-funded forgiveness and income-based repayment programs is permanently lost.
A New Strategy For Downside Protection Or Yield Enhancement (Robert Huebscher, Advisor Perspectives) – Despite the interest of most advisors in managing portfolio risk, relatively few use options strategies, in no small part due to the complexity of trading and managing options across a wide range of client portfolios. A recent startup, Vest Financial, has started to offer advisors a form of packaged risk management strategies using an options overlay. For instance, “buffer” strategies protect against market downturns by eliminating a portion of losses – e.g., if the first 10% is buffered, a 12% market decline is only a 2% loss, and a 30% decline is only a 20% loss; the buffer is “paid for” by giving up a portion of upside in return, such as capping the portfolio at an annual gain of “just” 12%. Another alternative might be an absolute downside protection strategy, such as using puts to shelter against anything more than a 10% total loss (again, paid for by giving up a portion of the upside in return). Or clients can simply give up a portion of significant upside, in exchange for generating ongoing income (by writing covered calls). Ultimately, Vest’s options strategies aren’t necessarily new or unique, but the company helps ease the implementation of options strategies that most advisors aren’t very familiar with, and will assist in options strategies for any security that has listed options on an exchange, which includes most individual stocks and ETFs, but not mutual funds (as there aren’t any listed options against mutual funds). The management fee is 25-50bps, and technically Vest acts as a sub-advisor on the client’s investment accounts.
Pending AML Rules Could Jolt RIAs (Dan Jamieson, Financial Advisor) – The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) is expected to release new Anti-Money-Laundering (AML) rules later this rule, which will require RIA firms to develop internal policies and procedures to catch suspect activity, designate an AML compliance officer, provide ongoing employee training, and have an independent auditor test the program. For now, the new rules will only apply to SEC-registered investment advisers, and not state RIAs. Notably, in the past most responsibility for monitoring improper money transfers rested with RIA custodians and broker-dealers, but FinCEN has recognized that whoever is “closest to the client” is most likely to catch inappropriate activity, which means the regulations are coming to RIAs directly. If any questionable activity or fraudulent incidents occur involving more than $5,000, the RIA will be required to file Suspicious Activity Reports (SARS), and currency transaction reports will be required for cash withdrawals of more than $10,000 per day, all submitted through FinCEN’s Secrecy Act (BSA) eFiling system (and without notifying the client).
13 True Differentiators For Financial Advisors (Matt Oeschli, The Oechsli Institute) – Financial advisors are increasingly struggling to differentiate, in a world where most of us have similar platforms and can offer similar products, and where consumers are increasingly effective at sniffing out empty promises. To craft a true differentiator, Oeschli suggests that it must be legitimate (you really do what you say in a specialized way), high value (truly relevant to the client’s needs), and quantifiable (so the value can be demonstrated and substantiated). Ultimately, though, differentiation is about more than just having a niche of working with a particular type of professional in which the advisor specializes (e.g., a niche with doctors or dentists or architects), or at least that’s not the only way to differentiate. Other options include: specializing with people from a particular firm (e.g., all the executives at XYZ corporation); having a specialization in a particular financial challenge (e.g., an expert in IRAs or stock options strategies); having more credentials and expertise; having a high-powered Rolodex (where your value is being able to open doors and facilitate introductions for your clients to other people of influence); working with centers of influence (such that you can drop their name as a client, with their permission, to be perceived more favorably); having a specific geographic footprint; having a large team serving clients that allow deeper service (e.g., the advisor who only has a maximum of 30 clients to provide deeper service); a truly unique service or pricing model/cost structure; a big-time success story for a particular (high-profile) client; a unique visual look of your office that really is unlike any other; or recognized thought leadership or other awards from your industry. Ultimately, Oechsli suggests that most advisors can and should have multiple differentiators, but you don’t need all of them – two or three should suffice to distinguish you from other advisors, once you learn to articulate the differentiators clearly.
The Best Value Proposition Is What your Client Wants To Achieve (Stephen Wershing, The Client Driven Practice) – Most advisors talk about their value proposition based on what they do, such as investment management or financial planning or personalized advice. But Wershing suggests that ultimately, the goal should be to describe the outcomes of what your (typical) clients wants to do, or accomplish, or become, and how you help them get there. Because the challenge is that most clients don’t actually know how financial planning or wealth management really relates to them, and they understand even less about what it really means when you simply say you are a financial advisor or wealth manager. The point is not necessarily to talk about your deliverables either – because again, clients still may not really understand how getting a comprehensive financial plan, or a retirement road map, or a customized portfolio analysis, will actually help them in a meaningful way. Which means the point of talking about where you help your clients go – or the “future state of being” they’re trying to reach – you can help them connect the dots between why you do, and how it actually benefits them. Examples that actually fit this framework include helping clients achieve peace of mind, reaching retirement having made the right choices, being able to maximize a special opportunity available to them, being ready to successfully transition their business, or having their assets protected against risks and outside interests. Of course, the final caveat is that you have to be ready to actually deliver services that help them achieve these outcomes, but the point remains that helping clients understand the outcome – providing a financial plan that will allow you to enjoy a successful retirement – is far more effective than “just” being a financial advisor who offers financial planning.
The Non-Big-Four RIA Custodians Are Applying Tougher Love To Hobbist RIAs (Lisa Shidler, RIABiz) – The “big four” RIA custodians have an estimated $2.3 trillion in RIA assets, including Schwab ($1.1T), Fidelity ($750B), TD Ameritrade ($300B), and Pershing Advisor Solutions ($150B), and as they’ve grown those large RIAs have increasingly focused on working with larger RIAs, making it difficult for new RIAs to find a “startup friendly” custodian. Filling this void has been a number of much smaller “below-the-radar” RIA custodians, each estimated with no more than $15B of AUM in total, and all willing to serve the small RIA that can’t get onto other platforms. Now, however, even some of the smaller RIA custodians are trying to push “up market”, pruning some of their smallest RIAs and trying to attract slightly larger ones. For instance, TradePMR has long been recognized as working with new RIAs (particularly new hybrid RIAs) and has no minimum asset level (but expects firms to reach $2.5M of AUM within their first few months); however, in the past two years the custodian has reportedly cut more than 300 of its 1,300 advisors loose – mostly firms with <$100M of AUM (and especially <$10M), who were creating significant work for staffers, costing the custodian too much money, and/or exposing the firm to too much liability; the concern in particular surrounding “cashiering” requests to move money in/out of client accounts, and the risk of smaller firms succumbing to internet scams and wire fraud attempts. Similarly, Scottrade Advisor Services, which has a history of being friendly to state-registered investment advisers with <$100M of AUM, has also gone through a recent process of ‘pruning’ smaller advisors; for a period of time, the firm had implemented a minimum platform fee as high as $12,000, and although that custody fee no longer exists, the firm still acknowledges it is eliminating “risky advisors” from its platform (from a total of nearly 1,000 advisory firms) and acknowledges it prefers advisors who have a “commitment to growth” (and in exchange offers a dedicated one-on-one service rep upon reaching $50M of AUM).
How To Drive Deeper Client Engagement In 7 Weeks (Julie Littlechild, Absolute Engagement) – For most advisors, there’s little time to really to much work on the business, because they’re too busy working in the business on client issues, and for entrepreneurs even when they do free time up it may quickly turn into idea overload. Accordingly, Littlechild suggests a more structured approach, stretched out over 7 weeks, to try to help take a fresh look at the business and how it can be improved. The 7-week process includes: 1) take a fresh look at the business through the eyes of the client, including taking some clients out to lunch to ask them anew what they really value, and also literally walking around your firm and seeing how it really looks from the client’s perspective; 2) think about what “great” looks like in other industries (e.g., Ritz Carlton, Zappos, or Disney) and consider whether there are specific “great” experiences you could similarly add into your firm; 3) think through the steps of the client journey and what they experience at each stage (from initial awareness and first contact to onboarding and review meetings and client appreciation events); 4) implement some changes to standardize the most disparate parts of the client journey (the more consistently its done, the easier it is to make the experience consistently better!); 5) designate a person or role within the firm that is responsible for monitoring the client experience and identifying opportunities for continued improvement; 6) start gathering informal feedback or creating a formal survey process to identify if your changes are really improving client engagement over the next two years; and 7) take an opportunity to refresh and recharge by booking some time to explore and learn further (read a new business book, dig into some TED Talks, etc.).
Unless You’re Oprah, ‘Be Yourself’ Is Terrible Advice (Adam Grant, New York Times) – It seems that in recent years, we have entered “the Age of Authenticity”, where “be yourself” is the defining advice, whether it’s about your career or love life. Accordingly, we are counseled to erase that gap between what we believe inside and what we reveal to the outside world, and “let our true selves be seen”. Except Grant suggests that for most people, “be yourself” is actually terrible advice… because for most of us, many things really are better left unsaid. In point of fact, though, some of us do this naturally already. Researchers have identified a personality trait called “self-monitoring” – those with high self-monitoring are the ones constantly scanning the environment for social cues and adjusting accordingly, while those with low self-monitoring are more internally guided and do not adjust as much to the external environment. Those who exhibit less self-monitoring tend to be perceived as more authentic, and some research suggests those who score lower on self-monitoring measures actually do tend to have happier marriages and lower odds of divorce. However, Grant notes that low-self-monitors only do better in their love lives; it’s the higher self-monitors who tend to advance faster in careers and earn higher status (in part because they’re more concerned about their reputations in the first place and act accordingly). And believing too much in your own authenticity – that there is one “true self” inside you, can actually inhibit personal development, as studies have long shown that if we believed ourselves and our personalities to be fixed, we’re more likely to actually give up and stop trying to improve ourselves. Given these dynamics, Grant suggests that what we’re actually in search of is not authenticity, but “sincerity” instead – what we’re really responding to is not someone’s authentic inner being, but simply someone whose outward actions are consistent with their outward statements. Which means the path to improvement is not about finding our inner selves and living authentically, but simply about finding what connects with and resonates with others, and then trying to sincerely live up to it. Or stated even more simply: “No one wants to hear everything that’s in your head. They just want you to live up to what comes out of your mouth.”
Graduating And Looking For Your Passion? Just Be Patient (Angela Duckworth, New York Times) – As the commencement speeches end and a new wave of graduates enter the workplace, one of the most common refrains from modern commencement speeches is to “follow your passion”. Except the challenge for most recent graduates is that they’re not even sure what their passion is. In fact, Duckworth is a psychologist who studies world-class achieves, and has observed that most of the time, it takes time – potentially years – to develop the direction and focus that you ultimately identify as your life’s work and “passion” (for instance, Julia Child didn’t fall in love with French cuisine until her late 30s). So for those who know their passion, that’s great, but for everyone else – young graduate or someone who’s been working for years already – the best approach is not to follow your passion, but try to foster your passion and find it in the first place. Which means you don’t have to stress that you don’t automatically and intuitively “know” your passion; instead, just try to keep developing in the direction of what you enjoy and strikes your interest, and your only goal in finding your first job should be something that has at least some initial appeal (rather than trying to find the ‘perfect’ job and career track from day 1). In addition, try to find something that stirs your interests, and feels like it has a higher purpose of helping others; those who find careers with an enduring passion almost always find a path that is inspiration because of the impact it has on others, not just themselves. Ultimately, then, the end point of “finding your passion” becomes an iterative process of continuing to move towards work that interests and inspires you, and fills you with a sense of purpose… and if you’re not happy in what you’re doing now, consider whether it’s simply time to take the next step.
The Key To The Best Financial Advice: Humility In Large Doses (Jason Zweig, Wall Street Journal) – The sad reality is that it’s hard work for consumers to find a good financial advisor, an issue that has only been accentuated by the recent Department of Labor fiduciary rule requiring advisors to act in their clients’ best interests (which for many consumers just makes them surprised and suspicious that wasn’t already the case!). And Zweig notes that while traditionally the approach for most who do want to find an advisor was to ask their friends and family for a referral, doing so risks allowing judgment to be colored by a charismatic-but-not-necessarily-competent advisor. As an alternative, Zweig suggests starting with fee-only advisors, located through sites like NAPFA, the CFP Board’s “Let’s Make A Plan”, or the FPA’s “PlannerSearch”, and then check their background for prior misconduct through services like BrokerCheck, read through their Form ADV brochure, and ask all the advisors interviewed a standardized list of questions. Beware the advisors who are overly cocky and confident, as the best at investing are more likely to have the “humility in large doses” that comes with real investment experience. Of course, this article is ultimately written for consumers and not advisors, but it’s an interesting reflection of how the media views financial advisors; how do you stack up against the criteria noted in Zweig’s article?
I hope you enjoy the reading! Let me know what you think, and if there are any articles you think I should highlight in a future column!
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. You can see below his latest Bits & Bytes weekly video update on the latest tech news and developments, or read “FPPad Bits And Bytes” on his blog!