Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the news that the 5th Circuit Appeals Court has denied what appears to be the last and final appeal of the states to intervene and defend the Department of Labor's fiduciary rule, in what will probably prove to have been the final effort to revive it (although the court itself still hasn't actually issued their final mandate to vacate the rule after their March 15th decision). On a happier note in the news this week, Focus Financial began the paperwork process to file for an IPO, in what would be the first ever initial public offering of an independent RIA providing wealth management (or at least, a holding company that has aggregated dozens of them together).
From there, we have several tax-related articles this week, including a look at savings strategies for high-income individuals who want to save more above-and-beyond maxing out their 401(k) plans and IRAs, workarounds for families that have (unwittingly?) saved money in grandparent-owned 529 plans and now realize the adverse financial aid consequences of the arrangement, and tips and strategies for estate tax (and broader estate) planning when working with ultra-HNW clients (where it's not just about the technical strategies themselves, but ensuring they are properly implemented to avoid IRS scrutiny, and appropriately communicated to the family to avoid future disputes).
We also have a few practice management articles on attracting and retaining employees, including: new research that what employees want isn't just a progression of Maslow's hierarchy but a combination of 3 core areas (career, community, and cause); why it's a good idea to try customizing job descriptions to individual employees (essentially fitting the job description to the employee, instead of the traditional approach of trying to find an employee who fits the job description); tips for handling underperforming employees; and why some advisory firms are exploring new employee benefits like month-long sabbaticals to attract and retain top talent.
We wrap up with three interesting articles, all around the theme of the advisor's role in not just providing advice and recommendations to clients, but helping them actually implement the advice: the first looks at how coaches often command much higher fees than advisors (because people will pay 'something' for good advice and expertise, but even more for someone that helps ensure they actually get it done!); the second looks at how the research on trust in professionals (including advisors) isn't just about demonstrating the advisor's competency and expertise, but his/her "warmth" and caring (because client's won't implement the advice if they don't believe it's really in their best interests); and the last draws on Dr. Moira Somers' new book "Advice That Sticks" and the research from the medical industry on what leads to patients actually adhering to the advice and prescriptions their doctors provide... and what advisors can learn from it about how to make our own advice "stick", too!
Enjoy the "light" reading!
Weekend reading for May 26th – 27th:
5th Circuit Denies States' Second Attempt To Defend DoL Fiduciary Rule (Mark Schoeff, Investment News) - This week, the 5th Circuit Appeals Court once again denied attempts by the state attorney generals of California, New York, and Oregon, to intervene and defend the Department of Labor's fiduciary rule after the Department of Justice (on behalf of the Department of Labor) had declined to appeal the ruling itself by the April 30th deadline. Previously, the states had requested to intervene and had been denied (in a 2-1 vote, by the same panel of judges that ruled to vacate the DoL fiduciary rule in the first place), and then had appealed the decision and were denied (again by a 2-1 vote of the same judges), and also requested to have their appeal heard by the full panel of 17 judges in the 5th Circuit (claiming it was inappropriate that the request to have the decision reviewed was being evaluated by the same judges who would be reviewed) which was denied as well. And while technically the Department of Justice still has until June 13th to appeal directly to the Supreme Court, the fact that they declined to appeal to the 5th Circuit in the first case, and have made no public statement at all expressing interest in defending the rule further, suggests that with this "final" loss by the states to intervene, the DoL fiduciary rule is now "99% dead", pending only the 5th Circuit formally issuing the court mandate that would put into effect its March 15th decision to actually vacate the fiduciary rule.
Focus Financial Files For IPO To Raise $100M With 'Interesting' Timing (Brooke Southall, RIABiz) - This week, RIA aggregator Focus Financial filed Form S-1 paperwork to complete a $100M IPO (soon-to-be ticker symbol "FOCS"), a milestone event as it would mark the first ever real IPO of an independent RIA wealth management firm (or at least, a holding company comprised of dozens of them) in the public markets. What's surprising, though, is that private equity firms Stone Point Capital and KKR just acquired a majority stake in Focus last year, raising questions of why Focus (and its new private equity owners) would choose to do an IPO event so quickly after the acquisition. Though with Focus' revenues sitting at a whopping $662.9M in 2017, and up nearly 20% since its acquisition last year alone, the IPO doesn't appear to be driven by any financial woes of the company itself. Instead, it may simply be that the early Focus founders are looking for their own liquidity event, as the company is now almost 12 years old (having been founded in late 2006), which is "two lifetimes" for the normal cycle of private equity investing. Although with Stone Point and KKR now the majority owners, the decision may as much be driven by their own decision to IPO now, simply to take advantage of favorable market multiples with the current (but arguably long-in-the-tooth) bull market. Nonetheless, the potential for an independent RIA to successfully IPO may mark a major turning point for the entire independent RIA community and channel, as while it's already a seller's market with a strong level of buying demand, proof that RIAs can successfully grow to the point of IPO (at least under an aggregator approach) will likely just attract more buying interest and capital to invest into RIAs... not to mention stoking interest for other large RIAs to similarly try to grow large enough to IPO someday as well.
For High-Income Investors, Where To Save Beyond The 401(k) Max (Christine Benz, Morningstar) - Saving in a 401(k) or IRA plan is a staple of good retirement planning, but for a subset of higher income individuals, those tax-preferenced retirement accounts alone simply aren't enough... both because they have contribution limits ($18,500 for 401(k) plans, $5,500 for IRAs, plus catch-up contributions for those over age 50) that may be lower than what a high-income individual can save, and simply because higher-income individuals that maintain a more expensive lifestyle need to save more than what is possible in 401(k)s and IRAs alone. After all, someone who maxes out both retirement plans (401(k)s and IRAs) for 44 years (from age 21 to 65) at a conservative 4% return amasses "only" about $2.8M, which is about $2.1M after taxes, but that produces "only" about $84,000/year of retirement income, which still isn't enough to replace 70% of income for a household that was earning $175,000+ during their working years (even when stacking a healthy level of Social Security benefits on top). So for those who have fully maxed out, what are the additional alternatives? One option is using a Health Savings Account, not to cover current retirement expenses, but as a form of "single-purpose Roth IRA" to cover retirement healthcare costs on a tax-free basis in the future (which is especially appealing given that HSAs are both tax-deductible on contribution and tax-free at retirement, at least for qualifying medical expenses, and at worst can be withdrawn taxable-but-penalty-free after age 65, just like any other IRA). Other options include making extra after-tax contributions to a 401(k) plan (if the plan allows), especially given the opportunity to later convert those contributions tax-free to a Roth account, or simply contributing to a taxable account (given both its flexibility and liquidity, and at least capital gains and qualified dividends are taxed at preferential rates!). (Michael's Note: Also worth noting as an option here are non-qualified deferred annuities, which provide for some tax deferral opportunities, and may be appealing as an asset location vehicle for at least a subset of "extra" otherwise-taxable savings.)
Workarounds For Grandparent-Owned 529 Plans (Mark Kantrowitz, Saving For College) - When it comes to 529 plans, the existence of college savings can impact potential financial aid for the student... but the exact impact depends on who actually owns the account. If it is owned by the (dependent) student, or his/her parents, the impact is fairly minimal (treated as a 'parental' asset, even if owned by the dependent student, which generally means just 5.64% of the account balance is counted towards financial aid formulas, and distributions themselves are ignored). But when the account is owned by anyone else – such as a grandparent – the treatment is far less favorable, as while the asset itself is not reported on the FAFSA (since it isn't owned by the student or his/her immediate family), the distributions taken from the account and used for the student are counted as untaxed "income" to the beneficiary, which can reduce aid by as much as 50%(!) of the distribution amount (i.e., a $10,000 account balance that is distributed from a parent 529 plan impacts financial aid by only $564 based on the account balance, but reduces aid by as much as $5,000 based on the distribution itself from a grandparent-owned 529 plan)! So what can grandparents do to "fix" the situation, if they've already created 529 plans for the grandchildren? Options include: change the account owner to the parents (though if the grandparents previously took a state income tax deduction for 529 plan contributions, they may now be recaptured); roll over a year's worth of funds to a parent-owned 529 plan after the FAFSA is filed (so it doesn't count as a parental asset) and then take the distribution later that year (as the distribution from the now-parental 529 plan won't count as income to the student anymore); take distributions later (after January 1st of the beneficiary's sophomore year in college) as the FAFSA financial aid formulas use current assets but prior-prior year income information, which means sophomore-year income distributions are already "too late" to be counted towards financial aid even in their senior year (though wait until after January 1st of their junior year if they're going to take 5 years to finish college!); or simply wait until after graduation and distribution the account to the student to pay down their own student loans (which unfortunately will be subject to income taxes and a 10% penalty, albeit only on the earnings portion of the distribution, not the entire amount).
On The Front Lines Of Ultra-HNW Estate Planning (Thomas Kostigen, Private Wealth) - While the regular increases of the Federal estate tax exemption have dramatically narrowed the scope of estate tax planning in recent years, for ultra-high-net-worth clients, estate planning remains as complex as ever, both for the estate tax planning opportunities that remain, and also all the non-tax issues that arise when planning for substantial family wealth. For instance, renowned estate planning attorney Thomas Handler notes that the biggest issue that arises in ultra-HNW estate planning is a failure to properly integrate all the parts of the family planning, given the sheer amount of complexity involved (with one family having an estate plan that was the product of 31 different law firms!). And the complexity isn't just an issue from the planning perspective; it's also a problem because it means a lot of HNW estate plans aren't implemented properly (which for Handler's firm, includes an implementation checklist with an auditor-style review process to ensure that each step is completed), which is especially important because many HNW estate tax strategies can fall apart under IRS scrutiny if there was a failure to dot the i's and cross the t's. In addition, it's important to consider that what may be "good" for estate tax purposes can have other unintended consequences; for instance, one client who transferred closely held stock for a GRAT estate tax planning strategy subsequently lost control and got voted off the board of his own company by diminishing his direct ownership of the stock (oops!). Another key point that Handler advocates: use a "letter of wishes" alongside an estate plan to explain the intent of the plan (including and especially where some siblings are getting less than others) to reduce the risk of the estate plan being contested by squabbling (disinherited) family members.
The 3 Things Employees Really Want: Career, Community, & Cause (Lori Goler & Janelle Gale & Brynn Harrington & Adam Grant, Harvard Business Review) - Psychologist Abraham Maslow famously put forth the big idea that we all have a hierarchy (pyramid) of needs: first we need basic physiological and safety; then we seek love and belongingness; then self-esteem and prestige; and finally self-actualization. Yet Maslow's hierarchy was first created in a world where most jobs didn't even necessarily cover the basic needs, much less worry about the higher-tier ones, while today the shift from manufacturing to knowledge/service businesses, and the higher incomes they support, means work is less about just trying to secure enough money for basic safety and physiological needs, and more about what else it fulfills (in a world where employers are trying to fulfill more, offering not just salaries and bonuses, but meals and gyms, and a host of other benefits to compete for "Best Place To Work" recognition). In fact, more recent research is finding that once the basic needs are met, the rest of the pyramid is less of a sequential hierarchy, and more of 3 clusters of motivators: career (having a job that provides autonomy, allows you to use your strengths, and promotes your learning and development), community (feeling respected, cared about, and recognized by others), and cause (feeling that you make a meaningful impact, identify with the organization's mission, and believe that it does some good in the world). In essence, as long as firms uphold their end of the "psychological contract" to deliver in these three areas, employees bring their whole selves to work... and when it's breached, employees become less satisfied and less motivated, and therefore contribute less and perform worse. The key point, though, is that in the modern world, it's not just about bringing one of the three – a great career opportunity, or a great community, or a strong cause – but that all 3 contribute to satisfaction and motivation, and that a business needs to consider how it's providing employees with opportunities to fulfill all three (and the research finds that these motivators are the same across generations of Millennials, Gen X'ers, and Baby Boomers).
Why You Should Let Employees Personalize Their Job Descriptions (Vivek Bapat, Harvard Business Review) - In most industries, what we buy is becoming increasingly personalized (from individualized playlists instead of radio stations, self-selecting news sources instead of watching network broadcasts, etc.)... except the work we do remains entirely standardized, with job descriptions that are built by the company and employees are simply fitted into the mold, rather than adapting to their unique strengths and abilities. Which, unfortunately, both increases the risk of a not-perfect match, and over time means that job descriptions don't always evolve with the personal growth of the employee themselves (which can eventually lead them to disengage). So what's the alternative? Instead of trying to fit employees into jobs, fit the job to the employee, by personalizing the job description to his/her individual strengths. Bapat suggests this approach is especially effective at important inflection points for the individual or company (e.g., when career trajectory has otherwise stalled, or when the firm is restructuring, though it's also relevant in simply recruiting for open positions). The key, though, is to start with a conversation with the employee (or prospective employee) about their interests and goals, their strengths and capabilities, and then adjusting the job description to fit their natural talents (e.g., making "helping others" a core responsibility for those who are altruistically minded anyway, establishing clear goals for big thinkers, creating new positions for creatives, etc.). Of course, this approach doesn't necessarily mean that everyone only takes on the "plum tasks" – work still has to be distributed across all the employees in the organization, and not all of it will be fun – but the key point remains that to better engage employees, rather than trying to get them excited about the job they're being fitted to, try fitting the job to them (and then hiring around them for the gaps that remain).
How To Handle Underperforming Employees (Caleb Brown, New Planner Recruiting) - It's an unfortunate reality that at some point, every advisor firm will be confronted with an employee who is underperforming (i.e., failing to complete important job-specific tasks quickly and accurately)... which, if not addressed, can take its toll and both the firm's profitability, and the morale of fellow employees. Accordingly, in his recent book "Successful Hiring for Financial Planners", Brown offers 6 "Do's" and "Don'ts" to handle underperforming employees, including: (re-)establish performance goals jointly (often the problem is that, especially for new employees and new job positions, the employee doesn't entirely understand what they need to do to be successful in the firm in the first place, and what the expectations are); don't focus exclusively on the negative (as while candid feedback is important, sometimes the problems stem from a lack of confidence, which means only berating them for their failings will just make them even less motivated to try to improve and succeed); offer to provide additional training and resources (as given that employee turnover is so costly to the business in the long run, it's usually far less expensive to train an employee and help them get better, than trying to replace them); don't just shift work away from underperformers (as that only burdens the other team members and makes them resentful); ask for input on what you might be missing (i.e., as a business owner, ask your study group or association colleagues for input, as perhaps there's an angle on the situation you're missing); and don't ask underperformers to train their replacements (as if they're already doing a bad job, having them train their successors may just perpetuate the problem!). And ultimately, if none of these work, recognize when it's time to just terminate the employee (which should be done in person, by being direct at the onset of the meeting, and ideally create a script of your own talking points so you don't get flustered in the moment). And then consider what you'll do differently next time so the situation doesn't repeat itself in the future!
Using Sabbaticals To Attract And Retain Top Talent (Jeff Benjamin, Investment News) - Historically, the "sabbatical" – an extended period of time off to refresh and renew – were reserved for tenured college professors, who might receive the opportunity every 10 or 20 years to refresh their creative juices for new lines of research or write a new book. Now, however, advisory firms are beginning to introduce sabbaticals as an employee benefit – not necessarily in the format of a year-long break (as is more common in academia), but offering a month-long break from work (or any work-related activities) to fully disconnect from work and rejuvenate. Balasa Dinverno in the Chicago area launched a sabbatical program that offers four weeks off after 5 years of employment (in addition to any vacation time that employees have earned)... with employees returning with "sabbatical adventure stories", from international travel to spending extra time with young children (and a sabbatical map in the office kitchen with push pins representing the locations employees have traveled during their breaks). Of course, offering sabbaticals requires the business to have a certain size to be able to cover for missing employees while they're out (Balasa Dinverno has 54 employees in total), and the planning process may begin as much as a year in advance on how the employee's job duties will be covered while they're gone (along with notifying clients a few weeks in advance so they know where to go for service while the employee is gone). From the firm's perspective, though, the sabbatical is not only an appealing employee perk to attract and retain talent, but helps to lift the motivation and spirits of the entire firm, as employees come back with their sabbatical adventure stories... which just makes the others want to stay on board with the firm and look forward to taking their sabbaticals, too!
The Coach Gets The High Fees, Not The Advisor (Tony Vidler) - While there are lots of ways to set a fee-for-service model, and figure out what is competitive in the marketplace, the hardest part of setting fees is figuring out what is "appropriate" for a particular client. And Vidler suggests that beyond pricing based on the complexity and required expertise of the situation, an important criterion to consider is specifically the level of the client's engagement in the process in the first place. Because the reality is that even if a client's situation is very complex, if they are not deeply engaged in the process, they won't likely be willing to pay very much to have the problem solved. Of course, the advisor could set a lower fee for the less-engaged client to entice them, but such price discounting approaches can be a slippery slope... and in many cases, simply results in working with clients who aren't enjoyable to work with in the first place (because they aren't really engaged with, and may not really care about, the planning process). But when the client is deeply committed, and understands the complexity of their situation and the amount of help they need, the advisor may be able to charge a much higher fee, commensurate with the services being provided, that the (engaged) client will happily pay to solve the problem they are engaged with. Or stated more simply, an "advisor" helps give guidance and a potential solution, but a coach helps clients actually implement (and takes responsibilities for making it happen). In other words, clients will pay more not just for "the answer" but someone who steps up and says "I will make this happen for you... I will get you where you want to be". Which is why it pays better to be a coach than an advisor!
Why You're More Likely To Trust A Financial Adviser Who Acts Like Your Doctor (Herman Brodie, Marketwatch) - There's a famous adage that trust takes years to build but only seconds to destroy... yet ironically there's little scientific evidence to actually support it, at least stated that way. Instead, as Brodie outlines in his new book "The Trust Mandate", the research suggests that trust is actually built on two foundations... each of which must be built, and can be destroyed. The two pillars of trust are: 1) our perceptions of the other person's intentions (i.e., do they care and have our best interests at heart... a perception judgement we often make very quickly); and 2) our perception of the other person's ability to act on those intentions (i.e., do they have the skills, resources, etc., to make it happen). Or stated more simply, trust is built on a foundation of "warmth" (perceived caring), and "competency" (perceived ability). From this perspective, it's easy to understand why doctors are well trusted; not only does medical training make them competent, but the fact that they ask "how are you feeling" and "where does it hurt" also helps to demonstrate their warmth, the second essential pillar of trust. Similarly, this helps to explain why, unfortunately, most of the financial services industry rates low – not because would-be clients aren't convinced of our competency, but that they fear the competency will be used to the company's benefit instead of the client's! Which matters not just because high-trust professionals are more likely to be engaged by prospective clients, but are also more likely to seek out the professional when they actually need help, speak candidly about their needs (allowing for better recommendations), forgo second opinions, and follow the professional's recommendations (as well as refer the professional to others). The key point, though, is that in an industry that already has high perceived complexity and competency, the key to differentiating is not about showing that you're competent, but showing that you care – or as the famous industry saying goes, "Prospects don't care what you know, until they know that you care."
Does Your Advice Stick (Moira Somers, Journal of Financial Planning) - In her recent new book "Advice That Sticks: How To Give Financial Advice That People Will Follow", Dr. Moira Somers explores the research on how consumers actually implement the advice they receive from professionals (or not). Which is a particular challenge when it comes to financial advisors and advice about money, as money exerts a powerful influence on most people, in ways that aren't always obvious or clearly stated (and instead can only be "observed" in their spending habits, job choices, investment decisions, charitable giving, etc.). Which makes it even more difficult to persuade them to actually implement advice to improve their situation, especially when good financial advice often involves not doing the "fun" stuff and instead delaying gratification (akin to getting people to actually change their behaviors to improve their health by giving up on the junk food they may enjoy). The key point, though, is to recognize that there is actually a skill in how to effectively deliver advice, and in a manner that makes people more likely to implement it, along with a long list of "preventable" mistakes that advisors themselves commonly make, including: assuming that people who pay them for advice are actually ready to take it (not always the case!); using too much industry jargon clients don't actually understand; disregarding the emotional side of the client experience; being "blindsided" by predictable problems in follow-through; overestimating how much people can take on when they're undergoing major life transitions; and allowing disapproval, disappointment, or disdain to taint the relationship. Notably, the medical industry was in a similar state many decades ago, with a famous survey of physicians in the 1970s finding that only 25% of them believed the doctor themselves had anything to do with whether patients followed through on their recommendations (a myth that has long since been shattered, recognizing that how doctors deliver their recommendations and prescriptions has a major influence on whether patients comply). So what can advisors do (and learn from the medical industry) about boosting "adherence" to their recommendations? Suggestions include: get educated about non-adherence and the common challenges that will likely arise (including that not all clients are necessarily ready to make changes, even if they hired the advisor for advice); for a month, record every instance of "non-adherence" where clients don't implement, and try to identify the patterns; take a renewed focus on eliminating industry jargon from client meetings; aim for shorter meetings (and send a quick memo within 24 hours of the meeting, summarizing what was discussed); don't assume clients understood the crucial aspects of the meeting (and instead discuss with them whether you properly understood their needs and addressed them); and do a "warmth audit" of your team, with a focus on who does (or doesn't) do a good job with the essential non-verbal components of making a connection with clients, including eye contact, nodding, and smiling (as clients are less likely to implement if they don't feel a good personal connection in the first place!).
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.