Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the news that the Federal government is officially moving the tax filing deadline from April 15th to July 15th, not only allowing tax payments to be deferred but the entire tax filing process (though it remains to be seen whether/how states will follow suit as well, and those seeking tax refunds to get cash in their pockets now will likely still want to file as soon as possible!).
Also in the news this week is discussion that the U.S. is considering whether to issue 50-year(!) government bonds to finance the looming coronavirus economic stimulus package to take advantage of ultra-low interest rates, and that the economic stimulus package may also include a provision allowing the U.S. Treasury to provide a backstop guarantee to money market funds to prevent the risk of recreating a repeat of the panic run on (institutional) money market funds that happened during the 2008 financial crisis.
From there, we have a number of articles about investor behavior during the current market volatility (and how advisors can help), including a look at the data showing that in reality most investors do not panic sell (but the few that do can be especially poor under-performers as a result), how your brain reacts emotionally to market volatility in a form of fight-or-flight response (for which rational explanations of markets don't necessarily help), and some tips on how to reassure clients during these volatile times (and even remind them that you're available to help their friends and family who may be in search of a financial advisor to help them through the volatility, too).
We also have a few articles on the emerging practice management implications of the recent market decline, including why advisory firms that didn't run 'healthy' 20%+ profit margins may now face forced layoffs to right their expenses relative to their revenue and the fees they charge, how market volatility and potential layoffs may at least create an opportunity for firms to refocus themselves for the future, and why the recent market decline may not necessarily tank the valuations for advisory firms that want to sell (at least, as long as the seller is willing to bear more of the risk by making a portion of their price contingent on the market recovery that's anticipated in the coming years).
We wrap up with three interesting articles, all around the theme of dealing with our own thoughts and personal disruptions caused by coronavirus: the first provides tips about how to get comfortable and find more 'calm' in the face of a pandemic that may feel particularly challenging to fight (given that it's an enemy we can't see, and one that forces us to socially distance and isolate when, as human beings, we tend to come together in times of stress); the second provides a powerful reminder that it's "not crazy" to be fearful of covid-19 and to be thinking about the potentially challenging long-term implications, and the importance of finding others who share (or at least are willing to listen to and hear) your concerns to talk them out; and the last provides an uplifting reminder that the wave of meetings, events, and activities now being cancelled is unexpectedly presenting us all with a "gift of time"... raising the question of what those "if I had more time I'd get around to it" activities and goals we'll all be able to take up, now that the time is being forced on us anyway?
Enjoy the 'light' reading!
U.S. Extends Individual Tax Filing Deadline From April 15 To July 15 (Richard Rubin, The Wall Street Journal) – Today, Treasury Secretary Mnuchin announced that the tax filing deadline for individuals (and it appears for businesses as well) is being extended to July 15th for the 2019 tax year. Notably, earlier this week, the Treasury had indicated that taxpayers would be able to defer their tax payments until July, but would still have to file returns (or seek extensions) by April 15th. Now, however, the entire tax filing deadline itself is still being extended… though those who are eligible for tax refunds will likely still want to file sooner rather than later simply to access their refund. And it’s not yet clear whether those who have 2020 estimated tax payments, normally due in April and June, will still be obligated to make 2020 payments (even as they wait to file their 2019 tax return), nor is it clear yet how 2019 tax extensions will work with the new July 15th date (and whether the standard October 15th date will still hold, or if a full 6-month extension will still be available, which could push extension due dates out to January 2021 for the 2019 tax year!?). And questions remain of whether states will follow suit and adjust their own tax deadlines to conform in the coming week(s) as well.
White House Mulls New 50- and 25-Year Bonds To Finance Stimulus (Jennifer Jacobs & Saleha Mohsin, ThinkAdvisor) – With ever-growing estimates of the prospective economic stimulus plan in response to the coronavirus now topping $1 trillion, the White House is exploring the potential of issuing new 25-year and even first-ever 50-year Treasury Bonds to finance the additional Federal debt at the lowest possible cost to taxpayers. Initially, the concern was simply that there wouldn’t be much appetite from investors for ultra-long-term bonds at today’s ultra-low interest rates, but with demand for government bonds growing with the current investor flight to safety, interest in growing in leveraging the demand to issue longer-term bonds to lock in the government’s low-interest borrowing costs.
Treasury Proposes To Guarantee Money Funds In Stimulus (Saleha Mohsin, Josh Wingrove, Jennifer Jacobs, & Christopher Condon, Bloomberg) – As a part of the coronavirus stimulus plan, the Treasury Department is proposing to temporarily guarantee money market mutual funds via its exchange stabilization fund, to end whenever the President ends the current National Emergency declaration that was made last Friday (similar to the guarantee against over $3T of money market funds for nearly a year during and after the financial crisis). The concern is that, similar to the financial crisis, as institutional investors and hedge funds in particular begin to deleverage, there is a higher demand for cash assets and accelerating outflows from institutional money funds, creating concerns that, similar to 2008, a money market fund might “break the buck” and accelerate into a full-blown money market panic. Notably, though, reforms in the aftermath of the financial crisis itself, passed in 2016, forced money market funds into tiers with differing levels of safety, and the bulk of money market assets are now held in Treasury-only funds that remain stable. Consequently, it’s only the ‘second-tier’ money market vehicles coming under stress, which still may not break the buck, but the fact that they may impose restrictions on withdrawals if dropping below certain liquidity thresholds is still creating concern that investors may accelerate withdrawals out of such funds before the gates are imposed, hastening their potential demise (for which a guarantee that such a rush for the exits won’t be necessary is viewed as the best way to ensure that there’s no run against the money market funds in the first place).
The Myth Of The Panicky Individual Investor (Dan Egan) – As a behavioral finance expert in 2009, Egan had an opportunity to analyze a database of the UK’s largest self-directed brokerage clients and their trades… and found that while there were some poorly constructed and undiversified portfolios, and extreme allocations (both all-in and all-out of stocks), the one thing that was not evident was broad-based panic-selling during the financial crisis. In fact, on average, the self-directed traders were more likely to buy dips and let cash accumulated during rallies for the next buying opportunity, and more generally actually tended to buy relatively low and sell relatively high (and while some did try more proactively and poorly to time the market, it actually was not the majority). Of course, as financial advisors, we've all seen individual investors panicking and the devastation that it can cause. But Egan notes that, in practice, if an advisor talks to 10 clients and if, of those clients, 9 are reasonably calm and 1 panics, it's the 1 that's most salient, most likely to be remembered, most likely to be shared as a story with the media... making the frequency of panicked individual investors seem more common than it actually is (not to mention that calm and successful self-directed investors are less likely to call an advisor for help in the first place, and advisors are disproportionately more likely to work with the most panic-prone clients who self-select to working with advisors for help, just as doctors would report that nearly all their patients are sick not because 'everyone' is sick but simply because they generally only see sick patients in the first place!). In fact, the actual data, from various sources, suggests that in the end, most investors simply do nothing, either because they don't know what to do, don't care enough about the stock market to pay attention, or ironically just 'choose' to put their heads in the sand in the face of difficult times (which actually likely helps them avoid a panicked sale). And the research also shows that gross of trading costs and taxes, the average individual investor does not underperform (which may only be easier in a world where trading commissions have zeroed out). Furthermore, some investors do want to de-risk (e.g., those with shorter time horizons or nearing retirement), and others 'need' to sell (e.g., to raise cash if they lose their job). Though notably, amongst the investors who do try to engage in more proactive trading and market timing, the data does still suggest that they disproportionately underperform, such that while panicked selling may not be as common as most make it out to be, it is a serious problem for those investors who are prone to such behavior.
This Is Your Brain On A Crashing Stock Market (Jason Zweig, The Wall Street Journal) - Market crashes are scary, especially when virtually all financial assets fall at once, and layoffs rise as the economy faces a severe recession. Which is only compounded by the fact that we cannot necessarily find comfort with our friends as we might have in the past, given the orders for 'social distancing' in various states and counties. All of which unleashes enormous amounts of stress on the brain, which neurochemically goes on 'red alert', with the bloodstream flooded with adrenaline, raising pulse and blood pressure and breathing rates, the body releasing cortisol to mobilize stored energy, and the prefrontal cortex (responsible for long-term planning) becoming less active to avoid 'getting in the way' of the body's fight-or-flight response. Of course, while the body's ability to tunnel-vision on a threat may have been useful historically to our species, in an investment context it tends to lead predictions to be biased towards something negative happening (which the body is preparing to fight or flee from), and a desire to find the quickest way to resolve uncertainty and ensure survival (e.g., selling out altogether). So what can investors (and even stressed advisors) do in such situations? Some helpful techniques include: taking charge of anything you can control (as we all tend to feel less stressed when we still have control over at least something in our environment); trying to making up your mind of what to do only when the markets are closed (so the headlines and flashes of red don't unduly influence you in the exact moment); if you feel the need to sell, committing to a fixed dollar, share, or percentage amount and systematically doing it over time so you don't pull the trigger all at once; trying to tax-loss harvest so at least sales have some tax benefits; directing dividends to cash rather than reinvesting them so at least it feels like some cash is building up; and finding some way to stay connected with friends, family, and mentors (or your financial advisor!), because social contact itself is a key way we regulate our emotions.
The Right Way To Reassure Clients... And Get Referrals In The Process (Steve Wershing, Client Driven Practice) - In times of market stress, there are many ways to try to reassure clients, from economic statistics to comparisons to previous markets, putting together a PowerPoint slide deck of market analyses or simply telling them to keep calm. But the reality is that while clients may be asking questions or seemingly panicking about the market decline, the actual fear often emanates from deeper in the brain (the same non-rational survival part of the brain that makes people want to stock up on months' worth of toilet paper!), the part of our brains that triggers the fight-or-flight response. In other words, clients aren't really looking for a rational explanation of what's going on and what might come... they're struggling with and trying to figure out how to manage their fear. Accordingly, Wershing suggests that the best way to handle the conversations are: don't try to tell clients how they 'should' feel ("stay calm!"), and instead ask them what's on their mind and give them a chance to talk it out; empathize with them by acknowledging what they are going through, and help them feel understood; try to help clarify what's behind the fear for them (is it really about the market decline, or wondering when/whether their lifestyle and ability to visit the grandchildren will be impaired?); reinforce your commitment (show that you have some strategy, will stick with them, and will adapt if/when/as conditions change); empower them by showing them what they can do to make adjustments (e.g., spending changes) and get back on (or stay on) track; stay engaged, even when conversations are difficult, because they're also very valued (as Wershing notes, no one says "we are so grateful you were there to help us to get through that bull market"... now is when it matters!); and at the end of calls when clients are feeling better, be certain to remind them that "if you have any friends who are nervous and don't have an advisor, or whose advisor is not reaching out to them, feel free to have them give me a call... I'm happy to give them 15-20 minutes to help answer their questions, no obligation because they are a friend of yours."
Why Advisory Firms Might Have To Consider Layoffs (Eric Rasmussen, Financial Advisor) - With assets-under-management as the dominant model for financial advisors, and the S&P 500 down nearly 30% from its high earlier this year, even the diversified portfolios of advisory firms may face 15%+ declines in revenue when their first-quarter billing hits. And given that almost 75% of an advisory firm's expenses are compensation for its people, with the rest mostly fixed costs (for everything from office space rent to essential technology), there is a real risk that advisory firms will have to downsize their teams to stay afloat. Of course, there is a huge psychological impact to firing team members - both to the psyche of the business owner themselves, and the morale of the rest of the team who may all similarly begin to fear for their jobs. Fortunately, advisory firms that were already running 'healthy' profit margins of 25%, and can manage what is often at least a 5% cut in discretionary spending just by trimming flexible expenditures - may make it through just fine (particularly if they don't also have any debt payments). But advisory firms that allowed themselves to become 'staff heavy' and didn't run 20%+ profit margins in the first place will now face the likely potential of needing to lay off the 'excess' staff now to right-size the business. For which team members who are 'client-facing' are still the most likely to be retained - as firms only face the risk of a further downward spiral if service to clients declines and leads to more clients leaving - but firms that are struggling may still have to take a hard look at whether they're really providing the 'right' level of service given the fees they charge, the revenue they generate, and the amount of staff it takes to deliver.
In Tough Times Like These, Here's How To Refocus Your Practice (Jarrod Upton, ThinkAdvisor) - The key role of a business owner and leader is always to be focused on the question: where do I need to take our firm from here? In good times, answering that question is about where to focus next for growth. But it's an important question when hard times come as well. And failing to do so can lead to a lost sense of purpose and complacency, that make it even harder to adapt when times get difficult. So for firms that did get complacent, or even 'just' overly content with how well things were going (but lost their hunger to keep adapting and now face real business challenges), Upton suggests that the key starting point is to come back to the "Why" of the firm - why does the business do what it does, and what is essential to doing so? A renewed focus on the firm's "why" will help to make decisions about what to keep and re-focus on, and potentially what to 'cut' if necessary when revenue is down. Because the reality is that starting with "what do I do" in the midst of a market decline - as with clients who are panicking and casting about on whether to sell or not - often leads to poor decisions if it doesn't first tie back to the bigger goal (whether it's the client's long-term goals, or the advisory firm founder's "Why" and long-term business vision). Or stated more simply, if you had unwittingly become a bit overly content or complacent about the business, and didn't necessarily manage with a lot of stringent control, taking some time to re-assess the "Why" of the business will help to clarify what the business really needs to do to keep moving forward from here!
A Recession Won't Stop RIA Buyers Or Torpedo Valuations, But It Will Alter The Terms (Michael Thrasher, RIA Intel) - In the financial crisis, the number of deals involving RIAs fell nearly 70% and didn't recover for nearly 3 years thereafter, but industry commentators and actual RIA buyers and aggregators suggest that the pullback will be far less this time around. The distinction is that because access to capital remains strong, and large RIAs are still focused on reinvesting and growing through the difficult times, buyer demand thus far is remaining strong through the pandemic. And in practice, because deals take so long to negotiate, many are already in the midst of negotiation and closing since months before the coronavirus emerged and will likely still follow through to the finish line. Of course, sellers themselves may not be as enthusiastic to sell as revenues (and therefore the value of the firm) decline, but thus far it appears that valuations for advisory firms may not be compressing (if only because sellers won't want to sell unless buyers are still willing to pay what the firm was worth before the decline). Instead, what's shifting thus far are the terms of the deal, such as a reduction in how much is paid upfront, and more money owed to sellers locked up in an escrow account until key terms are met (e.g., the market, revenue, and profits of the firm recover to at least $X dollars by Y date). Or stated more simply, if sellers are at least still comfortable with and willing to bet on a recovery, the market decline thus far may not drastically reduce the valuations of advisory firms, but it will necessitate sellers taking on more of the risk (and that they'll only receive the full value if the markets and firm profits really do recover in a 'reasonably' timely manner).
Finding Peace Within The Pandemic (Lawrence Yeo, More To That) - Human beings are 'herd' animals, and we tend to naturally come together to fight against the collective challenges that we face. However, the coronavirus pandemic presents a unique challenge to the collective human psyche, as the 'enemy' is not another group of humans, but an 'invisible' virus that is not only incredibly difficult to fight and defeat, but ironically requires us to be separated and 'socially distant' to fight it (further undermining our instinctive desire to find safety in the herd and community with others in times of distress). Not to mention that the coronavirus' impact is quite varied in practice - for some, it ravages portfolios, for others it's a threat of (or already the cause of) layoffs, while some industries and businesses are actually seeing growth opportunities. The common threat, though, is one of physical health from coronavirus... and when we feel our health and physical well-being is at risk, most other issues tend to be sidelined anyway. With the caveat that when a global pandemic breaks out, everyone gets focused on their safety and physical well-being at once... potentially leading to panic (and hoarding of toilet paper!) as we enter survival mode. Accordingly, Yeo suggests three tips for trying to find 'peace' with the coronavirus, so it doesn't become all-consuming: 1) recognize that anxiety is actually useful in creating a game plan... but anything beyond that point is self-destructive, which is more challenging as the early alarmists now claim they've been 'proven right' while the optimists struggle to adjust, leading to what Yeo suggests should be a 'rational alarmist' approach; 2) maintain daily habits and keep the mind engaged as, in practice, a lot of our normal daily habits are now being disrupted (by social distancing), so forming new habits can restore a sense of steadiness and control; and 3) realize that social distancing (and even social isolation) will just make us realize how precious human connection really is, and while we can't necessarily come together until the virus does pass, now at least is the time to make plans of what you will do differently with your friends and family when you can?
Your Covid-19 Thoughts Are Not Crazy (Austin Frakt, The Incidental Economist) - One of the challenges in talking to others about the coronavirus pandemic is that people are in very different places, both emotionally and even rationally, depending on both their mindset and their current situation. Some are focused on the (relatively short-term) media narrative, and upset about how their daily lives are being disrupted (or how the local and national politicians are responding); others are focused on the long-term, spanning fears from whether or how much coronavirus will spread further, or more practically how long they may have to be working from home, or if schools will remain closed for the year, or the long-term danger to loved ones who may be more susceptible to the virus. Notably, Frakt finds that because the media narrative has been so focused on the near-term, that those who are trying to think long-term about the implications of the pandemic may be feeling especially isolated now, with few to talk to... but nonetheless notes that it's "not crazy" to be worrying about the longer term future and projecting out the implications of the pandemic. Instead, for those who want to spend more time thinking about the long-term impact, try to find others who are ready to have the same conversation... because talking to and interacting with our community of fellow human beings has always been, and remains, one of the key ways that we de-stress and get comfortable with an otherwise-uncertain future.
The Gift Of Time (Justin Castelli, All About Your Benjamins) - With widespread cancellations of everything from industry conferences to business meetings, kids' sports and family activities, and now increasingly our own client meetings (that at best are shifting to be virtual, which still tend to be shorter in duration), as financial advisors, we may suddenly be finding ourselves with clearer calendars and more "time" available than we've had in a long, long time. Which means that being confined to our homes, unable to engage in those meetings and interactions, can either be a big downer... or an opportunity to take back the time we always wished we had more of, to do all those things that are seemingly always put off "until we have more time", from exercising more and making healthier meals, to writing or reading more, or simply spending more time with family. And so with everything else in our lives on 'mandatory' slowdown, Castelli suggests that while life is giving us lemons, it's an opportunity to make lemonade - an unanticipated "gift of time" to start doing all those things we've always talked about doing but never had the time for... until now, when we do. And so the question becomes: what will you be doing differently in the coming days and weeks with the "gift of time" we've all been given?
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.
Terry Rocks says
Thank you for taking the time to share this. Praying for all of you at Kitces. We will prevail as a country and hopefully become better in serving and taking care of our neighbors and community.
As I understand it ….. If the standard tax extension date of October 15th get pushed back, then the 2019 national average wage index cannot be finalized for calculation of the social security primary insurance amount, thus impacting age 62 early retirees for proper payment effective January 2021. Sure, they could estimate and then have to back later to “correct” the social security payments. What a mess.