Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the announcement that SIFMA is aiming to head off the DOL's fiduciary proposal by putting forth its own new uniform fiduciary standard for broker-dealers, even as critics note that the SIFMA proposal would fail to achieve exactly what the DOL proposal is meant to do: place meaningful restrictions on the worst practices that can cause client harm.
From there, we have a few technical planning articles this week, from a look at senior housing trends and the tendency of seniors to move (or not) when they retire, to a discussion of how to create a 'bridge' portfolio for clients who are delaying Social Security and need to come up with cash flows during the intervening delay years, an article about how to open the conversation about prenups with your clients who are getting married, and a review of the new FBAR rules for reporting foreign financial accounts that all U.S. citizens must comply with or soon face stiff penalties.
We also have several practice management articles, including: how advisors who are dragging their feet about succession planning may need to do some self-reflection to identify their fears and blocking points; tips on how to actually upgrade the quality of your client service; how to ensure you're complying with the RIA requirements for getting "best execution" for your clients; and how to think about whether your advisory firm, if you're hit a growth wall, needs to hire an operations manager or a chief operating officer (COO) instead.
We wrap up with three interesting articles: the first covers a recent high-profile McKinsey consulting report that suggests robo-advisors may not win the day, but that "virtual advice" delivered remotely by human advisors using technology may be the emerging major trend; the second looks at how the emerging "Internet Of Things" could dramatically change retirement, from medication dispensers that remind you if you're behind, to a coffee-maker that can alert your family if your sleep habits have changed; and the last is a look at how advisors are beginning to shift their compensation models... not necessarily because of the "robo-advisor" threat, but simply due to competitive pressures with other advisors, the ongoing evolution of advisory firm business and service models, and a desire to reach new types of clientele.
And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including John Hancock's acquisition of advisor PFM solution Guide Financial, the release of Fox Financial Planning Network's "AdvisorTouch Symphony" practice management resources to support advisory firms that want to roll out their own online investment service, and the announcement that Wealthminder has raised $1.45M in capital to expand their white-label online-advice-solution for advisors.
Enjoy the reading!
Weekend reading for June 6th/7th:
SIFMA Tries To Head Off DoL With New Fiduciary Proposal (Andrew Welsch, Financial Planning) - In its ongoing effort to defeat the Department of Labor's fiduciary proposal, this week SIFMA issued a new "fiduciary" proposal of its own entitled the "Proposed Best Interests of the Customer Standard for Broker-Dealers" that advocates for a greater focus on disclosure of fees and conflicts of interest, rather than being required to avoid them outright. The SIFMA proposal also advocates for a single uniform standard, that would apply across all types of investment accounts, rather than be limited to the DOL's scope of IRAs (and employer retirement plans), and span across regulators with a suggestion that the SEC should take the lead. Ironically, SIFMA also notes that an "unintended consequence" of the DOL proposal is that broker-dealers may feel compelled to move towards a fee-based model, which SIFMA notes would be adverse in the situations where clients don't necessarily have a lot of ongoing portfolio changes. On the other hand, in related coverage on the proposal from Investment News, Barbara Roper of the Consumer Federal of America responded that SIFMA's proposal focuses too much on disclosure and consent to conflicts, fails to sufficiently target the financial incentives that create such conflicts, and is weak and vague precisely where the DOL proposal is strongest: in providing meaningful restrictions on the practices firms use to encourage advisers to behave in ways inconsistent with their customers' best interests.
Retiring? It's Time to Move (Michael Finke, Research Magazine) - Retirement brochures are covered with 'classic' pictures of a retired couple sitting on lounge chairs gazing out at the beach, and some research suggests that such images actually can make us more aware of the opportunities in our future and help us to save more. Yet as Finke notes, perhaps the real issue is simply that it's not reflective of what retirees actually do when they retire. In fact, a recent new study from the National Association of Real Estate Investment Trusts finds that only about 1% of seniors in their 60s actually move in any particular year. On the other hand, broader senior housing trends do find that seniors are moving more today than they did in the past, and the likelihood of seniors moving has tripled since the 1970s (though it's still at a low rate), driven primarily by aged 65-74 retirees in higher wealth groups that relocate to an environment tailored for retirement living (i.e., "active adult" retirement living communities). In fact, a recent study found that going forward, a whopping 40% of baby boomers indicated that they may move out of state in retirement, though the destination location is driven by everything from cost of living and income/property tax costs to climate/weather and simply overall retirement lifestyle opportunities (which baby boomers are significantly more likely than prior generations to be concerned about). Notably, seniors appear to be especially sensitive to property taxes, and one study found that raising average property taxes by just $100 increases the likelihood that a senior will move by 8%! From a broader tax perspective, the composition of a retiree's assets may also be a factor; those with limited assets and a large pension may prefer states like Pennsylvania (with higher income tax on retirement accounts but an exemption for pensions), while those with large pre-tax retirement accounts may prefer states like Florida and Texas (no income tax, therefore no state taxes on the IRA). But perhaps most significantly, a 2009 study by the Center for Retirement Research finds that when retirees decide to move voluntarily, it generally does make them significantly happier.
Bridges To Social Security (Jon Guyton, Journal of Financial Planning) - While much has been written about the value of delaying Social Security benefits, from a practical perspective the decision to delay benefits for someone who otherwise intends to retire in their 60s creates a challenge: how to coordinate retirement cash flows between a portfolio and Social Security when benefits won't begin for several years. For instance, imagine a retiree who wishes to spend at an initial withdrawal rate of 4.5% plus Social Security benefits to sustain inflation-adjusted income; yet if the plan is to delay Social Security for four years until age 70, the retiree's withdrawal right might be 6.5% for several years, followed by a decline to less than 4.5% once the (higher-because-of-delay) Social Security benefits kick in. So how best to invest a portfolio that will have a higher withdrawal rate followed by a lower steady one? Guyton suggests viewing the situation as though the goal was to produce a stable income throughout, plus a "bridge portfolio" for the delay years; thus, for instance, the client's core portfolio might be invested to produce the originally-desired 4.5% withdrawal rate, but a portion of money (e.g., $60,000) will be set aside (into an entirely separate account) and invested conservatively just to cover the 4 "bridge" years from now until delayed Social Security. The benefit of the strategy is that it can help insulate the bridge portfolio from market declines (by separately investing it conservatively and having it clearly held in a separate account that doesn't experience market declines), and help illustrate to the client the various sources of cash flow being used in coordination. In situations with married couples who have two Social Security benefits to start (or delay), the bridge portfolio could have multiple tiers to coordinate each step along the way (e.g., from now until the first spouse begins, and from then until the subsequent point when the second spouse's benefit begins).
Talking Prenups With Clients (Kimberly Foss, Financial Planning) - Given high rates of divorce (and the fact that not all states have clear laws on spousal support), there's much to be said for having couples sign a prenuptial agreement (a "prenup") before getting married... except for the challenge that many still view it as unnecessary, and also "unromantic" as well! Yet Foss makes the case that advisors are particularly well positioned to open the door and encourage their single-soon-to-be-married clients down the prenup path. The starting point is to be certain you're asking single clients about their relationship status, to be aware of whether it may soon be an issue (and gives an opportunity to first introduce the concept at an easier, unemotional time). It's also important to start the conversation early simply because a prenup takes time to get done - Foss says six months is standard, and it's actually important to sign the prenup far in advance of the wedding to ensure neither side later challenges it as being signed under last-minute duress (in California, the prenup recipient must have 7 days to review the agreement and seek independent counsel). In some cases, clients don't want to open the prenup discussion even with uneven wealth, for fear of painting the spouse-to-be as a gold-digger, but Foss points out that it's also an opportunity to secure the safety of that spouse, by clearing delineating how he/she will be supported financially in the event of a divorce. Other tips for the prenup include: be certain to discuss both assets and liabilities, especially with younger clients who may have significant student loans that the other spouse might not want to be shared; consider having a clause that calls for a review and renegotiation in 10 years, as circumstances can change (an originally-stay-at-home spouse could turn out to be the primary breadwinner in 10 years!); and think beyond money (many prenups now include a "social media clause" not to disparage the former spouse on Facebook!). Foss notes that prenups are often 'easiest' to discuss with clients getting married for the second or third time (who have both seen prior divorces, and may have more complicated situations due to children from prior marriages), but the discussion is relevant for all; and for clients who are still uncomfortable with the conversation, consider even using celebrity prenups as examples of their importance. And ultimately, recognize that a prenup is similar to life insurance; you don't buy it because you're hoping the sad event will happen, but it's valuable to have it there in case it does, and it pays to be prudent.
The New Rules of Offshore Accounts (Laura Saunders, Wall Street Journal) - Any U.S. taxpayer with more than $10,000 in an offshore (non-U.S.) account is responsible for filing FinCen Form 114 (also known as FBAR for "Foreign Bank Accounts Reporting"), which provides details of those offshore financial accounts, and is due by June 30th. The penalties for not filing are significant, and can claim 50% or more of an offshore-account balance, yet the State Department estimates that millions of people are failing to report, with fewer than one million people completing the requisite filings despite 8.7 million U.S. citizens living abroad (which means even if half of them are children or have too little wealth to file, there are still millions failing to report). Notably, while the rules have existed for decades, and were rarely enforced, the issue has become more pressing in recent years, as Congress passed the Foreign Account Tax Compliance Act (FATCA) in 2010 that requires foreign financial institutions to turn over information about U.S. account holders so the IRS can crack down. And this year will be the first year institutions actually have to turn over information, which means those who have skirted the rules (deliberately or accidentally) in the past, may now be "outed" for their noncompliance. Unfortunately, though, many view the reporting as onerous (as reporting gets complex with foreign pooled investments like mutual funds, or foreign tax-deferred accounts), and as a result organizations have been lobbying to simplify the rules, even as record numbers of nonresident U.S. citizens have been renouncing citizenship (up to 3,415 people last year). For those considering whether to terminate citizenship, though, it's important to note that expatriation filing fees are $2,350, and more significantly high-net-worth individuals (subject to a few exceptions like dual citizens since birth) must actually pay an "exit tax" equal to any net capital gains they have on worldwide assets (above an exclusion of about $690,000) along with forced recognition of deferred income in IRAs and other tax-deferred accounts (and additional taxes can apply if the renounced-citizen gifts money back to U.S. citizens as well!). On the other hand, for those who don't want to renounce citizenship and just want to come clean for unintentional past mistakes, the IRS introduced a new "streamlined" limited-amnesty program last year, and there's also an existing Offshore Voluntary Disclosure Program (OVDP) to come clean for more serious offenses.
Succession Planning: What Are You Afraid Of? (Mark Tibergien, Investment Advisor) - For decades, both Tibergien and others have called on the importance of advisor succession planning, both from the perspective of protecting and providing continuity for clients, and how to effectively execute the transition for the sake of the business and to preserve the value of what the advisor built. Yet only a small percentage of advisors actually has an actionable succession plan. Tibergien suggests that perhaps our limited success is a result of not looking at the fears that advisors may have about pursuing a succession plan - after all, fear is a powerful emotion that can propel us forward in some circumstances, but freeze us in our tracks in others. So what are the fears that advisors may need to confront? Tibergien offers up a long list, including: are my assets [as the retiring advisor] actually enough to support my lifestyle in the first place; do I have confidence in the person to whom I would transition the business; do I know what activities will keep me engaged in life from the moment I leave the business; do I fear I will lose my stature in the community; do I fear I will become less relevant to the people I know and work with; and do I believe I have not accomplished enough during my career? The ultimate point is that often our fears are subconscious, and it takes time for self-reflection to surface them, confront them, and work through them. Some advisors may even wish to explore working with a life coach or counselor to help navigate their succession planning fears. But failing to do so can create unhealthy dynamics that hobble a firm and potentially lead to client harm, so Tibergien urges that for advisors who are not ready for succession planning, it's at least time to start reflecting on the succession planning fears.
4 Tips & Tricks to Upgrade Your Client Service (John Bowen, Financial Planning) - There's no doubt that client service is crucial in advisory firms, but Bowen notes that often there's a gap between knowing what to do to deliver good service and actually doing it... and even once it's being delivered, there's always room and opportunity to continue enhancing the experience. Accordingly, Bowen suggests that first and foremost, advisors should always be in a process of "re-discovery" with clients - a structured process of sitting down with clients to re-engage them about their concerns, needs, goals, and values; the fact that this was done in the original planning process isn't enough, because situations can change, but advisors may not recognize how much it's changed without a process to revisit what their clients need today. While some advisors fear clients will look down on the process - fearing it makes the advisor seem out of touch - Bowen notes that in practice, advisors who go through the process typically report that clients find it more reassuring to know that the advisor is really trying to keep up to date. Going further, Bowen also notes that advisors in today's world have a unique opportunity to keep up to date with clients in "real time" by connecting with them on Facebook and Twitter, which allows you to see what clients themselves are sharing out to the world - providing you valuable information about ways that you can delight clients (e.g., the client who announces a trip to Italy can be sent a gift guidebook to Italy, and the client who announces their daughter is pregnant can get an article with tips for new grandparents). Third, Bowen suggests that while clients recognize you won't necessarily have 'all' the answers, having a good network of experts you can refer them to is very valuable, and as a result advisors should always be working continually to upgrade their own network of professionals and experts to which they can refer clients for the best outcomes. And finally, Bowen emphasizes the importance of regularly surveying clients for feedback as well, so at a minimum survey your clients (anonymously) once a year to get their candid feedback on how you're doing - and be sure to ask not only about what you're doing well, but whatever problems there are that your clients wish you would improve, too.
Best Practices For Best Execution (Brian Lauzon, Iris.xyz) - A registered investment adviser (RIA) has a duty to seek "best execution" as a part of the core duties of loyalty and care under the fiduciary standard; in other words, advisors must take steps to reasonably ensure that when trading on behalf of clients, trades are executed as favorably as possible. Notably, this doesn't necessarily just mean executed with the lowest trading fee, nor is it just about being executed at the most favorable price; instead, advisors must demonstrate a process that has reasonably weighed both of these factors, along with others that may be relevant, including the value of supporting research provided by the platform, responsiveness of the broker executing the trade, financial strength of the broker, capabilities to execute without impacting the market, etc. Notably, if you do business primarily with a particular RIA custodian, and your client advisory agreement notes that the custodian's supporting broker-dealer has been selected to execute trades, ongoing due diligence responsibilities are more limited, but advisors are still expected to demonstrate the diligence process in selecting that platform in the first place (if you're not sure if this applies to you, see Item 8.D on your own Form ADV Part 1), and also demonstrate that they are periodically reviewing that it wouldn't be better to change to another platform. On the other hand, if clients have truly given you discretion to trade across multiple broker-dealer platforms, and you have discretion about where trades will be executed, it's even more incumbent on you as the advisor to have a process to select, and monitor, whether you are getting best execution. For advisors who need to 'catch up' on the issue, Lauzon suggests several best practices, including: review the "brokerage practices" section of your own compliance manual, and make sure you're doing what it says you will; review execution performance of brokers on an ongoing basis (execution prices, error rate, etc.); review relationships with any brokers you trade with at least annually; and be certain you have a process to periodically review your trade blotter to monitor the usage of various brokers and their execution.
A COO Or No? (Amy Kizer, Financial Advisor) - For advisors who are hitting a growth wall, given the sheer volume of both administrative/business management issues and client relationship responsibilities, it's time to consider whether you're ready to step back from handling the administrative/management work and focus on the clients. Yet even if you are ready to step away and delegate the operational duties of the firm, Kizer notes that there's still a significant difference between an operational manager, versus hiring a "Chief Operating Officer" (COO). While both will be responsible for handling operational activities of the business and executing initiatives, the key distinction is that a COO is also responsible for helping to shape the strategy and the culture of the business, and takes on additional leadership and management aspects of the business. Similarly, while an Operations Manager might be responsible for ensuring the firm's financial reports are compiled, a COO is responsible for actually managing the resources that are reported into the financial reports in the first place. So how do you choose which type of role and path for the business? Kizer suggests several key factors, including: level of office organization (if you just need to create better process and procedure for your back office, an operations manager is a better place to start); business strategy (if you don't have a clear strategy, or aren't ready to build one with your [new] COO, then hiring a COO probably won't work out well for you!); willingness to take on partners (a senior professional coming on board as a COO may expect some equity participation in addition to compensation, and at a minimum should have a 'partner level' seat at the executive table to be involved in important decisions); and sheer size of business (generally, a firm probably doesn't need a COO until at least 8 staff members, if not more; only 20% of firms with $1.5M of revenue have a COO, but by $3.5M of revenue it's up to 60%). Regardless of the choice between Operations Manager or COO, though, Kizer notes that either can help breathe new life into a firm where the advisor owner has hit a wall!
Robo-Advisors Have A Cloudy Future But Virtual Advice Supercenters Will Win The Day (Brooke Southall, RIABiz) - A recent report from global consulting powerhouse McKinsey & Company, entitled "The Virtual Financial Advisor: Delivering Personalized Advice in the Digital Age", suggests that the outcome of so-called "robo-advisors" is still murky at best, but that the idea of "virtual" advice (which is different than robo-advice because it involves an actual human advisor) is here to stay. The core defining features of the new emerging "virtual advisor channel" include dedicated human advisors who work directly with clients but do so at a distance, centralized hubs from which high-caliber advisors can be trained and then work and interact with clients via phone/video chat/email, and a virtual fulfillment process where nearly all transactions and interactions are able to be completed digitally and seamlessly. Notably, McKinsey emphasizes that this isn't just about having a simple service center for low-value clients, but a coterie of high-end advisors that provide an end-to-end service model (especially for the mass affluent), that just happens to not include in-person meetings. And McKinsey emphasizes that their vision is around mega-firms that will institute these large service centers, not necessarily independent RIAs that are largely ignored in the McKinsey report. Overall, McKinsey sees the market potential at approximately 42 million households worldwide, with the mass affluent category one of the most likely adopters (at 20% to 30%), creating the potential for $66B in annual revenues for the virtual advice model. On the other hand, existing robo-advisors suggest that McKinsey's report understates their own ability to improve technology-based service delivery, raising the question of just how crucial the human will or will not be in the equation.
How the Internet of Things Will Upend Retirement (Joseph Coughlin, Wall Street Journal) - The "Internet Of Things" is the emerging phenomenon that more and more of the "things" in our daily lives are now becoming internet-connected, creating a world where the internet isn't just about our ability to go online for information, but is used to proactively interact with us in our own environment. In the context of retirement, the Internet Of Things could significantly change how we live our lives. For instance, your pill dispenser might buzz to remind you to take your medications, your refrigerator will not only keep your food cold but also help track your eating habits, and your coffee maker will not only prepare the morning cup of joe but be able to spot changes in your morning routine that could indicate a new problem in your sleep habits - all of which is valuable information that can either go to a health management center for support, or even be communicated to family and friends who want to make sure that everything is ok. This emergence of the Internet Of Things will also change our expenses and how we budget in retirement; in the near term at least, expect that appliances with these additional information services will probably also charge a new/separate monthly fee to access them, potentially creating a flurry of new line items in the retiree's budget that we never considered (for instance, consider how 'essential' a cell phone and data plan are today, compared to just 20 years ago). Notably, the emerging Internet Of Things may also create challenges, from considering privacy and with which organizations you really want to share your most intimate household data, to the challenge of how to integrate all these devices so using them really does make your life easier and not more complex. Nonetheless, the reality is that technology is going to increasingly play a role in our world, not just for Millennial tech adopters, but everyone including retirees... along with the financial and social costs that must be navigated as well.
How Should Advisors Be Charging Now (Charles Paikert, Financial Planning) - The landscape of advisory firms is changing; firms that deliver comprehensive financial planning and wealth management for a 1% AUM fee were the low-cost high-value providers 20 years ago, but today at best are 'competitively' priced and under more pressure than ever to justify their value (and even their price point given robo-advisor services at 35bps or less). If the trend continues, in another decade such firms may end out being the high-cost high-value provider - not necessarily fatal, if the high value can justify the cost, but a huge pressure on firms to step up on what the deliver. In fact, a recent Financial Planning survey found that while 59% of independent advisors charge on AUM (and over 3/4ths of RIAs), 13% of advisors primarily charge fixed fees and another 6.5% charge by the hour - and in the same survey, 1/4th of advisory firms said they'd changed their fee structure in the past year, and another 13% plan to do so this year. Notably, though, the competition that is driving such changes doesn't appear to be primarily driven by robo-advisor competition, as the FP survey found that change is primarily due to growing competition with other advisors, as well as operational pressures in the business, and a TD Ameritrade Institutional study also recently noted that downward pressure from robo-advisors on fee levels of advisory firms is "yet to be proven". Still, new/different pricing models are beginning to emerge. A growing number of firms are offering flat fee models for a specified list of services, while others are calculating retainers based on combinations of income and net worth (e.g., 0.5% of net worth plus 1% of the client's AGI). The new models not only provide a different way to manage the business compared to AUM fees, but in many cases are opening the door for advisors to new segments of clients (e.g., younger clientele without assets). And many firms are now using 'hybrid' compensation models, such as a flat minimum fee plus a percentage of AUM, or a combination of a very small fee based on net worth (e.g., 0.10%) plus a higher AUM fee for actual portfolio management. On the other hand, critics note that many of the compensation model alternatives are more complex, and/or many clients are uncomfortable with the sticker-shock of hourly or project-based fees, and suggest instead that the AUM model is more palatable to clients while hourly/retainer fees and in general unbundling fees will be a harder sell.
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! And click here to sign up for a delivery of all blog posts from Nerd's Eye View - including Weekend Reading - directly to your email!
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!
Hi — Thanks for the update, I always love the links. But the format (at almost 5000 words this week) is too long for me. I’ll make time for quick summaries and then long relevant articles, but not long summaries. I’d love to see it 1/4 the length.
Steve Marcum says
I disagree with Victor’s comment. I actually like the format / length. The summary at the top is 500 words. Perfect for a quick read that allows you to direct yourself to the more lengthy summary below. And then the links are provided for a deep dive if interested. I’m a newer follower to the site and find the delivery of content quite effective.