Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with a recent interview with the CFP Board where it reiterated its focus on growing the number of CFP certificants (as there are still more CFP professionals over the age of 70 than under the age of 30!), but also that the organization is committed to not lowering its standards in the process of pursuing growth. Also in the news this week are some highlight articles of the recent T3 Enterprise conference for advisor technology in large firms (which included some new product launches relevant for independent advisors, too).
From there, we have a few practice management articles this week, including an interesting look from the latest FA Insight benchmarking study showing how the challenges that advisory firms face are quite different depending on the size of the firm (reinforcing the notion that what got the firm to where it is may not move it forward from there), a discussion from Philip Palaveev about what advisors should be thinking about when they consider whether to merge with another advisor and form an ensemble firm (or not), a profile of some advisor study groups and their value (even and especially for firms that are already growing), and a discussion of how financial planning software is starting to change to allow planning to be done quicker and faster.
We also have several more technical articles, from a new study showing that long-term care needs may be more frequent but much shorter duration than typically thought (which raises the question of whether today’s long-term care insurance is the right type of coverage), to a discussion of IRS Announcement 2014-32 which discusses transition rules to the new once-per-year IRA rollover rules taking effect in 2015, and a look at the new Society of Actuaries 2014 Mortality Table that could impact everything from more favorable RMD calculations for retirement accounts to making lump sum pension rollovers more valuable for those who wait a few more years.
We wrap up with three interesting articles: the first looks at how once you include the volatility of career earnings for Millennails and the relative stability of Social Security and pension income for Baby Boomers, the reality may be that the ideal portfolio should actually be quite similar for young adults and retirees; the second discusses how it’s not enough for advisors to have clients who are “satisfied” but that ideally clients should be “engaged”, which requires advisors to adjust from thinking about what they offer to clients and instead consider what they can create with clients instead; and the last looks at how it can actually be a good business idea to wear the same kind of outfit every day (and yes, it will give you insight into why I always wear a blue shirt!).
And also be certain to check out the videos at the end from Bill Winterberg, highlighting some of the news and buzz from this week’s T3 Enterprise advisor technology conference! Enjoy the reading!
Weekend reading for November 15th/16th:
More CFPs Needed but Board ‘Won’t Lower Standards’ (Jamie Green, ThinkAdvisor) – In interviews during last week’s Schwab IMPACT conference, the CFP Board continues to be focused on growing the number of CFP certificants, now up to 70,598 in the US, but insists that it will not lower standards in an effort to do so. The CFP Board also noted that it is following the so-called “robo-advisor” trend, which in the long run even raises the question of whether the CFP Board should someday consider certifying robo-advisor companies as being CFP certificants, but the organization emphasized that under current rules the CFP Board certifies individuals, not companies/firms. For the time being, the CFP Board’s focus is simply to keep growing the number of CFP certificant individuals, as there are still more CFP certificants over the age of 70 than there are under 30. The CFP Board also notes that they are taking a bigger focus on getting large corporations to embrace the CFP marks, by seeking to make CFP certification “the must-have for providing and receiving advice”, in addition to the recent announcement that the CFP Board will soon launch a “Career Center” to help attract more people to the profession and assist them in finding jobs (as well as providing information to firms about how to effectively onboard new planners).
Beating Robos At Their Own Game: Advisors Fight Back (ThinkAdvisor) – This week was the T3 Enterprise conference (an offshoot of the popular advisor technology conference, but targeted specifically for the executives of broker-dealers and other large firms), and the big theme was how technology tools are emerging for advisors that will allow them to compete for online client share and online engagement. Big announcements at the conference including MoneyGuidePro’s launch of MyMoneyGuide, a tool that allows advisors to engage prospective clients with a 90-minute interactive online planning experience hosted live by MoneyGuidePro instructors, who then pass along to advisors the clients that are interested in moving forward with more help. Other companies talking about how their tools help advisors compete with technology included Laserfiche, Jemstep, RiXtrema, and more. A related article on T3 Enterprise from ThinkAdvisor also highlights recent announcements from eMoney Advisor and their new EMX platform, Advizr (a new web-based financial planning software), the next generation of WealthAccess and their account aggregation tools, and more.
How to Stand Out at Any Size: 2014 Growth by Design Study (Eliza De Pardo and Dan Inveen, Investment Advisor) – The FA Insight benchmarking study is now the biggest in the industry based on the number of study participants, and the authors are finding that the key issues firms face seems to vary significantly based on the size (as measured by revenue) of the firm. The evaluation what works and what doesn’t at various firm sizes, the study breaks firms into four categories – Operators ($100k – $500k of revenue), Cultivators ($500k – $1.5M of revenue), Accelerators ($1.5M to $4M of revenue), and Innovators ($4M+ of revenue) – and then compares the “standouts” that have the strongest revenue growth and income generation from the rest. In the Operator category (typically one owner/advisor with a generalist support employee), growth rates tended to be high (albeit from a low base), although notably the best firms in the category were less likely to rely on client referrals (which are actually a very passive approach to new business generation) and more likely to be proactive in trying to generate new business with strategies like building relationships with professional centers of influence. Amongst the Cultivators, the challenge tends to be the capacity of the business, as it grows to a size that even with a client support position and an additional associate advisor, there may be struggles for efficiency as the sheer number of clients gets larger and larger; in fact, the study finds that operational efficiency is the biggest driver of growth for cultivators. By the accelerator phase, the firm is typically much larger again, with multiple advisors, multiple owners, and even dedicated full-time management, and the biggest shift in this phase is that firms tend to hold themselves out as offering more holistic services given the breadth and depth of their team – in other words, standout Cultivators are more likely to position themselves as wealth managers, and offer a wider range of services. In the (largest) Innovator category, the struggle is on how to deliver and implement services consistently, as the sheer number of staff and advisors make it challenging to do so; in fact, the organization can become so complex that instead of enjoying economies of scale, many Innovator firms actually see overhead expenses (as a share of revenue) rise compared to Accelerators, and the standout firms are the ones that best manage this difficulty by having a clear strategic focus in what they’re doing. The bottom line: the challenges that firms face are quite different as the firm grows, which means that what got the firm successfully to where it is now won’t necessarily be what keeps it moving forward from here.
To Ensemble Or Not To Ensemble (Philip Palaveev, Wealth Management) – While the buzz of the industry in recent years has been high-profile acquisition deals (for sometimes very large dollar amounts!), Palaveev notes that the real news lately has been the sheer number of mergers that have been quietly underway, as firm owners band together to seek resources and economies of scale, leverage each others’ skills, manage capacity challenges as they reach a maximum number of clients, and perhaps tackle a succession planning challenge. And there are plenty of advisors out there to merge with, given that more than half of all advisors are either solo practitioners or work within a branch or office but besides shared overhead may as well be working alone (and only 1/3rd of the industry’s advisors work in teams). Yet Palaveev notes that merging together isn’t for everyone, and that many advisors really may prefer to stay solo, especially those who either just know they won’t be able to let go of full control (as surrendering some control is essential in a merger of partners), or who prefer a more flexible lifestyle (than what may be feasible with a partner). Even for those who are ready to merge, Palaveev points out that partnerships are a lot like marriages – there is an important courting process to get to know each other, and rushing too quickly to the altar rarely turns out well. For those who do want to merge, and are considering a potential partner, Palaveev notes several important areas to consider, including: synergy (do the partners bring complementary skills to the table that help one another, like one who’s good at business development and the other who’s good at running the business?); personality (do you really get along well with this person, given that you’re going to be spending a lot of time together!?); and shared vision (if one wants to grow a big business and the other wants a small cozy practice, this isn’t going to end well). Once these issues are resolved, only then should you even get into the details of the merger itself, how to combine together systems and businesses (from which broker-dealer will you use to whose CRM will be retained); be prepared to roll up your sleeves to sort through the complexity.
A Peek Inside Elite Advisor Think Tanks (Chris Latham, Financial Advisor IQ) – In today’s busy world, most advisors probably feel like they don’t have the time and bandwidth to participate in a study group, yet the reality is that many of the biggest advisory firms in the country are the strongest advocates for study groups and use them as “think tanks” for their business. For instance, Brent Brodeski is CEO of Savant Capital Management (with $4.2B of AUM), but still participates in two different study groups, including Zero Alpha Group (ZAG, with 8 member firms managing more than $14B) and also the Alliance for Registered Investment Advisors (aRIA, with $22.2B of AUM). While some might question why the leadership of large national firms would travel to spend together and share secrets with “the competition”, the firms note that it’s this exact environment that helps them to continually push to improve and get better. In addition to just brainstorming about business, some of the largest study groups also publish white papers, use their collective bargaining power to negotiate discounts with vendors, and even operate with their own executive director. Not all study groups are so large or infrastructure-intensive, though; the fundamental key is simply to create an environment that maintains trust and supports transparency, so members can feel open to share and gain constructive but critical feedback.
Short And Sweet (David Lawrence, Financial Advisor) – There is an emerging trend that financial plans – the actual, physical deliverable provided to clients – is getting shorter, in an effort to stop overwhelming clients with the massive document and find some time-savings and efficiency. The key is figuring out how to do so, without sacrificing the underlying quality of the plan. So far, the transition seems to be shifting the planning experience to be more interactive, where the plans are crafted and delivered on the spot, using the software tools, rather than arduously prepared in advance. Solutions include: MoneyGuidePro, which maintains a “Financial Snapshot” to show clients how they’re progressing over time and also a “Play Zone” set of sliders that allow them to manipulate their plan in various scenarios and see what happens; NaviPlan, which has prebuilt presentations to explain key concepts to clients; GoalGamiPro, which has a quick assessment tool to build an initial plan in less than 10 minutes; and Guide Financial, which is focused not on full financial planning analysis but simply on helping clients get an easy and quick snapshot of their financial situation, by pulling data in directly from account providers so it is maintained automatically without any manual data entry.
New Evidence On The Risk Of Requiring Long-Term Care (Leora Friedberg et. Al., Center for Retirement Research) – Understanding the potential risk of needing long-term care assistance, whether in a nursing home, assistance living facility, or as home care, is essential when planning for retirees, yet recent research is raising the question of whether the risk and consequences may actually be overstated. Early models, using data from the 1980s, showed that men and women aged 65 had a 27% and 44% chance (respectively) of ever needing nursing home care, and a more recent study using data from the 1990s and 2000s showed that men and women aged 50 have a 50% and 65% chance (respectively) of ever needing some type of care. However, in digging further into the more recent data, it turns out that while the odds of needing at least some care is high, the average duration may actually be much shorter than is commonly thought, with a relatively high frequency of people needing care, recovering, and then actually returning to the community. The significance of this is that not only might people realistically face less in long-term care costs than has been previously projected, but that if long-term care needs are actually a series of high-probability-but-low-cost occurrences, then long-term care insurance may be a less effective solution than previously thought as well (as insurance is better suited to low-probability high-cost risks, not the opposite!).
IRS Fill In Details Of Once-A-Year IRA Rollover Rule (Sally Schreiber, Journal of Accountancy) – Last week, the IRS issued Announcement 2014-32, which provides further detail on the “new” once-per-year IRA rollover rules since the court decision in the Bobrow case earlier this year forced the IRS to adjust. Previously, the IRS allowed the one-60-day-rollover-per-year rule to be done on an IRA-by-IRA basis, but going forward it will be applied on an aggregate basis across all IRAs. While the IRS had previously said this new rule would apply in 2015, some transition relief has been created for those who have already done rollovers in 2014, and are now trying to figure out what they will (or will not) be permitted to do in 2015. Specifically, the transition rule states that if an IRA made or received a distribution in 2014, that account will be subject to the once-per-year rollover rule in 2015, but the 2014 rollover will not be aggregated against other IRA rollovers that happen in 2015. In other words, if a rollover went from account A to account B in 2014, then no further rollovers can happen in 2015 [within 12 months] for accounts A and B, but someone could still do a rollover from previously-untouched account C into account D. On the other hand, if the rollover from A to B had occurred in 2015, that would be the taxpayer’s rollover for the year, and the account C-to-D rollover would run afoul of the rules. In essence, the IRA aggregation rules taking effect in 2015 mean that rollovers in 2015 and going forward only have to be aggregated with other IRA rollovers that occurred in 2015 but not prior. The IRS also confirmed that the new rollover rule does not apply to trustee-to-trustee transfers, to Roth conversions, or to rollovers between qualified plans and IRAs.
Rising Longevity Will Push Plan Sponsors Further From DB Plans (Mark Miller, Wealth Management) – The Society of Actuaries has released the latest version of the 2014 Mortality Tables and Mortality Improvement Scale, which is used to calculate the funding requirements for defined benefit pension plans. The update is the first since the year 2000, and indicates that American male pension recipients are living an average of 2 years longer than they were in 2000 (females are up 2.4 years of life expectancy). The significance of the new mortality tables is that with longer life expectancies, this means pension plans will now show even greater liabilities on their balance sheets and find themselves even more underfunded (to the tune of needing 4.4% more funding for a 65-year-old male and 5.5% for a 65-year-old female). Also notable is that when the new SOA table makes it more expensive to secure a pensioner’s obligations, that also means the value of a pensioner’s lump sum is higher; accordingly, those eligible for lump-sum distributions may benefit more by waiting until the new tables are adopted by their pension plan over the next few years, while pensions themselves will likely be trying to encourage workers to take their lump sums earlier to reduce their own risk (though notably if interest rates increase while waiting, a loss in lump sum due to a change in the discount rate could more than offset the benefit of the mortality table change). In the coming years, the new SOA tables will be adopted by the IRS as well, which means the calculations for required minimum distributions may eventually become slightly more favorable as well (i.e., the RMD factors will become slightly smaller).
Retirement Planning: Millennials Vs Boomers (Noah Beck, Research Affiliates) – The conventional wisdom for asset allocation, as embodied in today’s target-date funds (TDFs) that already have almost 2/3rds of a trillion dollars, is that Millennials (young adults) with long time horizons should have very aggressive equity exposures, while Baby Boomers (retirees and near-retirees) should be more conservative given their nearer-term need for retirement cash flows. Yet Beck notes that holistically, asset allocation decisions should also incorporate an individual’s human capital – the present value of their future earnings – which may be negligible for near-retirees, but can be quite material for Millennials, and also their guaranteed income streams (e.g., Social Security and pensions) which are relatively small for Millennials (as payments won’t begin for 40+ years!) but are material for Baby Boomers. The significance of this is that Social Security and pensions are rather bond-like in their risk/return characteristics, while a Millennial’s human capital is more stock-like (given its potential volatility, with a risk of bouts of unemployment during recessions). Yet if we include the heavy implied-bond allocation of Social Security and pensions for Baby Boomers, and the implied stock-like allocation of human capital for Millennials, then the complementary portfolio should actually be more aggressive for Baby Boomers and conservative for Millennials! This against-conventional-wisdom outcome is even further emphasized when recognizing that Millennials often have significant debt (that further magnifies the volatility and risk of their personal balance sheet) while Baby Boomers tend to have (relatively) less. In the end, Beck notes that since the value of stock-like human capital naturally declines over time (as the worker ages and approaches retirement), while the value of implied-bond-like-assets such as Social Security rise, the reality may be that the transition from earnings-to-Social-Security-and-pensions is already the natural glidepath for most individuals, and that the portfolios of Millennials and Baby Boomers should actually be quite similar!
The Future Of Client Engagement (Julie Littlechild) – According to research from Advisor Impact, 91% of advisor clients are “satisfied” with their advisors, yet Littlechild points out that satisfied merely gets us to “good”, not to different or great, and while satisfied clients may not leave, they may not be very inclined to refer, either. Instead, Littlechild suggests that ultimately the goal should be to get clients engaged, and that we need to look at what drives client engagement. In turn, focusing on “engagement” can actually change the entire focus of the firm itself; instead of asking what we can offer to clients, it’s about what we can create with clients instead. Some examples of co-creation, borrowing concepts from other industries, include: just as Apple launched Apple Pay to revolutionize the way we pay with credit by focusing on making the process relevant and easy to use and consistent with customer behavior, how could planning be shifted so that when clients think about money issues they have the right information at their fingertips at those exact moments they need it?; and Tim Horton’s (the Canadian donut and coffee chain) recently announced a new campaign for customers to “Help Us Choose Our Next Donut”, and similarly Littlechild asks how advisory firms could have a more structured feedback and co-creation process to refine their services for clients, or what it would be like if advisors offered a menu of services and guided clients through selecting what they need (so they’re a part of choosing a planning service precisely right for their needs). Other concepts of engagement and co-creation that Littlechild suggests include: conduct a “Client 360” where you put yourself through every step of what a client experiences, and see what you think when looking at the whole client experience; engage clients in building the agenda for each meeting before it occurs, to be certain you’re covering what they want to talk about; and use a large screen TV in your conference room to make client planning and investment reviews interactive and collaborative.
The Genius Of Wearing The Same Outfit Every Day (Paul Petrone, LinkedIn) – An interesting commonality shared by both Steve Jobs, Mark Zuckerberg, Homer Simpson, and President Obama, is that they all wear the same outfit every day. Yet the reality is that the same-outfit strategy is not just a sign of laziness or complacency; there are actually some remarkably good reasons to do so. The first is a growing body of research showing that our brains only have the capacity to make so many decisions every day before getting tired, and eliminating even small decisions – like what to wear in the morning – can actually have an impact (President Obama has specifically cited this as a reason for why he only wears gray or blue suits). The second reason for the same-outfit approach was embodied by Steve Jobs – he did it not to preserve brain power, but to establish himself as a brand, and his trademark look of a black turtleneck, blue jeans, and white shoes, made him more memorable and distinctive. So whether it’s preserving brain power to focus on other activities, or a drive for consistent branding, there really is something to be said for wearing the same outfit every day. (Michael’s Note: For those who are wondering, yes these are both reasons for my consistent blue-shirt-black-suit outfit at every conference and speaking engagement. It’s not a coincidence!)
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!