Weekend Reading for Financial Planners (Mar 1-2)

Posted by Michael Kitces on Friday, February 28th, 1:43 pm, 2014 in Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with an interesting review of the recent Technology Tools for Today (T3) conference by industry commentator Bob Veres, who observes a number of new trends emerging in the world of advisor technology (perhaps most notably, that it's becoming less about advisor tech itself, and more about the advisory firm's ability to implement it effectively!). There's also a discussion from RIABiz on technology trends impacting the world of advisors in the RIA space in particular.

From there, we have a number of practice management articles this week, including a great discussion of what it costs to get a good advisor website these days (as well as the factors that impact the cost, and some vendors to consider), some tips for advisors looking to do more content marketing, a good list of tips on hiring advisors and mistakes to avoid, and an interesting look at how most advisors eschew mentioning religion in the context of financial planning but a few are having great success by doing the exact opposite and carving out a religion-based planning niche.

We also have a few more technical articles, from the latest research about what actually leads to a happy retirement (a healthy level of activity and health itself appear to be the overwhelming drivers, and a "relaxed" retirement is often a less happy one!), to an interesting investment-based analysis of Social Security (finding that a good decision to delay Social Security for a long-lived client is the equivalent of buying an immediate annuity with a nearly-equity-like but "risk-free" return at life expectancy!), and an interview with retirement taxation guru Natalie Choate who warns about increasing IRS scrutiny on Prohibited Transactions in retirement accounts.

We wrap up with three interesting articles: the first is a new research study covered in the Wall Street Journal that finds the tendency to buy deep-value stocks or chase high-growth investments may not just be a matter of knowledge and experience, but could actually be part of our individual genetic wiring; the second article is from Gen Y advisor Sophia Bera, about what she's done to truly differentiate her firm's website and build a successful online practice; and the last is an article that looks at how the growing impact of technology and the web is simultaneously allowing small niche players to find an audience/customers/clients but is also leading to a concentration where the biggest hits/successes are even bigger, which raises interesting questions about whether in the end the internet will help small firms survive and thrive or lead to a "winner-takes-all" outcome where the largest firms overwhelming dominate! And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end! Enjoy the reading!

Weekend reading for March 1st/2nd:

Five Technology Trends That Are Reshaping The Industry - On Advisor Perspectives, industry commentator Bob Veres shares his insights about current trends in advisor technology coming out of the recent Technology Tools for Today (T3) conference. The key changes in the coming years include: 1) Collaborative financial planning, where data is entered using account aggregation and planning is done live and interactively with clients; 2) Alerts, where the CRM tells you who hasn't been contacted recently and instead of doing financial plan updates to see if anything has changed enough that action needs to be taken, the planning software continuously updates itself in the background and it tells you which clients are in trouble, deviating from their plan, and need to be contacted (e.g., the software alerts you if, based on recent market movement, a clients retirement plan Monte Carlo probability falls below X%); 3) Workflow integration, where having a "workflow" moves beyond just a coordinated list of related tasks in your CRM to an overarching workflow for processes that span your office and multiple software tools and help coordinate each step along the way, including notifying the right staff members at the right time and within the right software; 4) Remote back offices, as advisors increasingly find that much of the back-office operations and financial planning data analysis doesn't actually need to be done in the physical office (which creates the opportunity for all sorts of outsourcing solutions, especially since most/all of the software is cloud-based anyway); 5) Automated marketing tools that help advisory firms attract visitors to their website, and turn those visitors from strangers into prospects who can ultimately become clients. One notable overarching trend to all of this, though - as the number of choices proliferate, the challenge for advisors is increasingly shifting from having the available technology tools, to figuring out how to effective adopt them and get them to be fully utilized in the advisor's firm.

The 6 Biggest Trends Affecting The RIA Business - This article from RIABiz highlights some of the top trends in the RIA space, although in truth these are trends that really affect advisors across all channels. The big trends are: 1) Technology innovation is back with a vengeance (in recent years as the shadow of the financial crisis fades, investments into industry tech innovation are accelerating, coming from both custodians, tech vendors, and product providers); 2) Big data mania is building (large research companies and some custodian platforms are starting to delve into all the data they have on advisors using their platforms, looking for new insights about best practices); 3) Ongoing rise of fiduciary advice (while wirehouses may never deliver fiduciary advice effectively, it does depend on economies of scale to be most efficient, and wider adoption reduces fiduciary as a marketing distinction in the first place; in addition, as fee-only investment advice has now been mandated by law in the UK, the lessons of what works and not may soon get adopted here in the US); 4) Ultrarich are up for grabs (after the recent wirehouse scandals, especially at UBS, RIAs targeting the ultra-HNW have newfound opportunities to reach some of the most lucrative clientele and with a lower cost due to less overhead); 5) Finding new ways to balance atomization and centralization (the balance between having a landscape with thousands of tiny advisory firms that can be quick and flexible, and the efficiencies and economies of scale with centralization that is now increasingly supported by custodians, TAMPs, roll-up/aggregator firms, etc.); and 6) Balancing the efficiency of deep tech integrations and dynamic use of best-of-breed software (both advisory firms and RIAs are struggling to find the balance between just buying the "best of breed" software in every category, even though it might not fully integrate, versus buying deeply integrated and efficient software that might include parts that are suboptimal).

How Much Should You Spend On A New Website? - With the growing pressure on advisors to refresh their digital presence and update (or create!) their websites, marketing consultant Kristen Luke often fields questions about how much a website should cost, as the possibilities range from "free" by doing it yourself using a platform like WordPress.com to the alternative extreme of spending $64,500(!) with wealth management website design specialist Lucre. Of course, most advisors will end out somewhere in the middle of that wide range, but where in the range depends on a number of factors, including whether the website design is custom-built or based on a template, whether you will write the content of the website or not, the level of creative input required from the designer (either regarding the design itself, or the marketing/messaging), how well the website differentiates you, if the programming can/will be outsourced overseas or provided locally, the overall depth of sophistication for the website, the sheer number of pages to be designed and implemented, and whether or not the designer is also helping with SEO (search engine optimization) as well. Given the range, Luke actually suggests that the best starting point is to choose a budget first, and then find the provider/platform that can provide the most and offer the best fit for the price. Specific providers that Luke recommends include: for bare-bones do-it-yourself, try WordPress.com or SquareSpace; if you can afford the "sweet spot" of a basic custom website (about $2,000 - $5,000), check out Make It A Great Day or FMG Suite, or for a lower-upfront-but-higher-ongoing alternative try AdvisorWebsites. If "money is no object" Luke suggests hiring a creative agency that will work with you to develop a truly custom website that differentiates you through design and messaging; good options include the aforementioned Lucre, and also CreativeMint. Overall, Luke cautions that while there will be some differences in quality across the price points, one of the biggest differentiators of cost is how much of the work is shifted back to the advisor or outright streamlined (which can sacrifice quality, creativity, or originality), so consider the trade-offs carefully.

Content Marketing Tips For Advisors - Content marketing strategies, like blogging, newsletters, and writing guest articles, can be an inexpensive way to market and speak directly to prospective clients, but what is saved in hard dollars can be spent in the time it takes to create the content itself, and requires both communication skills and a deliberate strategy. Financial planner Dave Grant, who implements this himself as the owner of Finance For Teachers, suggests that the starting point for good content is to make sure it's relevant to your clientele, which means focusing on topics that are important and timely for your niche (and of course, means you need to have a niche in the first place, that visitors to your website should be able to clearly identify to know if it's for them!); for instance, when Illinois recently voted through an unprecedented pension reform bill, he wrote an article about how teachers who are his clients would be impacted by it, which subsequently was viewed more than 1,300 times and got shared over 100 times via Facebook, generating a lot of further interaction with prospective clients. And because Grant's site is "Finance for Teachers" it was very clear for any teachers who visited the site that he was uniquely suited to speak on the issue with them! Notably, Grant also decided to leave some of his own opinions about the legislation out of the article, recognizing that his personal views might differ from his target audience, and that the focus should be on them.

8 Hiring Mistakes to Avoid - This article in Financial Planning magazine by Kelli Cruz of Cruz Consulting Group looks at how even though an advisory firm is very much a people business, many advisory firms struggle to have an effective recruiting and hiring process. The common mistakes include: 1) Be cautious about hiring people with no industry experience or who lack critical skillsets (unless you have an established internship or career track program, you're probably better off hiring someone who can hit the ground running); 2) Don't only hire prospective candidates who are a mirror image of you (find those with complementary skillsets instead, who can really help you build!); 3) Don't rush the process (hiring the first candidate you interview out of sheer desperation will not likely go well!); 4) Don't hire a candidate who doesn't match your firm's culture (skills are teachable, values are not!); 5) Don't hold out for the perfect candidate (compromise on skills that can be taught on the job, but don't budge on key traits/values); 6) Don't skimp on the interview process (which means key employees should also interview the candidate and support the hire!); 7) Don't upend your compensation structure for a candidate who doesn't fit (your compensation philosophy needs to be consistent or you'll disrupt existing employees); and 8) Don't forget that the onboarding process for your new employee and establishing a career track for them is crucial to make the new hire stick!

When Financial Advice Gets Religion - The standard practice management advice is that advisors should steer clear of discussing religion with clients, as - like politics - it's a hot-button, emotion-fraught subject. However, for some advisors religion is not something to avoid or only address indirectly, but instead is positioned openly at the forefront of the relationship. For instance, a number of advisors have made Christianity and its teachings about money a central part of their practice, and use it to shape the conversations with clients about investments and risk as well - as one advisor notes, "If you’re scared to death of losing money, you’re not going to take the same risk as someone who sees it as a vehicle to help the world or help God and pay for His bills, and try to grow it so He can give more money away." In other situations, religious issues may shape what companies/investments are acceptable to include in client portfolios, a form of 'religion-based' socially conscious investing. Not surprisingly, the article finds that the depth of advisors' own faith typically dictates how big a role, if any, religion plays in their practice with clients, and in the extreme some advisors not only incorporate religion into their practices, but actually make it a core niche that they serve.

What Makes a Successful Retirement? - This article by Texas Tech financial planning professor Michael Finke looks at some of the latest research on retirement living itself, and the mismatch between how we think retirement will be, and how those golden years often actually turn out. After all, the reality is that for most people, retirement really is hard to vision clearly, as it's hard to really know what it will be like when all of our workday routines and habits are changed. The most common theory around retirement living, which Finke labels "continuity theory", is that the best way to manage what can otherwise be a stressful change in our lives is to maintain as much continuity (home, city, friends, activities) as possible while transitioning into retirement. The alternative is called "activity theory", where the idea is that perhaps starting anew forces us to break old habits, establish new routines, meet new people, and create a new lifestyle, and that it's healthier to immerse quickly into making those transitions rather than fighting or delaying them. Emerging research is finding that there's a lot to be said for the activity perspective; for those who have a relaxed retirement, the significant reduction in activity appears to be associated with lower retirement satisfaction, while active retirees are happier. And notably, while these results are apparent even when controlling for health, it turns out that the single greater driver of retirement satisfaction almost always is health, so making investments into one's health can be just as important as investing the money for retirement. Even with a healthy start to retirement, though, the research suggests that we do "slow down" as the years go by, especially as we move into our mid-70s and beyond (from the so-called "go go" years to the "slow go" years), which in turn impacts spending and creates a form of "retirement spending smile" (where expenses decline as retirement progresses, but then uptick slightly in the latest years as health costs rise). Interestingly, the research also shows that while greater wealth helps facilitate a happier retirement as well (it's easier to stay physically and socially active when you live near a beach to take those walks, or have a condo downtown where your social activities are), the relationship between retirement happiness and wealth begins to decline at "higher" levels of wealth (beyond $2.3M) as perhaps the nest egg becomes more of a burden than a facilitator; in fact, overall, it appears that retirees, especially more affluent ones, may have trouble finding happiness and satisfaction in the challenge of navigating how to spend down wealth successfully.

Providing Better Social Security Advice for Clients - In this article, Joe Tomlinson of Advisor Perspectives looks at the value of delaying Social Security benefits and various Social Security claiming strategies based on a rate-of-return analysis; in other words, what rate of return would have to be earned to replace the economic value of the Social Security delay decision. For instance, someone who earned the maximum Social Security benefit would today be eligible for a monthly benefit of $2,641/month at age 66, but could get $1,981 as early as age 62 (a 25% reduction) or $3,486 at age 70 (a 32% increase). Thus, the benefit of delaying from age 62 to 70 is a cost of $1,981/month for 8 years, in exchange for an extra $1,505/month (the difference between $3,486 and $1,981) for life (which in turn means life expectancy becomes a critical element). Given a life expectancy of 86 for a 62-year-old male, 89 for a 62-year-old female, and 92 for a 62-year-old couple, Tomlinson finds that the implied real return for waiting is 3.58%, 4.57%, and 5.24% respectively, which are significantly higher than available than the comparable risk-free inflation-adjusted alternative of TIPS. In fact, for couples the real return value of delaying approaches the equity risk premium for stocks, which Tomlinson notes is because these adjustments may have actually been actuarially fair when they were first developed (mostly in the 1950s), but as longevity has increased and interest rates have declined (and the formulas have not adjusted), the math is now far more favorable. While the analysis doesn't specifically account for taxes, Tomlinson also points out that if delay makes sense before taxes, it generally makes sense after as well, as taxes may reduce the net takehome amount but don't necessarily change the relative benefit of the delay in the first place (i.e., the extra payments for delaying are reduced by taxes, but the payments for starting early would presumably have been taxed, too). Given the complexity of combinations for most clients, though (as not everyone is just looking at a simple age-62-versus-70 balance), Tomlinson recommends checking out Social Security Solutions, a Social Security optimization software tool for advisors.

Life & Death Planning for Retirement Benefits by Natalie ChoateNatalie Choate on RMDs, Smart Tax Strategies, and Prohibited Transactions - From the Journal of Financial Planning, this article is a "10 Questions" interview with retirement benefits and estate planning expert Natalie Choate, author of the popular practitioners' "bible" book "Life and Death Planning for Retirement Benefits" on IRAs and other retirement plans. Choate notes that in the context of retirement accounts, the greatest value financial planners can provide is just helping to ensure clients follow the bread-and-butter fundamentals, like remembering to take a required minimum distribution (though there is a way to request a waiver of the penalty with Form 5329), having a beneficiary named for the IRAs and other retirement accounts (and double-check periodically that the retirement account custodian hasn't lost/botched the paperwork!), and avoiding retirement rollover mistakes. However, amongst the more recent developments to watch out for as well include the IRS' increasing scrutiny on and enforcement against Prohibited Transactions (e.g., having a business inside of an IRA that runs afoul of the rules by having the IRA own the business and also pay the IRA owner a salary as manager of the business, which can disqualify the entire IRA), and the proposals that keep surfacing to kill the stretch IRA and replace it with a five-year rule that would apply to most beneficiaries. Retirement account NUA planning remains popular, as does using trusts as beneficiaries of retirement accounts, though be cautious with trusts for spouses (it forfeits the spousal rollover option) and for other trusts the inclusion of the new 3.8% Medicare surtax on net investment income complicates the matter when the trust receives IRA distributions and has other portfolio income as well (which kicks in at only $12,150 of taxable income for trusts, and can potentially be avoided by distributing income to trust beneficiaries, though that creates other complications!). Notably, with last year's Supreme Court decision overturning part of DOMA and the IRS' subsequent acknowledgement they will recognize all same-sex marriages for income and estate planning purposes, there are also more planning opportunities for same-sex couples who can now take advantage of retirement account rollover rules too.

The ABCs of Investors’ DNA - From Jason Zweig of the Wall Street Journal, this article looks at an interesting recent study that finds the proclivity towards value investing may not just be a matter of knowledge and experience. This isn't to say that the environment and personal experiences don't matter either; in fact, the legendary Benjamin Graham had a formative investing experience when he was young and witnessed his mother get wiped out as a small-time speculator in the Panic of 1907, and Sir John Templeton was also the son of a speculator who had lost it all. Yet perhaps the reason why these two who witnessed early investment disasters moved on to such success, while many/most others do not, may still be more a matter of genetics than we ever realized. As it turns it, researchers studying twins have found that there's a significant genetic aspect to a willingness for value investing; an analysis of the investment portfolios of 35,000 twins in Sweden compared the portfolios of identical to fraternal twins (the former have 100% shared DNA, while the latter share the same amount as any other siblings), and found that up to 24% of the differences in the degree to which investors favored value or growth stocks was explained by the similarities or differences in genetic code. Again, this doesn't mean that genetics alone dictate the portfolios, but the point remains that willingness to buy cheap value stocks versus fast-moving growth stocks may be at least partially an innate hard-wired tendency for us.

"I'm Not Your Father's Financial Planner" - This article from the Blueleaf Advisor blog profiles Gen Y financial advisor Sophia Bera, who has been building an advisory firm with a heavy online presence and focus and succeeding in standing out from the crowd. Sophia's key tips for success include: 1) Have a website that really rocks; it's increasingly your first impression to consumers, so getting a site that's custom built and not just the same template everyone else uses is crucial; 2) Maintain a blog, which should give prospects a taste of what it would be like to work with you, show your expertise, and keep clients up to date on topics they value (Sophia focuses on creating one blog post per week to keep a consistent flow); 3) Rethink your 'About Us' page, and tell your story more informally in a manner that can really connect you with prospects and clients as a human being (with an updated and quality headshot!); 4) Establish 'Street Cred' by getting quoted in the media, and (tactfully) show off that you've done so; and 5) Use social media strategically, which means don't just have 7 social media accounts you update once a month, and instead focus on 1-3 platforms you can be active on regularly to really connect with people (Bera advocates Twitter as a primary platform and also LinkedIn).

Winners Take All, but Can’t We Still Dream? - This article from the New York Times takes an interesting look at the double-edged sword of the technology and information revolution that's currently underway in the world. On the one hand, the potential for platforms to be built and with content/material/value distributed at low cost with immense reach can create a "long tail" world where sellers and businesses prosper even if their offerings appeal only to a small fraction of the market; in other words, niches and small-scale creative talent can flourish. On the other hand, the low cost and immense reach of digital platforms also means that small differences in talent or quality can lead to hugely magnified differences in reward, and a "winner take all" kind of economic environment. This dynamic is incredibly important and significant, and thus far we're seeing aspects of both play out in the real world; platforms like NetFlix, iTunes, and Amazon are allowing specialized creators of videos, music, and books to have reach like never before, yet at the same time digital song titles selling more than one million copies were up to 15% of sales in 2011 from only 7% in 2007 (with similar trends in the publishing and film industries) as busy consumers increasingly flock to buy "what everyone else is buying" rather than sift through the growing avalanche of options. While the article was written in the context of the creative industries, it seems equally relevant for advisors, where similarly there is an opportunity to create niche advisory practices in today's "long tail" world, but at the same time the biggest advisory firms seem to be accelerating their growth and widening the marketing inequality between big and small.

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!

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Michael E. Kitces

I write about financial planning strategies and practice management ideas, and have created several businesses to help people implement them.

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*Future of Financial Planning in the Digital Age *Cutting Edge Tax Planning Developments & Opportunities @ FPA Mid-Tennessee

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