Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with the news that robo-advisor SigFig has raised $40M of new venture capital, from established asset manager Eaton Vance, in its bid to become a leading robo-advisor-for-advisors solution as the company continues to pivot away from its challenged B2C roots.
From there, we have a number of practice management articles this week, from a brief review of the new retirement income software solution “Income Solver”, to a look at what the DoL’s “Best Interests” requirement really means (now that it appears the rule is here to stay), tips and best practices for doing client meetings virtually via webinar or video conferencing software, and why it’s so crucial for financial planning to be done consistently across an advisory firm.
There are also several technical planning articles, including: a look at how the long-term care marketplace is evolving as long-term care insurance (and Medicare and Medicaid) continue to struggle; how the problems of the student loan crisis may actually be understating, by failing to recognize how often low-income students in particular are enticed into colleges they can’t afford, fail to graduate due to the financial burden, and then end out with student loans and no diploma; a discussion of common estate planning strategies and assumptions that are changing in today’s environment; and a look at how the rise of indexing may make investments more efficient on a relative valuation basis while still leaving them exposed to potentially extreme absolute valuation distortions.
We wrap up with three interesting articles: the first is a look at how social networking is actually on the decline, as companies increasingly adopt social media for business purposes and drown out the less-and-less-common “personal status update”; the second is a fascinating new study discussed in the Harvard Business Review that suggests the “skills gap” in the U.S. may not be due to a lack of availability worker training and STEM programs, but simply that businesses don’t (or can’t) pay enough in wages to incentivize workers to go get those skills; and the last is an examination of the growing juggernaut that is Vanguard, now taking in nearly $1B of AUM per day and showing no sign of stopping, due not only to its incredible economies of scale and strong brand, but also its unique structure of being owned by its shareholders and the favorable investor-centric incentives that has created for the company’s management and leadership.
And be certain to check out Bill Winterberg’s “Bits & Bytes” video on the latest in advisor tech news at the end, which this week looks at Personal Capital’s announcement that it raised another $75 million of venture capital (albeit from an established financial services firm) to expand its tech-augmented-humans advisory service, SigFig’s announcement that it also raised venture capital this week ($40M, from another established financial services firm) as it pivots its B2C robo-advisor to become a B2B solution for advisors instead, and a look at a recent FINRA fine on an advisor which was triggered in part because he backdated and altered client notes in his CRM to obscure questionable recommendations.
Enjoy the “light” reading!
Weekend reading for May 28th/29th:
Eaton Vance Leads A $40M Investment Round In SigFig (Lisa Shidler, RIABiz) – This week, robo-advisor SigFig announced that it had raised a fresh $40M round of venture capital (reportedly bringing its total fundraising efforts to more than $70M), led not by Silicon Valley venture capital funds but the “stodgy” Boston asset manager Eaton Vance, on the heels of SigFig’s announcement last week that it was partnering with wirehouse UBS in a massive pivot from being a B2C robo-advisor to become B2B instead. And it was SigFig’s growing strategy of partnering with large banks and broker-dealers that drew Eaton Vance’s interest, as Eaton Vance has been struggling with the rollout of its NextShares product, an “Exchanged-Traded Mutual Fund” (ETMF) that will trade like an ETF but function like a mutual fund and provide the confidentiality for an active manager to make trades without the risk of being front-run. While Eaton Vance has been hoping their ETMF product would create an entirely new category, it attracted a mere $1M of assets in its first month, and Eaton Vance appears to be hopeful that SigFig’s robo-tools can become a distribution channel for its ETFs (similar to how Schwab distributes its own ETFs through its robo-advisor platform, and Blackrock is expected to distribute iShares via is FutureAdvisor purchase). Notably, Eaton Vance “just” invested into SigFig, and didn’t buy it outright, and the companies have stated that there is no official quid pro quo regarding cross-partnering on products, but Eaton Vance’s CEO will gain a seat on SigFig’s board of directors, which could certainly expedite a potential NextShares-SigFig relationship in the future, even as Eaton Vance’s existing institutional relationships may help open the door for SigFig to new B2B partnerships beyond UBS.
New Tool Aims To Optimize Retirement Withdrawals (Mary Beth Franklin, Investment News) – With ever-growing interest in retirement planning and optimizing retirement income strategies, the makers of Social Security optimizer tool SS Analyzer have just released a new solution called Income Solver. The primary focus of the software is to analyze the best ways to spend down retirement portfolios in a tax-efficient manner – showing, for instance, that conventional wisdom of liquidating taxable accounts first and then tax-deferred accounts (and finally tax-free Roth accounts) is often sub-optimal (due to the tax impact of clustering IRA withdrawals together in later years, which drives up the retiree’s tax bracket). Notably, the analysis is done alongside the Social Security optimization decision, which means the software also considers whether it’s better to delay Social Security or start early, and how the taxation of Social Security benefits mixes into the equation alongside the tax-efficiency of portfolio liquidations. Also included are tools to analyze the benefits of (partial) Roth conversions, including which assets to sell or accounts to tap to pay the taxes on the conversion, based on a targeted ‘maximum’ tax rate. Pricing for the Income Solver software is $1,200/year for the basic program, and $1,900/year for the premier that includes the full breadth of analyses and case support; current SS Analyzer subscribers can add Income Solver for $900/year.
DoL Fiduciary Rule: What “Best Interests” Means (Ron Rhoades, Scholarly Financial Planner) – With the DoL fiduciary rule now finalized (and not facing any viable Congressional challenge given President Obama’s promised veto), firms are now beginning to focus on what the new rules actually say, and what they might have to change going forward. The initial response from insurance companies and broker-dealers was that with the DoL permitting commission-based and proprietary products in the final rule, that it would largely be business-as-usual going forward, with RIAs choosing the ‘simplified’ level-fee-fiduciary path while the broker-dealers will more likely have to follow the full Best Interests Contract compliance obligations. Yet Rhoades suggests that large firms may be underestimating the significance of the rule by focusing on its “policies and procedures” requirements (e.g., additional compliance disclosures) and not the core principal of the rule, which is that advisors must act in their client’s best interests by adhering to “Impartial Conduct Standards” that require advisors to receive “reasonable compensation” and avoid conflicts of interest. In other words, it’s not just about adding disclosures and then doing business as usual; the advice that advisors provide really will be subject to greater scrutiny, with a focus on the fiduciary duty of loyalty to the client. Financial Institutions will be required to stop giving advisors incentives to act contrary to their clients’ best interests (e.g., eliminating sales contests and rewards), and compensation to the advisor, and institution, and related parties and affiliates will all be scrutinized in the future to evaluate prospective conflicts of interest. In fact, the pressure may be so great that Rhoades ultimately suggests that most firms will eventually look at fee-offsets to commissions, or switch to some other form of level fee arrangements, to qualify for the Level Fee Fiduciary streamlined exemption and avoid the Best Interests Contract altogether. Though ultimately, the impact of change will depend on enforcement of the Best Interests Contract, which for IRAs is beyond the DoL’s purview, and instead will be a matter of whether broker-dealers are or are not subject to (successful) class action claims in the coming years.
Best Practices for Client Meetings via Webinar (Teresa Riccobuono, Advisor Perspectives) – Conducting client meetings virtually as a “webinar” using video conference tools is becoming increasingly popular amongst advisors, a time-saver over in-person face-to-face meetings and an upgrade over telephone calls because the video preserves the “face-to-face” communication. Riccobuono provides several tips and best practices about how to conduct virtual meetings effectively, including: do due diligence on the available services, such as WebEx, GoToMeeting, AdobeConnect, and Join.me, and verify your firm doesn’t have any compliance concerns regarding one platform versus another; practice using the technology with staff members (e.g., from your office to another location outside of the office) to affirm you know how to use the tools; don’t roll out to all clients at once, and instead start with those who are long-term clients who will accept a possible technical glitch and are open to being ‘test subjects’; recognize that while some clients will prefer the new technology, others won’t, so it’s best to give clients the option and let them choose (and after they do a virtual meeting once, ask again if they still want to do it that way going forward); remember it’s still a “real” client meeting, so prepare in advance for the meeting as you always would, and be certain to send the video conference link to the client at least a day in advance; remember you can share control and let the client screenshare too, which can be helpful for tasks like walking through a 401(k) rebalancing; and don’t forgot to close out of the meeting, and turn off the camera, when you’re done!
Why Service Should Be Consistent (Ric Edelman, Financial Advisor) – Delivering consistent service is vital to building a positive reputation; as human beings, we like predictable outcomes (which is why many Americans will travel to a foreign country and then still go eat at a McDonalds there, and has been the ‘secret’ of Starbucks’ success!). And consistency is crucial to generating referrals as well, as it’s hard for a client to confidently give a referral if they’re not actually sure the referred person will get the same experience they did. But Edelman notes that actually being systematically consistent is far harder than it sounds, even for a single advisor in a single office and especially across a firm with multiple advisors across multiple locations. Especially since ideally, consistency shouldn’t just be a matter of the service that you provide, but also the nature of the recommendations (do you have a consistent financial planning philosophy across all advisors in the firm?), and the methodology used to deliver them. To achieve this, Edelman notes that his firm includes a consistent training for all advisors, regarding the firm’s planning process and philosophy, before they’re ever allowed to work with clients of the firm; even if they’re experienced advisors, they need to learn the firm’s way of delivering financial planning, to ensure consistency. And notably, while establishing a training process can be more intensive up front, Edelman finds that it makes the advisory business more scalable and efficient in the long run, as now improvements to any part of the planning process can immediately be leveraged across the entire firm.
Fresh Approaches To Paying For Long-Term Care (Mark Miller, Morningstar) – Long-term care is one of the most challenging wildcards for retirees, with half of all Americans expected to develop a disability at age 65 or older that is serious enough to need long-term care, and one-in-six spending at least $100,000 out of pocket for that care. And unfortunately, the current solutions to address the issue are a mixed bag at best; long-term care insurance only covers about 7.4 million people, Medicaid only kicks in after assets are spent down completely, and many seniors end out relying on family members for care, which triggers other problems (e.g., job interruption for the family member, reducing his/her own earnings, retirement savings, and future Social Security benefits). In the meantime, there’s an emerging shortage of professional caregivers, long-term care inflation that’s outpacing general inflation, and Medicare and Medicaid (which cover 61% of LTC costs) have their own woes. In response to these challenges, researchers are looking at new alternatives. A recent major Bipartisan Policy Center report suggests several options to consider in the future, including a new type of “retirement long-term care” that would provide limited benefits (2-4 years after a cash deductible is met) with just 3 simplified choices that could be bought with pre-tax retirement dollars (possibly attached to Federal and state health insurance exchanges and/or as extensions of Medigap and Medicare Advantage plans), and a new Federally-run “catastrophic” benefit that would shift coverage for the small subset of patients with lifetime costs exceeding $250,000 (likely housed within the Medicare program) that would be funded with an increase in payroll taxes or a new general funding tax revenue source. At the same time, insurance companies are also trying to get more creative to fill the void, with Genworth rolling out a new single premium income annuity product designed for people with a near-term long-term care need (where payments would be higher because the contract is medically underwritten and is intended for those in poor health), some insurers now offering “short-term care” insurance (with sales up almost 20% last year) that offers limited policies (e.g., $150/day for “just” 360 days and no inflation protection), and John Hancock recently rolled out its version of ‘participating’ long-term care insurance that provides Flex Credits which may rise if/when interest rates go up.
The College Debt Crisis Is Even Worse Than You Think (Neil Swidey, Boston Globe) – Going to college has long been lauded as a path to a higher income, and a means of upward mobility to lift up young adults out of lower-income and poverty-stricken households. In Massachusetts, a bastion of private non-profit higher education institutions, there has been a growing focus on filling freshman classes with lower income students to expand access to college. Yet it’s still not clear whether the sheer cost of college can be validated by the magnitude of higher earnings from getting a college degree, and even more problematic is that low-income students are often not getting through to graduation, ending out with a partial-degree’s worth of student loan debt and none of the benefits of the college degree itself. The problem is exacerbated by the fact that lower income families that can’t afford college – their Expected Family Contribution (EFC) is $0 under Federal financial aid formulas – still only get partial aid; the national average net price of college after grants and discounts is still $20,000/year, which means low-income students may still end out taking on what could be $100,000 or more in student loan debt given that many take 5-6 years to graduate. Fortunately, the efforts at many private colleges to lift lower-income students is at least more focused than the recent controversies at for-profit colleges, but there’s a growing awareness that while student loans are burdensome enough for those who do graduate, the astonishingly low completion rates – at one school, as few as 16% graduate in 4 years – mean that low-income students who can’t finish college (in part because of the debts they’re taking on as they try, which aren’t even forgiven in a bankruptcy) could actually be leaving them even worse off.
Estate Planning Errors: Assumptions Advisors Get Wrong (Martin Shenkman, Financial Planning) – A growing base of research about consumer behaviors is starting to cast a fresh light on a number of estate planning strategies. For instance, it’s long been observed that charitable giving as a percentage of income is higher for high-income individuals (given the tax incentives), but also for very low-income individuals, which was always assumed to be due to situations like religious considerations (e.g., tithing). But a recent study finds that many lower-income taxpayers give generously simply because, relative to their income, their assets (while smaller than more affluent folks) are still significant enough relative to their income to support substantial giving – an important reminder that charitable giving conversations need to expand beyond just tax-centric planning (especially given that so few will ever be subject to Federal estate taxes with a couple’s combined exemption approaching $11M!). Another interesting shift pertains to revocable living trusts, which historically were used to minimize or avoid probate; while that still works, as seniors live longer, and are potentially subject to senior financial abuse and cognitive decline, it’s important to recognize that revocable living trusts offer fewer protections and remedies from trustee malfeasance (which means at a minimum, it might be time to routinely consider a fiduciary trust protector to require a trust accounting and fire a trustee, even for “just” a revocable living trust). Other notably assumption changes include: in a world where fewer are subject to estate taxes, it may no longer be necessary to bother with the administrative burdens of Crummey notices (as even if the Crummey power is invalidated, it won’t have gift tax consequences for the family anyway); irrevocable trusts are turning out to be less and less “irrevocable” as 20 states now permit decanting of trusts (merging an old trust into a new one that has different terms); and giving away assets because a couple has LTC insurance in place could actually be ‘risky’ given that a growing number of seniors are accidentally lapsing their coverage due to cognitive decline… and then finding they no longer have the assets to pay for their own care, either!
The Paradox Of Active Management (Jesse Livermore, Philosophical Economics) – The ongoing transition of investment markets from historically being dominated by active investors to now facing a rapidly growing market share of passive indexing raises interesting questions about the future of market efficiency, as well as the actual transitionary impact of the rotation from active to passive. Notably, an interesting effect of the active/passive dynamic is that flows into passive funds can impact the market’s absolute valuation (based on net cash inflows or outflows that investors make to/from index funds) but not relative valuations (because the weightings are always the same), while the active funds can impact relative valuations (by trading from one individual stock to another based on the preferences of the active managers) but not absolute valuations (because the funds have to remain fully invested). Of course, in the real world marketplace investors often have a mixture of both, but the fundamental implication is that individual investor flows to passive funds will increasingly be a driver of absolute valuation, while the role of active management will remain focused on the zero-sum nature of managing towards relative valuations (and the potential arbitrage opportunities they may find). In turn, this helps to clarify why the ever-declining level of available alpha can continually make markets more efficient at the micro (individual stock) level, even as stocks still move to over- and under-valued extremes at the macro level. Of course, if investors began to index their aggregate allocation across asset classes based on global market capitalizations, then in theory valuations across asset classes could become more efficient as well… though notably, there’s no evidence at all that’s happening so far, as the rise of indexing has been an entirely intra-asset-class phenomenon so far, not a uniform strategy to allocate amongst them in the first place.
Social Networking Is Over (Mike Elgan, Computerworld) – While it’s been popular for platforms to call themselves “social networks”, most actually started as something else, from Twitter’s micro-blogging service to LinkedIn’s job-searching, Pinterest’s pinboards and Instagram and Flickr’s photosharing. Arguably, Facebook was only the true major social network. Yet while for a period of time social networking activity did dominate most of these sites, Elgan suggests that the age of social networking is already on the decline. To some extent, this is driven by shifting platform preferences (Millennials increasingly prefer messaging apps like Snapchat over ‘public’ social networks like Facebook), there are more other platforms to be distracted on (we surf Facebook less because we can also surf YouTube and listen to podcasts now), but the biggest killer of social networking may be social media. In this context, Elgan defines social networking as the sharing of personal content, and social media as the sharing of professional content… and notes that as business has moved en force into the world of social media, it is drowning out peer-to-peer social networking activity. After all, Twitter has been recategorizing itself from a “social networking” app into a “news” app, focused on allowing users to create their own personalized news feeds, and even Facebook is making more and more investments that are outside of its social networking domain (does anyone really expect individuals to use a 17-camera 360-degree video rig to post status updates for others to watch via Oculus virtual reality?), even as the number of people who actually post photos, videos, and status updates on Facebook has been declining. The challenge is further exacerbated by the fact that professionals adopting social media are drowning out social networking by virtue of the sheer quality; interesting articles and professionally created videos are more likely to get attention than a random person’s badly captured selfie, and businesses are now in a “bloody, all-out war to figure out how to get more of [our] attention”, resulting in content that increasingly drowns out personal status updates. Which means, again, that while social media platforms may be here to stay, the age of social networking may already be ending.
Paying Skilled Workers More Would Create More Skilled Workers (Thijs Van Rens) – In recent years, there has been increasing concern of an emerging “skills gap” between the skills that businesses need their workers to have, and the ability of workers to adapt their skills to those needs. In turn, this has driven policymakers to look at better ways to encourage STEM (Science, Technology, Engineering, and Math) programs, along with better access to worker training programs, to help prevent workers from being made ‘irrelevant’ by technology. Yet recent research suggests that the problem of the “skills gap” may not be a lack of access to programs that teach the requisite skills, but simply that employers aren’t paying the market price for the skills they require. In other words, workers aren’t adjusting to the demand for acquiring new skills, because there really isn’t enough return-on-investment to go back and get the training and education for those skills. Notably, this may not necessarily be because companies are just being stingy; in general, jobs in industries that do pay higher wages (e.g., finance and computers and electronics) actually are lower margin businesses, while higher-margin industries (e.g., retail trade, education services, and mining) tend to have lower-paying jobs. As a result, even those who get STEM degrees don’t necessarily end out with STEM jobs, thus failing to generate an earnings premium for their premium skills. Ultimately, the next question – that the researchers haven’t solved yet – is figuring out why the wages for scarce skills don’t actually rise materially compared to the wages for workers that share already-more-abundant skills, but at a minimum it suggests that just lamenting the availability of skills training and education may be putting focus in the wrong direction. Which has interesting implications in our industry as well, suggesting that perhaps the reason we have a talent shortage isn’t because there are too few CFP programs, but simply because advisory firms aren’t willing (or able?) to pay enough for CFPs to incentivize more young people to enter the industry in the first place.
Can Anything Stop Vanguard? (Ben Johnson, Morningstar) -While in most industries, the rapid ascent of a leading company just drives more competition to take the leader down, in the world of asset management Vanguard has become the clear market leader and is still experiencing above-average organic growth, now bringing in nearly $1 billion per business day in new investor assets. And Johnson suggests that this isn’t likely to change anytime soon, due both to Vanguard’s unique structure that successfully minimizes virtually all of the most common misalignments between management and shareholders (such that Vanguard is still lowering its fees as it continues to scale larger), but also the secular industry tailwinds supporting Vanguard, from the shift to fee-based advice, the growth of target-date funds, and the expanding ranks of underserved mass affluent households to use Vanguard’s new Personal Advisor Services platform. As a result, Johnson suggests that short of a sudden and highly unlikely breach of investor trust, it’s hard to see what could possibly slow down Vanguard in the coming years. In fact, the company is increasingly shifting to a more global focus, suggesting that its growth pace could continue as it begins to gain market share in non-US markets, too. Notably, though, Vanguard’s growth is beginning to morph the company from “just” indexing, to a growing range of low-cost offerings; the firm actually has a large and (mostly) successful roster of active managers (outperforming in part thanks to their Vanguard-style low costs), and the firm is now beginning to adopt forms of factor funds in the “strategic beta” marketplace. Still, while some new initiatives may succeed and others may fail, Johnson notes that Vanguard’s biggest and most sustainable competitive advantage is simply that it remains owned by (only) its fund shareholders.
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!
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!