Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the big announcement from SEC chairwoman Mary Jo White that she intends to have the SEC push forward on a uniform fiduciary standard for brokers and investment advisers, nearly 5 years after Dodd-Frank legislation originally authorized the SEC to do so. Of course, the devil remains in the details of what will or will not come forth as the SEC begins its own prospective rulemaking process in the coming months and years.
From there, we have a number of practice management articles this week, including a look from Investment News at how some of the largest ($1B+ AUM) advisory firms seem to be getting more profitable and successful (and growing even faster) as they get larger, a discussion of how increasingly advisory firm owners are attending conferences not for educational content but as an opportunity to network for advisor recruiting, and the issues to consider when deciding whether or not to adopt account aggregation software in your practice.
We also have several more technical articles this week, from an interview with economics professor Laurence Kotlikoff on his new Social Security planning book "Get What's Yours", to a discussion of how long-term care insurance may change as premiums continue to rise and emerging studies find that consumers are more likely to need long-term care than previously thought but the typical duration of claims is actually far shorter than once believed (averaging less than 1 year for men and under 1.5 years for women), and what clients should consider if they're not going to buy long-term care insurance and need to come up with their own plan. There are also two investment articles this week - the first is an look from Bob Veres at how advisors are preparing for the potential "bondmageddon" in the coming years, and the second is a research paper from GMO about how pension funds should manage "valuation risk" by dynamically adjusting equity exposure over time (a strategy that can help individual retirement planning as well!).
We wrap up with three interesting articles: the first is a profile of Luke Landes, who built the Consumerism Commentary personal finance blog into a seven-figure business over the span of a decade; the second is a look at how most people who feel they aren't productive enough are really just struggling with the fact that they're so overcommitted they couldn't possibly do everything they've set forth for themselves (there just aren't enough hours in the day!); and the last is a series of "lifehacks" and tips to manage your own personal efficiency, from how to better handle the never-ending flow of email, to maximizing your productivity by focusing on one task at a time for 25 minutes each.
And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including a review of this week's Nerd's Eye View article on how to choose technology and start a new RIA on a budget, to the newest "second opinion" tool for consumers from SigFig, and more!
Enjoy the reading!
Weekend reading for March 21st/22nd:
SEC's Mary Jo White Says Agency Will Develop Fiduciary Rule For Brokers (Mark Schoeff, Investment News) - After months of silence, this week SEC Chairwoman Mary Jo White revealed her stance on the ongoing fiduciary debate during a presentation at SIFMA this week, indicating that she favors adopting a uniform fiduciary standard for all retail investment advice, including brokers and investment advisers. Although the Dodd-Frank legislation gave the SEC authority to promulgate such a rule nearly 5 years ago, the SEC has not acted, but White indicates that the SEC will now begin a process of outlining what the new rules might be, possibly driven in part by the Department of Labor's own fiduciary efforts; in fact, it was separately revealed this week that the DOL still intends to issue its own fiduciary rule this year, but that part of their delay since January has been due to the fact that they are already beginning to coordinate with the SEC. While much remains to be seen in how White's comments will play out and what really will or will not be forthcoming from the SEC, fiduciary advocates lauded White's comments as a "breakthrough" on fiduciary with the SEC. On the other hand, since the Dodd-Frank legislation also included at least "some" protections for the brokerage industry, opposition to SEC fiduciary rulemaking has been more modest, possibly in anticipation that an SEC fiduciary rule may only have limited disruption and impact. Though in turn the brokerage protections under Dodd Frank also raises concerns from fiduciary advocates about whether the SEC's solution will be "watered down" when a rule proposal finally comes forth. Time will tell, but it looks like the wheels have finally been set in motion.
Bigger & Better (Mason Braswell & Trevor Hunnicutt, Investment News) - The number of large advisory firms is growing larger; a whopping 20% of the RIAs participating in Investment News' annual benchmarking study have more than $1B of AUM, up from just 2.5% of firms in such benchmarking studies a decade ago. But what's notable is not just that there are more large firms, but that such large firms appear to be growing faster once they cross the threshold (up 23%/year since the financial crisis, compared to only 15% for other firms), at the same time that they trim overhead (33% of revenues, compared to 39% for other firms) and become more profitable serving larger clients ($2.74M average versus just 1/3rd of that for smaller firms) and generating more profits for their own (averaging $841k/year in income compared to "just" $415k for others). For many large firms, the benefit of size is not just internal economies of scale, but getting better pricing from vendors, access to practice management consulting services from custodians, and other size/volume discounts. Though as well as many large firms are doing, growth continues to be an imperative, and $1B+ firms are now targeting $5B as the new/next threshold, which in turn requires new efforts to scale marketing and business development in particular, and an increasing focus on specializations within the firm. Perhaps most notable, though, is that getting larger from the $1B mark going forward is about being more strategic; as United Capital's Joe Duran notes, "The people who got you to $1B are doers, but the people who get you to $5B are thinkers."
Why Advisors Attend Conferences Now: Next-Gen Recruiting (Angie Herbers, ThinkAdvisor) - As advisory firms continue to grow, for more and more their biggest barrier is now the firm's capacity to work with clients, which in turn means advisor recruiting is becoming a top priority. In fact, Herbers notes that for many advisory firm owners, the primary reason they are attending conferences now is not for the education and content, but the opportunity to network for potential recruiting hires. Yet despite all the interest in hiring, the pipeline remains weak, with only 5% of advisors under the age of 35, and only a paltry 700 students completed bachelor's degrees in financial planning in 2013. Herbers commends TD Ameritrade in particular for trying to help address the issue, with its RIA NextGen Career Exchange (a free service to help match RIAs and students that may be potential hires), a series of 12 scholarships that will pay $5,000/year to students pursuing a bachelor's in financial planning, grants to help colleges launch and grow financial planning programs, and trying to beef up its technology recognizing that savvy young advisors expect (and are attracted to) a strong technology platform.
How To Choose An Account Aggregation Tool (Dan Skiles, Investment Advisor) - Account aggregation technology gathers information about a client's various financial accounts, and consolidates it all in one central place, either for clients to view as a dashboard of their financial position, or for advisors to use for streaming data (e.g., for 'live' updates to a financial plan or total household performance reporting). Yet while it's been around for years, account aggregation technology has changed significantly from its early days of "screen scraping" (where the software would basically just log into the client's online account and capture the information displayed on screen) to the current approach where account aggregation providers establish direct data feeds to various financial institutions. On the other hand, Skiles notes that for advisors who plan to pull the information into their portfolio performance reporting software, many such tools already have direct data feeds to numerous institutions. For those who want to buy a standalone solution, Skiles also notes that advisors must still choose between solutions that are tied directly to financial planning software (e.g., Yodlee via MoneyGuidePro or the account aggregation built into FinanceLogix), versus 'standalone' solutions focused primarily on account aggregation like eMoney Advisor or Wealth Access. Regardless of the path, though, Skiles cautions advisors against the most common alternative approach - simply gathering client login details to access their provider websites - as doing so can trigger additional compliance (i.e., custody) concerns.
Social Security's Rules Ripping Off Recipients (Jane Rusoff, ThinkAdvisor) - This article is an interview with economics professor Laurence Kotlikoff, whose recent new book "Get What's Yours: The Secrets Of Maxing Out Your Social Security" delves into the stunning "1,728 [Social Security] rules written in gobbledygook"; after being out for just a month, the book immediately launched to the top 100 of all books being sold on Amazon. In the interview, Kotlikoff highlights a number of planning issues and strategies for planners to consider, including: because of the larger dollar amounts involved, it's actually higher income clients who have the most at stake by making good Social Security decisions (and who lose the most by making bad choices); beware Social Security Administration workers, who may be well-intentioned but are poorly trained and are giving the wrong answer and/or bad advice to people "about 40% of the time" (even though they're not supposed to give advice at all); beware the "deeming" rules where if you file for benefits early, you are deemed to apply for all eligible benefits (with early benefit adjustments) and cannot just apply for one benefit and not others; beware the impact of remarriage, which can adversely impact spousal or survivor benefits from the first marriage; continuing to work, even after Social Security benefits begin, can increase AIME and result in higher benefits going forward; and spouses who work and pay into Social Security may actually get nothing from it, because they're simply replacing a spousal benefit they would have already had for their own benefit anyway (at least until they earn enough to generate more than the original spouse's benefit).
New Strategies for Covering Long-Term Care Costs (Mark Miller, Morningstar) - Recent research suggests that the odds of needing nursing home care may be higher than previously thought, but the length of needed care is shorter; the estimate is that 44% of men and 58% of women will need care, but the average duration is just 0.88 years for men and 1.44 years for women, with 50% of men and 39% of women staying no longer than 3 months. The implications of the research are significant when it comes to long-term care insurance, especially since the high volume of <3 month stays are short enough that even Medicare will cover them. The new data come at a time when the country's experts are debating ways to improve our current safety net and payment system for long-term care needs, especially given that just 13% of households currently purchase commercial long-term care insurance, in part due to the significantly rising costs of coverage as insurers continue to see significant losses on existing previously issued long-term care insurance policies. Yet there's little consensus about solutions; a 2013 Congressional Commission on Long-Term Care offered two solutions following 'classic' party lines, with left-leaning members advocating an expansion of Medicare, and right-leaning members advocating for tax incentives and regulatory reforms to stimulate wider use of private LTC coverage. Other options now being considered are blended solutions, such as allowing private insurers to offer a form of LTC coverage bolted onto the Medicare Advantage plans, or streamlining LTC coverage into a shorter list of understandable and easily comparable options offered through a tightly regulated marketplace, similar to how Medigap supplemental policies are sold. Another alternative, suggested by yours truly, would be to significantly expand long-term care insurance elimination periods, allowing for longer deductibles to bring down the cost of coverage, or to use a hybrid LTC policy that allows a similar high-deductible arrangement (though hybrid policies carry other risks!) which have been increasingly popular lately.
Creating A Long-Term Care Plan Without Insurance (Carolyn McClanahan, Financial Planning) - With the ongoing woes of long-term care insurers, and a huge number of Americans remaining uninsured against long-term care needs, McClanahan looks at some of the alternative paths for clients to consider. First and foremost, McClanahan notes that for most Americans, home equity continues to be the most important asset for older Americans, and changing residence can be an option, either to downsize to a smaller home (though watch out for real estate transaction costs and losing out on grandfathered property tax rates!) or simply to move and rent (ideally in a location with good elder support or outright into a continuing care community). Given that as health declines, family members often become involved - especially if there's no long-term care insurance - McClanahan also advocates creating a "caretaker agreement" ahead of time, spelling out which children will be involved, and also whether to increase the share of inheritance assets to that (often closest) child to compensate for the time and other expenses of providing family care. Similarly, it's important to have a plan about what will be done with the rest of the "stuff" in the person's house if a transition becomes necessary, and even before that point it's important to have a "transportation plan" as the ability to self-drive often goes first (and even when driving is down to "just" a few thousand miles per year, it may be cheaper to just pay someone else to drive when necessary). And of course, it's important to have a living will and power of attorney for health care in place, so the potentially difficult decisions can be made when the time comes and quality of life begins to significantly decline.
How Advisors Are Positioning Fixed-Income Portfolios in Advance of the Next Fed Rate Hike Slouching Toward "Bondmageddon" (Bob Veres, Advisor Perspectives) - With expectations that the Fed is getting close to beginning its process of lifting interest rates, some anticipate that the bond market will just yawn, while others are predicting "bondmageddon" instead. In surveying advisors, Veres found that few are actually trying to time or make active calls on interest rates at this point, given years of widely anticipated interest rate increases that haven't happened. Instead, most seem to be following one of two core strategies - either staying short on duration in anticipation of rates, or (for those who buy individual bonds) buying individual bond ladders where each bond can be reinvested at higher rates as the bonds mature. However, there is significant variability in the particular vehicles and methods that advisors are using to execute these strategies, which Veres finds generally fall into one of five camps: eliminating duration risk by getting out of bonds altogether (and instead holding other income-bearing securities like high-dividend ETFs and preferreds); using mutual funds (generally to take advantage of the bond purchasing price power that large funds have over individual investors, the ability to sell immediately without a bond spread haircut, and their institutional research and due diligence capabilities regarding individual bond holdings), particularly PIMCO and DoubleLine, or ETFs with targeted maturities like Guggenheim BulletShares; using separately managed accounts managed by bond experts (typically at a cost of 10-20bps, again gaining access to expert management and institutional pricing); advisors who purchase the aforementioned individual bond (or sometimes, CDs with FDIC insurance to avoid default risk) ladders themselves and/or with in-house talent; and then a small subset actually looking to implement more sophisticated bond strategies, working with firms like Performance Trust Company that have the capabilities to more proactively manage the yield curve. Notably, Veres points out that some advisors have been interested in individual bonds, but struggle by the lack of support from their custodian, who may not be tracking the bonds for pricing, or due to portfolio accounting software that can't properly track the amortizing value, not to mention pricing execution challenges when buying, selling, or just rebalancing.
De-Risking Goes Beyond Interest Rate Risk: The Case for Dynamic Asset Allocation in an LDI Solution (Catherine LeGraw, GMO on Advisor Perspectives) - For many institutional (e.g., pension) managers, the big discussion in recent years has been the de-risking of portfolios, with a primary focus on interest rate risk. Yet LeGraw points out that even with fears of rising rates, for many the biggest risk is not interest rate increases, but the impact on risk-based assets like equities when they revert from expensive to fair value, which can be especially damaging to businesses that must fund their pension shortfalls (and given the aggregate funding status for Fortune 1000 pensions is only 80%). And valuation is a risk in today's environment, with the Shiller P/E at levels that historically would have led to a mere 2% annualized real return over the subsequent 10 years; even though it can be difficult to "time the market", the valuation implications are significant enough to be considered for pension funds with long-term time horizons anyway. To address this, LeGraw suggests that a portion of the portfolio should be allocated dynamically between growth assets or hedging assets, based on such valuation measures; this dynamic allocation might cause the total equity allocation to adjust upwards or downwards within a range, helping to defend against funding shocks if assets do revert quickly to fair value. The bottom line: just as managers might dynamically manage exposure to interest rate risk by shifting duration within fixed income, so too can managers manage "valuation risk" by more dynamically adjusting total equity exposure within a range. And notably, the approach can be similarly applied for individual retirees, too.
How I Built a Seven-Figure [Personal Finance] Blog (Luke Landes, Plutus Awards) - This article is an interesting retrospective by Luke Landes, who built the Consumerism Commentary personal finance blog starting back in 2003, turning it into a substantive business over the ensuing decade. Tips and key points of success included: he started "early" by simply deciding to do something that no one else was doing at the time (writing about personal finance in blog form); he followed a passion and topic he was passionate about (otherwise, it's impossible to stick with it as long as it takes); he worked extremely hard, writing three high-quality articles a day for the first 7 years on top of his day job; when you regularly read, you become a subject matter expert, and your insights about connecting key data points and information become valuable, not only to your readership, but to give you direction on where to take your business next; he didn't start it just to be a business, but recognized that it was becoming one and made a transition when the opportunity presented itself (and even then, held out for the best opportunities); he didn't try to short-cut on issues like Search Engine Optimization, but simply wrote often and persistently and built his organic search traffic naturally over time; he gave actively to the personal finance community in which he was involved (from founding a Carnival of Personal Finance blogs, to creating the Plutus Awards), and never let "your time is worth $X" convince him not to help his colleagues (which his did heavily for 'free' for years); since his unique skill was writing, he didn't try to outsource it, but outsourced everything else behind the scenes so he could focus there; and he recognized it was time to sell his business while he was still on the top of his game (but recognizing that other competitors were rising fast).
A Formula to Stop You from Overcomitting Your Time (Elizabeth Grace Saunders, Harvard Business Review) - Many people who claim to have a "productivity" problem really have an "overcommitment" problem instead, taking on too many external projects and personal obligations than there are hours in the day, and then guilting themselves about not getting everything done without realizing how unrealistic it is to fit 160 hours of tasks into a 40-hour workweek! Which means the first key in time management lies in accepting that time itself is a finite resource, and therefore that sometimes hard choices must be made about what to commit to. In other words, if there are only 24 hours in a day, and you need some allocation for self care (e.g., sleeping, eating, personal grooming, etc.), which might take 10 hours per day, leaving you 14 hours for "everything" else, or about 7 x 14 = 98 hours per week. Now, you can begin to allocate time to both your internal/personal needs (personal development, hobbies, travel, managing your finances, prayer, etc.) and your external obligations (work, relationships, education, volunteer commitments, etc.). And if you add up the time for each category, and find out it's more than that 98 hours per week for everything personal and internal and work and external, recognize that what you really need to "fix" is not how productive you are, but what you've committed to in the first place.
How to Scale Yourself and Get More Done Than You Thought Possible (Danny Schreiber, Zapier) - This article is a write-up of a popular productivity talk delivered by Microsoft program manager (and author and avid blogger and speaker) Scott Hanselman. First off, Hanselman notes that the challenge of staying productive and focused seems to have become exponentially harder in our digital age, with a never-ending onslaught of new information; if you find yourself working late just to catch up, you've got a problem. To tackle the problem, first and foremost recognize what "work" really is and is not; drawing on David Allen (of "Getting Things Done" fame), there's a difference between pre-defined "work" you've set up for yourself, "work" as it appears (and interrupts you), and "work" where you sit down and think about what you should be doing and then do it (which is the ideal!). Often, this means cutting through your To-Do list (and your email), aggressively categorizing into things that you will either Do (and do it immediately), Drop (and just let it go), Delegate (to someone else), or legitimately Defer and do later (which should be rare). In fact, Hanselman points out that for most people, it's the "Drop" outcome, and just saying "no", that is most challenging for many, and gets them into the most work trouble. Hanselman also manages email by using rules to sort email (for instance, anything he's Cc'ed on goes to a separate folder he rarely views; if it's important, you email him directly!), and also rules about when he checks email (not first thing in the morning or late at night, just once for a chunk of time in the middle of the day). Other tips from Hanselman include: don't try to read everything, and instead find "trusted aggregators" - people who do a good job pulling together relevant news, links, and information, and sharing it for you (e.g., Weekend Reading!); answer questions once publicly (e.g., via a blog), and then send people to that resource you just created to answer the question (which also means you'll never have to answer the question a second time, just send them the link in the future!); most multitasking is a myth, but sometimes it can be productive (e.g., working out and listening to podcasts); and try the "Pomodoro Technique" where you focus on one task at a time for 26 minutes (and then take a break) and you'll be surprised by your bursts of productivity. For a full version of Hanselman's productivity presentation, you can view it below.
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!
Weekend Reading for Financial Planners (Mar 21-22) is out! http://t.co/fbnnbXa4le
If you don’t follow @MicaelKitces your missing a key insight into the American psyche & top end planning issues https://t.co/gTQAYCQwZe
How advisors are preparing for “bondmageddon”, & other “Weekend Reading for Financial Planners (Mar 21-22)” – http://t.co/yJmlHxQKB5
@MichaelKitces: Weekend Reading for Financial Planners (Mar 21-22) http://t.co/CGwr20F7IT
Weekend Reading for Financial Planners (Mar 21-22) http://t.co/eN1txadxN4 via @MichaelKitces
Weekend Reading for Financial Planners (Mar 21-22) – http://t.co/yJmlHxQKB5 // Feat. @luke_landes @PlutusAwards @RetireRevised @Kotlikoff
How to better scale your own advisor productivity, & other “Weekend Reading for Financial Planners (Mar 21-22”) – http://t.co/yJmlHxQKB5
Weekend Reading for Financial Planners (Mar 21-22) | http://t.co/1b1p7wWo7c https://t.co/VwlGCbC5fB
Weekend Reading for Financial Planners (Mar 21-22) – http://t.co/yJmlHxQKB5 // Feat. @RealLifeE @DannyAway @Zapier @CarolynMcC @FinPlan
Weekend Reading for Financial Planners (Mar 21-22) – http://t.co/yJmlHxQKB5 // Feat. @ThinkAdvisor @SkilesD @NewsfromIN @InvestAdvMag
SEC announces plans to move forward on uniform fiduciary, & other Weekend Reading for Financial Planners (Mar 21-22) http://t.co/yJmlHxQKB5
Not Too Late For “Weekend Reading for Financial Planners (Mar 21-22)” – https://t.co/iiIRXMlv1D
ICYMI: Weekend Reading for Financial Planners (Mar 21-22) – http://t.co/Ytaht3iXoC
Weekend Reading for Financial Planners (Mar 21-22) | http://t.co/8Ft3cIHC7Z https://t.co/Wdd21jspA2 via @michaelkitces