Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with the mega-news that Envestnet is buying PIETech, the maker of MoneyGuidePro, for a whopping $500 million as Envestnet seeks to further expand itself into a holistic “financial wellness” technology platform.
Also in the news this week was the news that the SEC’s “Share Class Selection Disclosure” initiative has culminated in 79 investment firms agreeing to return $125 million in inappropriately collected or improperly disclosed 12b-1 fees in their hybrid broker-dealer relationship with the client, another study reinforcing that while consumers still don’t trust the financial services industry they overwhelmingly (97%) trust their own individual financial advisor, the revelation that this week’s College Admissions scandal actually emerged as a tip-off to Federal investigators from someone seeking leniency in a securities fraud case, the news that Ameriprise is getting ready to launch a retail bank (so their advisors will be able to offer banking products to their clients), and a new advisory firm loan platform from SkyView Partners that will allow firms looking to merge, acquire, or complete a succession plan to bid out their loan needs to more than a dozen different banks at once.
From there, we have several insurance-related articles this week, including the news that Genworth (the largest long-term care insurer) is indefinitely suspending sales of traditional long-term care insurance through advisors and instead will rely solely on direct-to-consumer telesales instead (a potentially chilling trend for the availability of long-term care insurance to advisors from other carriers in the future), a good primer on the rise of “structured annuities” with various Buffer and Guard strategies to partially protect against downside, and an interesting look at how a decade of “unexpectedly low” interest rates have caused life, annuity, and long-term care insurers to make changes to their policies and premiums that have adversely affected both advisors and their clients.
We wrap up with three interesting articles, all around the theme of the brain and how it works: the first takes an interesting look at the connection between our brains and exercise, particularly running, and the ways that running appears to stimulate our brain functions (for which we may have had an evolutionary bias in the first place); the second explores the emerging research on why the brain is so “noisy,” and how the difficulty in being able to silence our brains may not necessarily be a result of “faulty wiring” but instead part of the brain’s learning mechanisms and how it is able to take in so much information in a wide range of contexts; and the last looks at how, because human beings must take in information to survive, but also exist as “herd animals,” that sometimes our need to be right can conflict with our need to feel socially connected… thus helping to explain why sometimes we’ll ignore factual information that might otherwise change our beliefs (because it would also disrupt our social connections), and how the key to really changing someone’s mind is to start by being more connected to them socially so the “leap” to new information doesn’t require such a socially disruptive leap of faith as well.
Enjoy the “light” reading!
Envestnet To Buy PIETech, Developers Of MoneyGuidePro, For $500 Million (Joel Bruckenstein, Financial Advisor) – Yesterday, mega-TAMP and advisor technology platform Envestnet announced that it was acquiring PIETech, the maker of MoneyGuidePro, for a whopping $500M in cash (60%) and Envestnet stock (40%). From Envestnet’s perspective, MoneyGuidePro was a key part of their vision of “Financial Wellness” as a holistic WealthTech platform, and aims to use the automated data flows from its Yodlee subsidiary to power MoneyGuidePro in the flow, while immediately giving Envestnet the #1 market share for financial planning software. From MoneyGuidePro’s perspective, the sale allows PIETech founder Bob Curtis to focus his energy on future development of the software and resolves any concerns about his and co-founder Tony Leal’s succession plan for the firm, in addition to freeing up their personal investment for what is reported to be a nearly 10X revenue acquisition (on MoneyGuidePro’s $50M of annual revenue). From the advisor perspective, there may be some concerns about whether Envestnet will adversely change or impact MoneyGuidePro’s software or culture, but PIETech will reportedly still operate as an independent division of Envestnet, with Tony Leal continuing as CEO and Bob Curtis freeing up his time doing day-to-day management to continue in a visionary role in developing the software (including and especially its recent BLOCKS modular planning tools to develop a more incremental financial planning approach). In other words, the goal appears to be using Envestnet’s resources to support MoneyGuidePro’s continued growth and development (including its integrations with other partners and even Envestnet competitors). Though for Envestnet, the end game may not merely be expanding MoneyGuidePro’s software reach, but also more deeply integrating its investment solutions, and a coming new Insurance and Annuity Exchange, into MoneyGuidePro to turn the software into a (fee-based) product delivery channel as well.
SEC Says 79 Firms Will Return $125M To Clients Under 12b-1 Fee Clemency Program (Mark Schoeff, Investment News) – This week, the SEC announced that 79 investment firms had agreed to return $125M to clients as a result of its recent “Share Class Selection Disclosure” Initiative, which gave firms the opportunity to avoid any SEC fines and penalties by voluntarily admitted that they had inappropriately used or failed to disclose using a higher-cost mutual fund share class with a 12b-1 fees (on top of also receiving advisory fees) and refunding clients for the excess 12b-1 fees they had paid. Amongst the firms that settled with the SEC were major independent broker-dealers LPL, Cambridge Investment Research, and Raymond James, along with regional broker-dealers RBC, Robert W. Baird, and D.A. Davidson, and wirehouse Wells Fargo Advisors, amongst 72 other firms as well. The success of the program – which resulted in substantial disgorgements to consumers and without the need for the SEC to investigate each and every firm – has already spawned a similar 529 Plan Share Class disclosure initiative, which has its own deadline of April 30th. More broadly, though, the success of the program is otherwise a significant blow to the hybrid broker-dealer model, as the problem only occurred because of the potential for the RIA side of the hybrid relationship to inappropriately use or fail to disclose related 12b-1 fees to the related broker-dealer, and raises questions about whether hybrid broker-dealers will just further accelerate their shift to fully fee-based advisory accounts and away from 12b-1 fees altogether.
Investors Are Confused About Financial Advice And Trust Their Advisors Too Quickly? (Michael Fischer, ThinkAdvisor) – A recent new consumer survey on “Financial Trust” from Personal Capital has found that 65% of those who work with an advisor believed that all advisors recommend only what is in their clients’ best interests, and the number is up from just 46% who said so in 2017 (suggesting that the SEC’s Regulation Best Interest proposal may already be amplifying consumer confusion). Perhaps even more striking, though, the survey also found that even though 30% of respondents thought a financial advisor was likely to take advantage of a consumer, a whopping 97% trusted their own financial advisor to act in their best interests (even as 18% were unable to say whether their advisor was serving as a broker or a fiduciary). The gap appears to be driven in part by the fact that while consumers may not trust financial services firms, they still largely trust financial advisors themselves, with 71% of survey participants stating that they would follow their advisor if he/she moved to another institution after the advisor’s firm was involved in a scandal. And notably, Millennials proved to be the most loyal respondents, with 80% indicating a willingness to follow their advisor to a new institution (compared to only 70% of Gen X’ers and 66% of Baby Boomers). More broadly, though, consumer trust does appear to be shifting to the fiduciary channels when it comes to firms themselves, with 28% of investors stating that they would trust an RIA with their money, compared to only 21% at a big bank or brokerage firm, 14% at a local advisory firm, and 8% to an online platform or mobile application.
How a Securities Fraud Case Uncovered the College Admissions Scam (Janet Levaux, ThinkAdvisor) – The big news in the consumer media this week was a College Admission scandal where wealthy parents were buying their children’s way into elite colleges, to the tune of hundreds of thousands or even millions of dollars, and involving everything from fake college SAT or ACT scores to fraudulently pretending that they were athletes when they weren’t. But as it turns out, the entire scandal may have originally been discovered due to a tip in connection with a securities fraud investigation, where a man named Morrie Tobin who was involved in a microcap stock manipulation scheme offered a tip on the college bribery scheme (which he was in the midst of, in being counseled to bribe the Yale women’s soccer coach to get one of his own kids into Yale) in an effort to obtain leniency for himself. In turn, the investigation from Tobin led to dozens of other wealthy parents who worked with the same college consultant, until eventually charges were filed and the news broke this week. Though ironically, Tobin himself was not charged in the college admissions matter, having instead struck a plea deal, while he still waits to be sentenced by the SEC for the original fraud matter.
Ameriprise Getting Ready To Launch Its Bank (Bruce Kelly, Investment News) – With banking becoming increasingly important to holistic financial planning and the wealth management model itself, from the lucrative revenue opportunities of affiliated-bank cash sweep programs, to the potential to generate revenue and profits from bank (e.g., mortgage) lending, Ameriprise Financial has indicated that it too will soon be launching a retail bank (possibly as early as this summer) by converting its existing national trust bank (which does not offer retail products) into a Federal savings bank (that will). Notably, the Ameriprise banking platform will not have new physical retail bank branch locations for consumers directly but instead will be a platform of banking products and solutions for the advisors already affiliated with Ameriprise. Anticipated solutions will include securities-based lending, home equity lines, and mortgages, as potential types of bank loan products that may become available to Ameriprise advisors.
Investment Bank Launches Digital Loan Platform For Advisor M&A (Investment News) – As advisory firm mergers and acquisitions continue to accelerate, an advisory firm lending solution called Succession Lending is expanding into an entire investment bank, to be known as SkyView Partners, that will both provide consulting on succession planning, mergers, and acquisitions, and also create a new “Lender Marketplace,” effectively adopting the LendingTree “have banks bid for your loan business” model to the world of advisor M&A. Under the new approach, advisors will submit their financial information to SkyView, which in turn will prepare an anonymized “advisory firm credit memoranda” that is circulated to 18 banks, who will then have the option of requesting full credit details to try to come to terms. Notably, while SkyView appears to have options available for both SBA and non-SBA loan terms, it promotes a “standard” loan structure of 6.75% to 7.5% fixed rate loans over a 7-year term, with a 2% origination fee to SkyView (that can be financed into the loan itself). Which means in practice, the “bidding” process amongst banks may not necessarily be for the best loan terms, per se, but ostensibly still gives advisory firms a better chance to find at least one lender who is willing to finance their succession plan, acquisition, or merger in the first place.
Genworth Move Could Signal Big Shift In Distribution Of Long-Term Care Insurance (Greg Iacurci, Investment News) – This week, Genworth (the largest long-term care insurer by number of policyholders) made waves by announcing that it was “temporarily-but-indefinitely” suspending sales of traditional individual long-term care insurance policies through financial advisors, along with also suspending sales of their medically-underwritten immediate annuities (that were also used to help cover long-term care costs), and that at least for the time being, the only outlet to buy coverage from the firm would be its internal telesales group (which sells directly to consumers). The shift is a recognition of the broader trend – that traditional long-term care insurance sales have fallen by nearly 90% since they peaked at about 700,000 policies/year back in the early 2000s – and that with so little long-term care insurance being sold, it’s just not cost-effective for the company to support the distribution costs of selling policies through advisors at all. In fact, while numerous carriers do continue to still life/hybrid long-term care policies, only about half a dozen insurers remain in the market for traditional LTC insurance at all – including Mass Mutual, Mutual of Omaha, New York Life, and Northwestern Mutual – and most of the largest long-term care insurers (e.g., CNA, John Hancock, MetLife, and Unum) have already stopped underwriting new policies altogether. Which raises the question of whether traditional long-term care insurance will even sustain in the direct-to-consumer channel, whether other LTC carriers will follow Genworth’s lead, or whether it may eventually be necessary for the long-term care insurance industry to entirely reinvent itself.
The ABCs Of Structured Annuities (Scott Stolz, ThinkAdvisor) – While indexed annuities have been popular over the past decade, with their (partial) upside potential in exchange for a downside floor of 0%, in recent years a new type of annuity has emerged that can potentially offer even more upside participation potential, but with only “limited” downside protection. The category is broadly labeled as “structured annuities,” a take-off from the popular “structured notes” that first emerged in the 2000s as a bond that pairs together options strategies to create partial-upside-with-limited-downside risk/return opportunities. Though again, unlike traditional indexed annuities, the downside floor usually is not just a floor of 0% (i.e., principal protection), but instead some kind of “partial” downside protection. For instance, a “buffer” annuity provides an initial downside loss buffer like 10%, which means if the markets have a loss of up to 10%, the investor is made whole, but if the markets drop more than 10% the investor bears any excess losses (e.g., if the market is down 5% or 10%, the investor loses nothing, but if the market is down 15%, the investor loses 5%, which is the “excess” loss after the initial 10% buffer); to be economically feasible for the annuity carrier, such buffer annuities also typically have an upside cap as well (e.g., a cap of no more than 35% in cumulative returns over 3 years, or 95% over 6 years). An alternative version of the structured annuity is a “Guard” strategy, which effectively is the opposite of a Buffer strategy – the annuity owner must absorb the losses up to the Guard threshold, but is protected from any more-severe losses (e.g., with a 10% Guard, if the market is down 5% or 10% the investor loses that amount, but if the market is down 15%, the investor is “Guarded” at a loss of no more than 10%). Given that there typically is at least some downside exposure – which is why structured annuities are variable annuity products – Stolz suggests that they should not be viewed as an alternative to fixed or indexed annuities, but as an alternative to other types of variable annuities for clients who want some risk-managed exposure to equities (particularly those with existing variable annuities who want to take at least some risk off the table). In addition, structured annuities do not currently offer any types of living benefit or withdrawal riders, so they are more likely to be used for accumulation needs, as opposed to generating retirement cash flows for current retirees.
Insurers Creating Pain Points For Advisers And Clients (Greg Iacurci, Investment News) – With persistently low interest rates that have spanned nearly a decade, insurers are increasingly being squeezed in the pricing of their products issued 10+ years ago, which simply never contemplated that interest rates would go so low, and for so long. The consequences have led to a slew of challenges for insurers, from long-term care insurance premiums that have had to be increased dramatically, to universal life insurers that have reduced their own crediting rates to policyholders. The challenge, though, is that sometimes “just” changing premiums or crediting rates alone isn’t enough, which has led insurers to make other even-less-popular and more-controversial changes, like universal life insurance policies that have increased their Cost-Of-Insurance (COI) charges as well. Of course, the whole point in the case of universal life insurance policies, in particular, is that the crediting rates and COI charges are not guaranteed (except for a rather low minimum floor and rather high maximum charge, respectively), but the fact that policies are virtually never illustrated assuming rates will decline and charges will increase is causing many policyowners to discover that their premiums are too low or their policies are underfunded. And some insurers have pushed the issue “too far,” such that several insurance companies have been sued for issues related to insurance costs, TransAmerica recently settled a lawsuit for $195M over its insurance cost increases, and the New York Department of Financial Services has now issued a consumer alert about buying universal life policies and urging buyers to beware of the potential for future increases in internal policy costs (after a spike in recent complaints about the issue). Similarly, variable annuity carriers have also become increasingly aggressive in making offers to policyholders to buy out their guarantees as well, with concerns abounding about whether the offers are really “good deals” for consumers or just for the insurance company. And the irony is that some of the most popular policies – which were the cheapest, precisely because they priced the most aggressively to win the business in the first place – are now the policies creating the most problems. Which is a powerful reminder that when it comes to insurance in particular, the cheapest policy can actually be the riskiest, as insurers that don’t have a safety margin for profits because they price too low are the ones that are most at risk for financial troubles in the future if markets (or in this case, interest rates) don’t turn out as expected.
How Going For A Run Changes Your Brain (Derek Beres, BigThink) – Going for a run is a popular way to exercise and work out in order to lose weight, but recent brain research suggests a number of additional connections between the act of running and its impact on our brains. A 2016 brain imaging study found that in the brains of serious runners, there was “increased coordinated activity in regions, mainly at the front of the brain, known to be involved in executive functions and working memory… [and a] relative damping down of activity in the ‘default mode network,’ a series of linked brain regions that spring into action whenever we are idle or distracted.” In other words, runners’ brains appear to have better blood flow to the areas that support executive functions and working memory and maintain more activity in the part of the brain that supports creativity and imagination. These shifts, particularly in the Default Mode Network, may be what brings about the phenomenon known as “runner’s high,” reaching a state of “flow” that can bring about a unique level of focus. In essence, then, this suggests that running might actually be a form of “moving mindfulness meditation” (which similarly is about engaging the executive functions of the brain while “shushing” the naysayer default mode). In addition, neurochemicals released during running are also responsible for reductions in the perception of pain and anxiety, the release of endorphins that trigger feelings of euphoria, and one study even found that the sensory neurons in our feet are the same as in our genitals (implying, in essence, that our feet are also constantly seeking pleasure, and running is one means to provide it!). The bottom line, though, is simply to recognize that because running was so essential to our evolution in the first place (in order to successfully be able to track and hunt food), that it makes sense our brains would be wired to have additional positive benefits associated with running. And while we don’t have to hunt our own food itself anymore, the positive feedback systems tied between the brain and running are still a part of our physical biology!
Why The Brain Is So Noisy (Michael Segal, Nautilus) – As much as Artificial Intelligence continues to advance, it still struggles tremendously with interpreting images in context; thus a yellow school bus may be easily identified as such when viewed head-on on the road, but when laid on its side across the road, the algorithm may interpret that it’s a snowplow, and when seen from underneath, it looks more like a garbage truck. Which suggests that, when it comes to the human brain, one of our great abilities is not just our ability to take in images, but to figure out what they are in (or out of) context. And in turn raises questions of how, exactly, the brain has “figured out” how to do this. In part, it appears to be because computers are binary – they’re either on or off – while neurons are more nuanced, and their input can be graded (not just on or off, firing or not, but the power at which they fire). In addition, while computers always interpret the same input to produce the same output the same way, the brain actually doesn’t, and it’s possible to have two different responses to the same stimulus. Historically, some have viewed this as a quirk or partial failing of the brain – that synapses are literally “unreliable” in transmitting information, and consequently suffer from “noise” and incomplete transmissions… especially when other parts of the brain are firing as well, and sending in conflicting or overlapping information. Yet more recently, some researchers question whether this is a flaw of the brain, or actually the way it deliberately operates in a more sophisticated manner, effectively using the noise to help identify and spot different contexts to an otherwise-similar situation that helps to identify new nuances and new relevant information (while also drowning out less-relevant information that would otherwise be overwhelming). Which helps to explain why at least thus far, Artificial Intelligence has struggled to keep up with and replicate the human brain; it’s not so good at figuring out how to continuously reinterpret information in new contexts the way the brain seems to be naturally forced and driven to do in the first place.
Why Facts Don’t Change Our Minds (James Clear) – One of the biggest challenges as human beings is that, once our minds are made up, it’s incredibly difficult to change them… even when faced with facts that “clearly” indicate we are wrong, and even in light of the reality that having an accurate view of the world is generally a necessity for survival in the first place. Yet the caveat is that human beings are still, biologically, “herd animals” that also want to fit in and bond with others, as living in the herd was itself an essential survival tactic (and historically, being separated or cast out from the tribe was effectively a death sentence). Which means sometimes, our desire for the truth may conflict with our desire to remain part of a tribe, and at that point, we may decide that it’s more helpful to stay socially connected to peers than to adapt to and understand the actual truth of the matter. Or viewed another way, there are beliefs that may be “factually false, but socially accurate.” Or stated more simply, “We don’t always believe things because they are correct. Sometimes we believe things because they make us look good to the people we care about.” Which is important, because it suggests that, in the end, it’s not new facts that necessarily change our minds; sometimes, it’s new friends – convincing someone to change their tribe to one that has new and different beliefs. In fact, even just reducing the distance between those with different beliefs – e.g., creating opportunity to break bread together – can establish rapport and friendship and makes it easier to then change one’s viewpoint to the other’s beliefs. The other notable effect of this “tribe” social phenomenon is that it also implies that the people most likely to change our minds are those who we otherwise agree with on 98% of topics, because the connection that exists on “mostly” agreeing on everything is what makes us comfortable to then accept new information on a particular belief (without otherwise feeling that changing the belief will alienate the friendship). Or stated more simply, heated arguments tend to come from people at the opposite ends of the spectrum, but learning is most likely to occur between people who are otherwise relatively close (but obviously not identical) in their beliefs in the first place. Which, notably, is also why books and reading are such an effective form of learning – because when the dissonance between current and new beliefs occurs, it takes place inside our own heads, without the risk of feeling judged by others, as we sort through a decision regarding the new information. On the other hand, the fact that learning new information and changing beliefs can also lead to an entire change in social circles and ties also suggests that it’s important to “be kind” to someone, even as they’re changing their beliefs, because doing so can literally break down their current reality… which is painful to lose, even if you’re right in the point you’re making to them.
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.