Enjoy the current installment of "weekend reading for financial planners" – this week’s edition starts off with a big announcement from the CFP Board, that the current Chair of the Board of Directors and two members of the Disciplinary and Ethics Commission are resigning amid an ethics probe. There’s also another article from the CFP Board explaining their current position on when the fiduciary duty does, and does not, apply to CFP certificants. From there, we have an article on how popular investment bear Gary Shilling is remarkably upbeat and bullish about the financial advising business itself, an article about how young millionaires under age 44 have dramatically higher expectations for digital and social media presence from their advisors, an interview with Behavior Gap artist and author Carl Richards, and an interesting technical article about how to plan for clients’ digital assets. We also have a few investment and retirement articles, including an analysis by Wade Pfau of the new "Stand Alone Living Benefit" (SALB) income guarantee for investment accounts, a study by David Blanchett regarding a new metric and approach to measuring the efficacy of various retirement income approaches, and a discussion from Bob Veres about investment advisor Gary Miller and has rather unique and analytical approach to making investment decisions. We wrap up with two very intriguing articles – one a study that finds that the brain is actually physiologically incapable of both empathizing and analyzing at the same time, and the other a discussion about how setting bold, ambitious, unrealistic goals can actually be the best path to success. Enjoy the reading!
Weekend reading for November 3rd/4th:
CFP Board Chairman Resigns Amid Ethics Probe – This article from Investment News covers the breaking news of the week – that CFP Board Chairman Alan Goldfarb has stepped down after an independent special committee formed to investigate claims that Goldfarb had violated the CFP Board’s standards of professional conduct. Two members of the Disciplinary and Ethics Commission are also being investigated, and also resigned, although it is not clear if the matters are directly related. Goldfarb himself has declared that he believes he will ultimately be found innocent, and has published a public comment letter to that effect; nonetheless, he did choose to step down from his chair position, indicating that he believed that separating himself was best for the organization. The incident also echoes the decision of Ron Rhoades to resign as incoming chair of NAPFA a few months ago after a compliance violation (as covered previously in Weekend Reading), although ultimately the matter was resolved with no penalties.
Fiduciary Standard: Moving the Ball Forward – This article on the Financial Planning magazine website from CFP Board CEO Kevin Keller discusses the CFP Board’s current position on the fiduciary standard and when it does, and does not, apply to practitioners – a response to a number of recent blogs, most notably from Ron Rhoades of Scholarly Financial Planner, that have criticized the CFP Board’s current position on fiduciary. In the article, Keller affirms that when the CFP Board implemented its current fiduciary standard back in 2007, the CFP Board did declare that in order to be subject to the fiduciary standard as a CFP certificant, the practitioner has to actually be doing financial planning, and accordingly promulgated guidance about what determines when a financial planning relationship exists and has rolled out educational content for CFP certificants to be certain they understand the rules. In the conclusion, Keller explores the most notable fundamental criticism from Rhoades – that the fiduciary standard should apply at all times simply because someone is a CFP certificant, regardless of whether they’re doing financial planning – although ultimately leaves open the question (without entirely shutting it down either) about whether the CFP Board will actually move the ball in this direction. Rhoades in turn has posted a reply to Keller’s article, which you can see here.
Legendary Bear Shilling Full of ‘Bull’—on Investment Advisors – This article from Advisor One is a review of the latest book "The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth & Deflation" by popular investment bear Gary Shilling. What’s notable about the book is that notwithstanding his overall bearishness, Shilling is decidedly bullish on financial planning and investment advice, stating that "People are deciding that they need help and that ‘do-it-yourself’ hasn’t really worked." Shiller suggests a two-fold benefit – that advisors can keep clients from doing bad things to themselves, and that some may actually bring further investment value to the table. However, Shilling still cautions that not all advisors will excel in this environment; he still notes that "It’s a rare advisor that performs well when things aren’t going all that great."
Young Millionaires, Social Media and Advisors – This article from MillionaireCorner discusses the results of some of their research regarding the behaviors of young millionaires (those younger than age 45) and their advisors. Notably, their results find that "young millionaires are three times more likely than millionaires of all ages to select a financial professional through a website providing detailed information on advisors" although the overall share of those going online to find advisors is still relatively small, and referrals from friends and family members are still the top channel (even for young millionaires). Young millionaires also indicated a preference for advisors who are engaged on social media platforms like Twitter and Facebook, have high expectations for responsiveness to email, and young millionaires are more likely to view their advisors’ blogs as an important source of information. While to some extent these results – with a tilt towards technology – seem to be true across younger people in general, it’s notable in this study that the results seem to hold equally well for young people who are wealthy. After all, most firms would be happy to reach any millionaire, but would be especially pleased to work with one still in his/her 30s or 40s who is still accumulating and won’t retire and start spending for decades!
Five Good Questions for Carl Richards – This article from the blog of Bob Seawright is an interview with Carl Richards of Behavior Gap, the NY Times, and Prasada Capital Management. In the discussion, Seawright poses five interesting questions to Richards. Most notable are Richard’s suggestion that the best way to deal with the behavior gap (where most investors substantially underperform indices) is by asking questions to help them get clearer about what they’re doing or trying to do in the first place; that it’s crucial to help people getting comfortable talking about money in the first place and breaking it down from being a taboo subject (like sex, politics, and religion); that it’s crucial to focus on people’s real lives and not just numbers and spreadsheets; and that we all (us and our clients) could stand to simplify our lives greatly, starting with getting clear about where you really are today and where you want to go.
Planning for Clients’ Digital Assets – This article from the Journal of Financial Planning provides estate planning guidance about how to handle your clients’ digital assets, from accounts at various websites, to social media accounts, and for some businesses the website itself (i.e., the domain name)! The article recommends as a starting step to make an inventory of all online accounts (at least those that may have any value, financial or personal), including login details like usernames and passwords. Notably, without this information, the situation for the personal representative can be very messy; only 5 states actually detail the rules for personal representatives over digital assets, while in the rest the executor may be subject to the overlapping rules of any number of jurisdictions (depending in large part on where the servers holding the information happen to be located!). Of course, this itself is secure information, so the article recommends storing it on a CD or USB drive that itself is encrypted and password protected; hard copies in a safe deposit box are not recommended, as they’re likely to become dated quickly (or if a safe deposit box is used, have a process to keep it updated!). Some online companies are stepping up to help with this need as well. In some situations, where digital assets have significant value, the authors suggest the client might even consider a special trust just to hold those assets, due to the special powers that need to be granted to a trustee to manage the digital assets effectively.
The Next Generation of Income Guarantee Riders: Part 1, The Deferral Phase – This article by Wade Pfau for Advisor Perspectives explores the new RetireOne "Stand Alone Living Benefit" (SALB) from Aria Retirement Solutions (backed by TransAmerica), an investment product intended to provide the benefits of a variable annuity’s so-called "living benefit" riders to guarantee retirement income, but without actually requiring the use of a variable annuity. The basic idea is that the client simply buys the wrapper guarantee, applied directly to an investment account, that provides a certain minimum income guarantee in exchange for a wrapper cost, while still allowing the investor to remain invested in a taxable account (albeit with some allocation restrictions); in the article, Pfau compares this product and strategy to simply buying a (Vanguard) variable annuity with a living benefit rider, or simply owning (less expensive) mutual funds directly, during the accumulation phase (a subsequent article will analyze the distribution phase). The basic conclusion – compared head to head, the SALB guarantee provides limited value, as the costs don’t appear to provide much benefit except in rare circumstances; however, if the investor is willing to invest more aggressively because of the presence of the SALB guarantee, such as going from an unguaranteed 40/60 portfolio to a SALB-protected 70/30 portfolio, the SALB offering often provides a more favorable outcome leading up to retirement.
Retirement-Withdrawal Strategies Quantified – This article by retirement researcher David Blanchett from Morningstar Advisor looks at comparing various retirement withdrawal strategies – such as the safe withdrawal rate approach or the RMD method – with a new metric that Blanchett labels "Withdrawal Efficiency Rate" (or WER for short). The idea of WER is to compare how much a retiree got by using the strategy, compared to what could have been obtained (on average) if the retiree had perfect information at the beginning of retirement about everything (i.e., market returns and time of death) that were going to happen. The results indicate that the best strategy is one where retirement is continuously re-evaluated based on the portfolio value and an updated estimate for longevity every year, which was slightly ahead of the "constant failure" method where the advisor simply runs an updated Monte Carlo analysis and adjusts the spending level to whatever was necessary to maintain a constant risk of failure (e.g., spending is updated so that the Monte Carlo results always have a 10% risk of failure). Notably, the safe withdrawal rate approach fared the worst, in part because the default method doesn’t allow for spending increases when markets perform well, although in practice a continually updated safe withdrawal rate approach (as applied in practice by most planners) would be fairly similar to the constant failure method.
Building Portfolios that Beat their Benchmark: Measuring Nanometers with a Yardstick – This article by Bob Veres on Advisor Perspectives looks at the investment management process of Gary Miller, of Frontier Asset Management, who is unique in both the way that he manages investments and also the metrics that he uses to evaluate them. Miller moves away from "traditional" metrics like Beta and relies instead on style (also known as "factor") analysis, where a fund’s style is evaluated not based on what the fund says it’s going to do, but a regression analysis of what it has actually been doing – in the hopes of identifying which funds really do or do not bring value to the table, with a deeper look than just analyzing often-window-dressed quarterly disclosures. The benefit of this process is that sometimes a fund’s public (and arbitrary) benchmark might make it look like the fund isn’t adding much value, when a deeper style analysis shows that in fact the fund is delivering value once its compared to a better benchmark. Similarly, Miller also looks at refinements of correlation measures to get a more accurate analysis. While in the end, most advisors won’t have the tools to actually do a of this – Miller has been developing his process for decades – it is nonetheless an interesting glimpse of how portfolio analysis is growing more sophisticated, especially given the availability of the computers we have today to help with the heavy lifting.
Brain Can’t Empathize And Analyze At Same Time, New Study – This article from Medical News Today discusses a recent academic study which found that, physiologically, our brains actually cannot empathize and analyze at the same time; they literally run on opposing brain pathways. In some ways, the situation is compared to optical illusions where there our two embedded images, but our brains can only see and perceive one at a time. The implications of the research for certain diseases, from autism to ADHD to schizophrenia are significant, but there are also striking implications for financial planners – most notably, that it’s not possible to be effectively emphathetic and analytical at the same time. This suggests in turn that planners may need to be more cognizant to give each pathway its due for a client, and also that clients will be constrained in their interactions as well!
The Timeless Strategic Value of Unrealistic Goals – From the Harvard Business Review, this article explores the value of setting bold, ambitious, UNrealistic goals for your business, as opposed to the realistic, achievable goals that most consultants and accountants recommend when doing business planning. The fundamental point is that when a goal is realistic, allocating available resources to available opportunities, it may just grow by a little. Conversely, when big stretching unrealistic goals are set, the firm seeks instead to figure out how to expand its resource base to meet its goal – often resulting in far greater growth and success. The key point to the article is that performance is a function of our expectations, since in practice we rarely exceed our own expectations or outperform our own ambition; thus, the key to driving better performance is to set goals that demand better performance to achieve them. While for some financial planners, this makes for an interesting idea for how they run their own businesses or manage their own careers, one wonders if there are principles of this approach that would be relevant for client goal-setting as well?
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!