Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with a fascinating study from Morningstar, which finds that, even as financial advisors increasingly frame “behavior management” as a key value proposition, consumer research ranks “helping me control my emotions” as dead last amongst the benefits of working with a financial advisor, instead showing a preference for more tangible benefits like the advisor’s relevant skills and knowledge, how well the advisor communicates, performance results, and actually achieving financial goals.
Also in the news this week was a big announcement that Bank of America is dropping the Merrill Lynch name from its investment banking unit, consolidating the Merrill Lynch Private Banking and Investment Group (PBIG) into just Merrill Private Wealth (removing the “Lynch”), and retiring the 165-year-old U.S. Trust brand altogether… and raising the question of whether the days are numbered for the entire Merrill brand itself. And there’s a fascinating discussion from Bob Veres about whether FPA chapters should consider “seceding” from the FPA to form a new “CFP Society” that would fulfill the original founding vision of the FPA to be the home for CFP professionals (while the FPA itself has declined from nearly 50% to barely 20% market share of CFP certificants since 2000).
From there, we have several articles on spending and cash flow decisions, from research that suggests social media (and the rise of modern media in general) may be helping to drive the ongoing decline in the National Savings Rate in recent decades, the rise of “stealth wealth” behavior for those who don’t want to live ostentatiously (whether to avoid being solicited as a “wealthy” person, or simply to help find social circles that don’t encourage profligate spending), research on the habits of wealth accumulators that differ from everyone else, a fascinating series of interviews with people who had “sudden wealth” events about how they really handled the money, the ways our spending does (or often doesn’t) really align with our values (as an alternative way to determine whether we’re “living within our means”), and why perhaps society needs to become more cognizant of – and more sympathetic towards – the fact that even households living within their means and exercising financial discipline are often still exposed to significant “financial fragility” as well.
We wrap up with three interesting articles, all around the theme of finding and building our own career path: the first explores the research of what it really means to “find your passion” or calling, and how it turns out that you’re more likely to find a passion by simply engaging in something that’s aligned with your values and having your passion for it build as you succeed (rather than trying to identify the passion and find the “perfect” passion job in the first place); the second provides a powerful reminder that almost by definition, you can’t learn from experience until you’re willing to do and experience something different than what you already do (which is why experimentation is so crucial); and the last is a fascinating reminder that while most people try to be good workers in their jobs, and find a good company to work for, that ultimately it’s finding the right industry that may actually be most important to long-term career success, as even the best companies and workers may struggle in an industry that is shrinking, while a rising/growing industry tends to lift all boats (while providing an outsized reward to the top performers in particular).
Enjoy the “light” reading!
Morningstar Study Finds Consumers Don’t Value Advisors’ Behavioral Support (Jeff Benjamin, Investment News) – While a growing number of industry studies suggest that the ability to close the so-called “behavior gap” (the difference between market returns themselves and what investors actually earn) is a key value proposition of financial advisors, a recent survey study by Morningstar of nearly 700 individual investors finds that “an advisor’s help to control their emotions” ranks dead last on consumers’ rankings of what they actually value from a financial advisor. The problem appears to stem at least in part from the fact that consumers don’t necessarily see their own behaviors as a problem in the first place, undermining any perceived value in having advisors be that hand-holder. So what did investors value instead? The first was simply reaching their financial goals, followed by whether the advisor has the relevant skills and knowledge to help them reach those goals, the advisor’s ability to communicate and explain financial concepts, and the advisor’s actual ability to help them maximize their returns. Accordingly, the Morningstar researchers suggest that at a minimum, it’s important to better help clients think about their investments in terms of goals – to better tie back to the goal achieving outcomes that clients desire – but the question remains as to whether or how advisors can actually convince clients that their value is a problem that clients themselves don’t necessarily recognize about themselves in the first place. Especially since advisors tend to work with wealthier and more successful individuals (who can meet their asset or fee minimums in the first place), and who therefore are perhaps even less likely to be fearful of their emotional mistakes and more likely to be confident in their own abilities (and simply want to add in an advisor’s relevant skills and knowledge to better help them reach their goals).
Bank Of American To Drop Merrill Lynch And U.S. Trust Names From Some Businesses (Rachel Louise Ensign, Wall Street Journal) – Just over a decade after Bank of America purchased Merrill Lynch in the depths of the financial crisis, the bank announced that it would begin to phase out the storied Merrill Lynch name from its trading and investment banking operations, though it will retain the Merrill name (as simply “Merrill”) for its private wealth management business. The change comes 105 years after the firm was founded in 1914 by Charles Merrill and his friend Edmund Lynch, which culminated in Merrill Lynch being known as the “Thundering Herd” and a corporate culture where “Mother Merrill” provided all; in fact, culture clashes between Merrill Lynch advisors and the Bank of America corporate offices have been rumored for years since the merger, and just a day after the name-change announcement broke Merrill Lynch Wealth Management president Andy Sieg sent out a memo trying to reassure its advisors that the Merrill Lynch name would stay on the wealth management business. However, Bank of America also announced that the 165-year-old U.S. Trust brand would be retired entirely, and will be rebranded Bank of America Private Bank, to run alongside the new Merrill Private Wealth Management (formerly Merrill Lynch’s Private Banking and Investment Group, or PBIG). And as Bank of America continues to report record profits, in part from the cross-selling and expanded wallet share it has managed to achieve by integrating its multiple business divisions under an increasingly unified brand, some are already raising the question of whether the transition from Merrill Lynch to just “Merrill” is itself a waypoint to phasing out the Merrill brand entirely, just as the U.S. Trust is itself being retired.
Should FPA’s Local Chapters Just Secede? (Bob Veres, Financial Planning) – At the core of the ongoing controversy of the Financial Planning Association and its proposed OneFPA Network is whether dissolving the chapters and centralizing more of the organization’s technology and operations in its National offices will finally help to reignite the association after 20 years of declining membership, or if the problem is actually that the National leadership are the cause of FPA’s problems and that the chapters are its brightest success (and should be more empowered with budget control and resources). Unfortunately, though, the challenge for the chapters is that they don’t necessarily have a lot of say in the outcome, given that the current Affiliation Agreement between FPA National and its chapters allows National to unilaterally rescind its affiliation agreement, which not only terminates the status of the chapter as a chapter, but also compels all of its assets to be forfeited back to National. Yet as previously discussed on this blog, chapters actually do have an alternative option: to donate their excess reserves to another organization, and then voluntarily and preemptively terminate their own chapter status with National. The question, though, is where else the FPA’s chapters would go, as the CFP Board is at least not currently a membership association, NAPFA’s fee-only limits would not permit all FPA chapter members to join, and other organizations like IWI or the AICPA’s PFP section don’t have a chapter infrastructure in the first place. The alternative? To create a new professional membership association, which advocate Michael Ross suggests calling “The CFP Society”, and would function more akin to today’s National Association of Estate Planning Councils (NAEPC), where the national organization is very small (primarily focused on just building a consolidated membership database, basic shared resources, and negotiating group benefits like disability insurance), and the bulk of the revenues go to the chapter (whereas at FPA, all $375/year of dues go to the National organization, and chapters merely have the option to apply their own surcharge, which is typically only $50 to $100, or less than 20% of member dues flowing directly back to local chapters). Which arguably may be quite feasible, given that the FPA’s overall membership amongst CFP certificants has dropped from nearly 50% when it was founded 20 years ago, to barely 20% today, leaving ample room for a competing organization to begin if the FPA proceeds to alienate a significant portion of its chapters with the OneFPA Network proposal.
Your Friends’ Social Media Posts Are Making You Spend More Money (Christopher Ingraham, Washington Post) – The National Savings Rate today is hovering around 7%, which is a significant improvement from the 3% trough right before the Great Recession hit, but is still down substantially from the nearly 13% peak back in the 1970s. Various economics researchers have suggested this is attributable to slower wage growth (combined with the rising cost of housing and medical care), along with the rise of easy credit (making it easier than ever to spend beyond our means), and more liquid defined contribution plans (that make it easier to draw down on retirement accounts in a pinch, in a way that simply wasn’t possible with most pension plans of old). But a recent research study suggests that perhaps the real issue is simply that personal spending has become more visible than ever, especially in a social media age, which in turn is feeding our very human tendency to try to “keep up with the Joneses” (and more generally that we have a tendency to evaluate our own standing in life relative to how we perceive our friends and neighbors are doing rather than our actual financial and other goals). The situation is further complicated by the fact that there is remarkably little information available to guide most people about what prudent spending rates in various categories should be in the first place, which instead leads us to look to social cues in the face of uncertainty… and make our spending decisions based on what we see other people spending on, which in turn creates a dangerous spending feedback loop as everyone tries to one-up one another’s spending behaviors (which the researchers dub, “consumption contagion”). Of course, as human beings we’ve always had some neighbors to compare to, but the rise of media – from magazines to then televisions (e.g., “Lifestyles of the Rich and Famous”) and now the internet and social media, have created new and even more problematic comparison groups for us to make problematic spending comparisons.
Stealth Wealth: I’m Just An Ordinary Average Guy (Physician On FIRE) – The basic concept of “Stealth Wealth” is relatively straightforward: it’s wealth that exists but generally goes unnoticed by at least the standard means of detection, effectively “blending in with your surroundings” (not unlike the Stealth Bomber flying through the air). In essence, stealth wealth is about not “acting rich” (e.g., not driving a luxury automobile, wearing expensive jewelry, buying a McMansion, doing social media check-ins at high-profile experience restaurants, etc.), even though you happen to be wealthy. Which means in large part, stealth wealth is simply about living within your means, more effectively exercising delayed gratification, and avoiding lifestyle creep or getting caught up in the “keeping up with the Joneses” phenomenon in the first place. Yet ultimately, the point isn’t just that not living ostentatiously wealthy makes it easier to save more and almost by definition means you’re likely spending less; it also changes other social dynamics as well. For instance, being less-visibly-affluent reduce the risk that when quoting you for services, someone quotes you a higher amount because it “looks” like you can afford it. And it reduces the social awkwardness of having friends and family always turning to you when the check arrives (“knowing” you can afford to pick it up for everyone). But perhaps most importantly is simply that by not trying to enjoy your wealth outwardly, you’re more likely to engage with friends and others who live a similar lifestyle, which in-and-of itself is even more likely to help you keep your spending reasonably anchored and not stuck in a consumption contagion cycle!
5 Major Differences In How Millionaires Spend Their Time And Energy (Hillary Hoffower, Business Insider) – In her recent new book, “The Next Millionaire Next Door: Enduring Strategies For Building Wealth,” Dr. Sarah Stanley Fallaw surveyed more than 600 millionaires to explore their behaviors and habits, and found a number of key differences from the average American. Some of the notable distinctions included that they spend an average of 5.5 hours/week reading for pleasure and 6 hours/week exercising (compared to only 2 and 2.5 hours, respectively, for the average American), but only 2.5 hours/week on social media (compared with the average American’s 14 hours), and that they sleep nearly 8 hours less per week, and work 6 hours more. Although when breaking down further to households who are either “under-accumulators” of wealth (less than 50% of the way to where they should be based on their age and income) or “prodigious” accumulators of wealth (twice the net worth expected at their age and income), the research shows that it’s actually the under-accumulators who tend to work significantly more (finding themselves stuck to the “revenue engine” to keep up with their consumption, which in turns leaves them “little time to plan, read, and contemplate their investments,” while also continuing to spend more time on social media and other distractions. In other words, the research effectively finds that those who are most effective at accumulating wealth tend to be the most focused on core activities that build it.
Financial Windfalls: 15 Stories Of The Money That Changed Everything (Andy Wright & Jhoni Jackson & Haley Gilliland, Topic) – It’s long been recognized that people who have “sudden money” wealth events don’t always have much success in holding onto their wealth, and in this series, the writers interviewed 15 people who had a wide range of “unexpected” windfalls – from inheriting a trust fund to winning a MacArthur Genius Award – and explored what they actually did with the money, how they reacted to the winning, and how the situation played out for them. For instance, one 18-year-old inherited $250,000, set aside by grandparents to go to college… and ultimately used $25,000 of the funds to go to college, and then donated nearly $160,000 to various organizations she became connected with in college; another won $23,000 on Jeopardy, only to later go on to “Who Wants To Be A Millionaire” and win $250,000, which he then used to invest into a small trivia business he was running that’s turned into a substantial business unto itself; a third received $500,000 as a viatical advance on three life insurance policies after being diagnosed with AIDS… only to end out surviving, and created a magazine for people living with HIV; another won $45,555 in a raffle, and used the money as a downpayment on a house, while another won $625,000 from a MacArthur “Genius” grant just two years after her husband died and used the money on childcare and household help so she could better focus her time on her kids and her job as a single mother, and a couple who won $1M on “The Amazing Race” TV show simply bought two iPods (back in 2004), a laptop, and tithed to the church. The most striking theme of the series: most people simply use their sudden money events to accelerate their life further in whatever direction it was already going, which means those on a positive track tend to remain so, while those who didn’t have direction without money may quickly spend down the money without direction, either.
Things We Don’t Cherish And Things We Do (Trent Hamm, The Simple Dollar) – In “The Artist’s Way,” author Julia Cameron makes the striking point that, “Often our spending differs from our real values. We fritter away cash on things we don’t cherish and deny ourselves those things we do.” And while the book was focused more broadly on how we nurture internal honesty and creativity, there is a fundamental personal finance point as well: we make many financial missteps by either spending money on things we don’t care about, or failing to spend money on the things we really do care about. In the case of the latter, the self-denial of not spending money on the things we really would enjoy and cherish can lead to feelings of deprivation and sadness. Of course, often that self-denial comes because we need to spend the money elsewhere first and there just isn’t enough left. Yet the point is that simultaneously, we often spend “extra” money on things that we didn’t really need, such as the name brand item (bought solely to impress someone else when a lower-cost generic brand would have been fine). Which means perhaps the real goal of prudent spending shouldn’t simply be about living within your means, per se, but trying as best you can to allocate where you spend your money to be in line with your values in the first place, spending minimally on things you won’t really cherish and spending more on what you truly will. Though that means the starting point is really about looking introspectively to what your values actually are in the first place, and trying to better understand what you really will cherish in the long run personally (versus what you may be doing solely to respond to outside forces, from social perceptions to Keeping Up With The Joneses), and recognize that there may be some things you’re spending on now (or have in the past) that may need to (sometimes awkwardly) be reassessed. Accordingly, Hamm suggests that a good starting point is simply to try cutting back a bit on everything, but then pay attention to which cuts actually hurt (and then don’t be afraid to roll those back to full spending), as often we don’t really realize what we’ll miss (or what we won’t miss) until it’s gone in the first place.
Financial Fragility Is Real (Pete The Planner) – With the recent government shutdown, nearly 800,000 government workers were suddenly uncertain about whether they’d be able to pay their bills when their bi-weekly paychecks weren’t going to arrive. The situation highlights a phenomenon known as “financial fragility” – those who may currently be paying their bills and not have debt or bankruptcy issues, but could quickly end out there if anything “bad” or financially disruptive were to happen. Of course, financially disruptive events can vary greatly, from being as “simple” as the end (or shutdown) of a regular paycheck, to the disaster of losing a home to California wildfires, assets in a divorce, or a long-term care event that quickly decimates an elderly couple’s lifetime savings. For Pete, the recent incident that reminded him of financial fragility was sitting in a doctor’s office – a visit that he feared could result in a very adverse (and expensive diagnosis) – and the realization that if his health problem really was as severe as he feared, his health insurance coverage was not going to be sufficient and he might face financial ruin. In part, this may be because unexpected (and unexpectedly large) medical bills have been particularly high-profile in the media lately, but it strikes at a more fundamental issue – that even if we’re all incredibly disciplined in how we save and invest, sometimes we just can’t financially withstand life’s disruptions. On the one hand, this emphasizes the sheer importance of having an emergency fund (and proper insurance for the things that go beyond what even an emergency fund could likely cover). But on the other hand, it also helps to emphasize that often financial fragility is a reality, and people who are currently in a difficult financial situation didn’t necessarily act “undisciplined” or do anything wrong, but simply didn’t have a realistic means to withstand or recover from an unexpected vicissitude of life.
How To Find Your Calling, According To Psychology (Christina Jarrett, British Psychological Society Research Digest) – It is increasingly popular to counsel young people, in particular, to “first discover your passion” and then to pursue it as a career and a calling. The caveat, however, is while figuring out what your passion is, it turns out that passions themselves are often something that’s only discovered through, in the first place. Which perhaps isn’t actually unusual as experience and actually doing it in the first place; in other words, it’s not about intuiting what you’ll be passionate about and going to do it, but instead doing things and trying to find one that you feel passion for when you do it. In fact, one study a few years ago found that engaging in a task or project actually increased the passion those workers had for the project, which suggests that finding a passion is less about intuiting some heavenly-endowed path, and more about simply the energizing feeling that arises when a chosen project creates a sense of positive progress and impact. In fact, another recent study found that those who believe that passion comes from the work you enjoy were less likely to find a passion at all, compared to those who focused on trying to find something that aligns with what they believe in and value in life, and then building a passion around it by engaging their focus there and finding a sense of progress. Though notably, this alignment between hard work (that can build passion) and finding work that is well-aligned to values in the first place is crucial, as hard work without passion merely turns into a negative grind (which may help to explain why “grit” alone doesn’t predict success, but grit combined with passion does appear to do so). On the other hand, there is still such thing as having “too obsessive” of a passion as well, which can lead to burnout (or at least anxiety). Though in the end, it’s still better to pursue a passion (and try to keep it “harmonious” and not obsessive) than not to pursue it at all, as the research also shows that a calling unanswered is worse than simply having no calling at all.
Experience And Variation (Seth Godin) – It’s often said that one of the best ways to learn is from “hands-on” experience, but Godin makes the important point that the only way to really learn from experience is to have a wide range of different experiences. Because you can’t actually learn something new until you experience something different so there’s a basis to contrast what is better or worse in the first place. Which in turn is why experimentation – in business, and even in life – is so important. Because while experimentation does bring the risk of being or doing it “wrong” (or at least less ‘right’ than it already is), not experimenting at all also ensures never having the opportunity to find a better solution, either. Or stated more simply, “if you follow the recipe the same way every time, you’ll get the same results every time.” The only way to improve a situation beyond its current trajectory (or stagnation) is literally to try experiencing something different.
The Importance Of The Industry You Work In (Jill Carlson, Medium) – Your career success is driven by three core elements: how you perform, how your company performs in its industry, and how the industry itself performs in the broader economy. Which is important, because most people just focus primarily on themselves and their own job performance, or perhaps working at a good company (or not), but not necessarily the role that the broader industry can have. After all, even if you’re a great performer in an otherwise solid company, if a great individual or company is in a shrinking industry, the industry will generally win, while if you’re in a rapidly growing industry even mediocre companies or sub-par workers can still survive and thrive. (And when a great individual meets a solid company in a growing industry, “something special happens.”) Thus the popular saying in Silicon Valley, “If you are offered a seat on a rocket ship, you don’t ask what seat. You just get on.” Because if you’re in an industry that grows 100x and a company that’s growing with it, any seat is likely to turn out pretty well! The caveat, though, is that picking “the winning industry” isn’t necessarily easy either, primarily because of our tendency to over-project recent success into the indefinite future, essentially confusing a short-term cyclical growth cycle (where the industry is growing but may soon have a downturn) from a broader secular growth cycle (that is likely to sustain its trajectory even through multiple cycles). For instance, the financial services and housing boom of the mid-2000s seemed like it would go on forever… right until it didn’t. While the technology boom of the 1990s also seemed like it would change the world… and ultimately it is, even though it took almost 20 years for Amazon to eventually begin dismantling the entire world of bricks-and-mortar stores. Nonetheless, the key point remains that the biggest opportunities aren’t just for great performers or those who find great companies, but those who pick the right industries in which they grow their careers in the first place. (The good news for financial advisors: a demographically-driven talent shortage combined with the rising complexity of money suggests the secularly positive cycle is still on when it comes to personal financial advice, not to mention that for nearly two centuries the financial services industry has remained one of the most robust!)
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.