Enjoy the current installment of “weekend reading for financial planners” – this week’s reading kicks off with three articles highly critical of the CFP Board. The first is a warning from FPA Board President Michael Branham that the CFP Board’s consideration of becoming a CE provider and competing against the 1,200 CE education providers it regulates is an untenable conflict of interest that could cause “irreparable damage” to the credibility of the CFP marks. The second article is a discussion of the latest CFP Board debacle when it granted amnesty to hundreds of wirehouse brokers who had violated CFP Board rules in their compensation disclosure on the CFP Board’s own website, even while it publicly and privately disciplined other advisors – including former CFP Board Chair Alan Goldfarb – for similar offenses. The third article is from a CFP certificant who works with clients strictly on a fee-only basis, but because of an unrelated ownership interest is not permitted under CFP Board rules to state that he is “fee only” – and declares that if necessary, he will drop his CFP certification rather than cause client confusion by stating he is “commission and fee” when in reality no clients will ever pay any commissions.
From there, we have several practice management articles this week, including one that provides an overview of the 10 types of online investment startups that may impact financial advisors (some favorable, some complementary, and some competitive), a second that provides some coverage of this week’s T3 Enterprise conference for advisor technology, and a third that provides an interesting process about how to craft a client value proposition statement (without all the data, numbers, and target client demographics typical of so many client value propositions).
There are also a few technical articles, including one looking at potential tax law changes that may be coming as a part of the December 13th Congressional budget negotiations (high on the list for planners: potential changes to the favorable payroll tax treatment of S corporation dividends), a second explaining the recent judicial challenge to the premium assistance tax credits that could have a significant “surprise” impact on the Affordable Care Act, and the third providing some excellent advice from 529 guru Joe Hurley about how to properly handle grandparent-owned 529 plans while preserving favorable financial aid treatment for the grandchild/student.
We wrap up with three interesting articles: the first provides a fascinating analogy that compares low- versus high-cost investing to joining gyms that have donut-eating requirements; the second points out that just as planners recognize that financial planning should be about the clients and their goals and not the numbers, financial planners themselves should focus less on numbers-centric business coaches and more on holistic-goal-centric life coaches; and the last provides a humorous look at the so-called “robo advisors” by putting forth a list of 10 questions that consumers can ask to vet their robo-advisor (a riff on the all-too-common “10 questions to ask to vet your financial advisor” articles). Enjoy the reading!
Weekend reading for November 9th/10th:
CFP Board’s Continuing Ed Foray Risks ‘Irreparable Damage’ – This article by Michael Branham, President of the Board of Directors for the Financial Planning Association, calls out the CFP Board on its recent declaration that it was “contemplating” entering the continuing education provider business to help elevate the overall quality of CE in the profession. The fundamental issue is that the CFP Board would be offering CE programs that compete with the nearly 1,200 CE providers which it also regulates, presenting a serious conflict of interest that could threaten the integrity of the designation and ultimately the CFP Board’s mission to serve and protect the public through its marks. Instead, FPA suggests that the proper role for the CFP Board is, as the standards-setting body, to review its CE criteria, make them more stringent if necessary, and otherwise improve enforcement… but not compete against those it regulates. Branham notes that this is the same reason why in most other recognized professions, the body that creates and regulates rules for CE providers does not also become a provider themselves, such as state medical boards, state accountancy boards, and state supreme courts; while the model of certifying body and CE body co-existing is present for some professional certifications, like the CFA, there’s a difference between simply trying to maintain a designation program and actually trying to protect the public by establishing a recognized profession. Ultimately, Branham points out that, given the forces that oppose the creation of a financial planning profession held to a high standard, it would be unwise of the CFP Board to strategically open itself up to conflict-of-interest criticism, especially in the midst of its lobbying around the fiduciary standard itself; protecting the CFP designation and financial planning profession necessitates a very deliberate and risk-averse approach to the role of being the certifying body for CFP professionals, and there is no overwhelming compelling evidence that entering the CE provider marketplace is the only necessary approach. Nonetheless, acknowledging that CE quality clearly does need improvement, Branham also announces that the FPA has formed a “Continuing Education Best Practices Task Force” chaired by former FPA President Dan Moisand, to evaluate the quality and delivery of CE for CFP professionals, and provide further suggestions to the CFP Board for improvement. (For a few starting tips to FPA and CFP Board, I’ve offered up my own suggestions on this issue in the past as well!)
CFP Board’s ‘Fee-Only’ Crackdown – This article from the November print version of Financial Planning magazine provides a good summary and overview of all the recent events surrounding the CFP Board’s controversies on its compensation disclosure rules and its “fee-only” definition. The focal issue was the fact that while under the current rules, advisors at broker-dealers – including wirehouses – are not permitted to call themselves “fee only” simply by virtue of the fact that they’re affiliated with a broker-dealer (regardless of how they actually do business with their clients), hundreds of wirehouse advisors were still listing themselves as fee-only on the CFP Board’s own “Find a CFP Professional” search on its LetsMakeAPlan.org website. When Financial Planning magazine pointed this out in a public article, the CFP Board promptly swept the “fee-only” label off all 8,000 fee-only advisors on its website, inserted “none provided” as their compensation disclosure, and then told all advisors (wirehouse or broker-dealer or otherwise) to re-enter their compensation disclosure. The move also implicitly granted amnesty to the nearly 500 wirehouse advisors who had been in violation of the rules. Yet as critics have pointed out, this “mistake” on compensation disclosure was the same that resulted in former CFP Board Chairman Alan Goldfarb stepping down from leadership and ultimately receiving a public letter of admonition, for stating that he was fee-only even though he had a small 1% ownership interest in a broker-dealer and an otherwise-uncompensated supervisory position (even though none of his clients actually did any commission business). Internal statements for the CFP Board’s Disciplinary and Ethics Commission suggest the CFP Board had been ignoring the problem “forever” and even NAPFA Chairwoman Linda Leitz suggested that while the compensation disclosure reset may have been appropriate, selective punishment is not. Especially since it appears now that Goldfarb was not the only one punished; former disciplinary and ethics commissioner Tina Florence was also privately sanctioned over the compensation disclosure issue because of one questionable sentence describing her compensation on her website, and a third unnamed DEC commissioner had stepped down at the time as well, for arguably similar violations to the wirehouse brokers who were granted amnesty. Notwithstanding the apparently differential treatment, the CFP Board maintains its claim that there is no double standard for enforcement…
Prized Advisor Title: In Trouble – This article by financial planner Rick Kahler expresses some of his concerns regarding the CFP Board’s recently highlighted rules on compensation disclosure, and what it takes to be called a “fee only” advisor. Kahler works with his clients exclusively on a fee-only basis, and holds himself out as such; however, because he has a minority ownership interest in a real estate brokerage and property management firm, from which he occasionally receives dividends, the CFP Board states he must advertise himself as a “fee and commission” planner because he “could” earn a commission for selling real estate, even though he doesn’t actually do so with his clients. Similarly, Kahler highlights another example of a fee-only planner who married a woman who owns a minority interest in her family’s property and causal insurance company, for which she still holds an insurance license but does not even work in the business; nonetheless, because the advisor and spouse have a financial interest in the firm, it is deemed a “related party” by the CFP Board because the couple “could” receive a commission, and therefore the planner must list himself as “fee and commission” even if no clients have ever actually done business with the property and casual company and are never intended to do so. Kahler’s recommended solution – also advocated previously on this blog – is that the CFP Board should be focusing on what clients actually pay, and recognize that if clients do not purchase commission-based products in the first place, the CFP Board should let the planner declare they are fee-only, regardless of whether they own outside companies unrelated to the delivery of their financial planning services or maintain licenses for commissioned products (which in many states are the same license required just to give advice about products as well, even for fee-only planners). Kahler states that while he supports the CFP Board’s efforts to stop abuse of the fee-only term, their current over-extension of the rules just create confusion and devalue the marks; if the CFP Board insists on their interpretation, Kahler states that he would rather honestly advertise his practice as fee-only than keep his CFP marks, and refuses to wrongly brand himself as a fee and commission planner just to keep the designation.
10 Tech Trends That’ll Rattle the Advisory Industry – Industry research firm Corporate Insight recently released a new report entitled “Next-Generation Investing: Online Startups and the Future of Financial Advice” that looks at how various categories of online investment firms may impact advisors; while acknowledging that advisors won’t be replaced completely, especially among high-net-worth clients (in fact, some of the solutions support advisors, drive clients to them, or are simply an alternative way to deliver advice from human financial advisors), Corporate Insight nonetheless predicts that these platforms will have a “measurable effect” on the investment industry. The key categories of platforms include: Algorithm-Based Investment Advice to construct basic portfolios from a simple questionnaire; Trade Mimicking where investors can copy the trades of other investors or professional managers; Low-Cost Online Managed accounts that allow consumers easy and inexpensive access to a diversified portfolio (again based on answers to a simple questionnaire about risk tolerance and goals); Online Financial Advisor Search tools that may help direct interested consumers to advisors; Online-Only Financial Advisors offers ‘traditional’ financial advice with real human beings but engaged in an online format; Online Financial Planning and Budget/Cash Management Tools for consumers who want better self-directed software; Retirement Plan-Specific Advice tools that allow consumers to easily research the quality of their own retirement plan; Customizable ETFs or other baskets of investments; Real Estate Crowdfunding built to offer investors direct ownership in real estate properties; and Tuition Financing Startups that are trying to provide an alternative solution for college funding by facilitating loans directly from investors to students.
Joel Bruckenstein Convenes A Wholesale Version of T3 – This article by Tim Welsh of Nexus Strategy on RIABiz provides a great overview of this week’s “T3 Enterprise” conference, an offshoot of the popular Technology Tools for Today conference hosted by advisor tech gurus Joel Bruckenstein and David Drucker (paired this time with Bill Winterberg as well) but targeting the executives of independent broker-dealers who make software decisions for hundreds or thousands of advisors at a time. The conference drew about 200 attendees between vendors, independent B/D executives, and some venture capital investors, and was intended to be an intimate gathering to make these key connections. Of special note was the Fidelity “innovation station” which showed how technology might seamlessly integrate across mobile devices, computers, and large tabletop touchscreens, supporting everything from more mobile advisors (and client services like remote check deposit) to interactive planning. A big theme of the conference was the continued migration towards the cloud, as Junxure showed off its latest cloud CRM offering (and ProTracker recently launched its newest cloud CRM offering as well!), and new “middleware” providers emerged to help become the software “glue” that integrates together multiple systems. Also present was inStream Solutions, which is shifting from being “just” financial planning software into an entire wealth management “operating system” that brings together financial planning, handling client alerts and distributions, managing workflows, and even an “advisor Wikipedia” to crowd-source solutions for client issues. Other “next big things” from the conference included Vestorly (online content marketing platform), investment research tool YCharts (aiming to be “Bloomberg for advisors”), and the introduction of “widgetization” by Finance Logix, a new kind of software integration approach where graphical “widgets” from one software are embedded into another (e.g., a retirement projection widget embedded into a CRM so the advisor can quickly see how the client is doing on their retirement plan from the CRM itself).
Here’s A Method To Create An Engaging Value Proposition With 6 Simple Questions – From the blog of Dutch financial planner Ronald Sier, this article looks at how financial planners can craft an engaging value proposition for their business and the services they provide, using the “Empathy Map” from consulting firm XPlane. The basic idea is to extend the description of your target clientele and what you do for them beyond just simply demographic characteristics, and delve deeper into their environment, behaviors, concerns, and aspirations. The process is relatively straightforward… envision the prospective target clientele you wish to serve, and then think through the following six questions (writing down answers as you go): 1) What does the client see? (What is the environment of your target client? What does it look like? What friends surround the client? What types of offers is the client already exposed to? What problems does the client encounter?); 2) What does the client hear? (What do friends and spouse talk about? Who/what really influences the client? Which media channels are influential?); 3) What does the client really think and feel? (What’s important to the client that might not be said publicly? What emotions move the client? What keeps the client up at night?); 4) What does the client say and do? (What are the client’s attitudes? What does the client talk about? Are there conflicts between actions and words?); 5) What is the client’s pain? (What are the client’s biggest frustrations? What obstacles stand in the way? Which risks are feared most?); and 6) What does the client gain? (What does the client truly want to achieve, and how is “success” measured?) The ultimate goal is to get a clearer understanding of what really matters from the client’s perspective, so you can know whether the value you provide really solves the client’s problems, whether they’d be willing to pay for it, and how to reach them… and in a much more “emotional” and human approach than just looking at client net worth, demographics, and other hard data.
Stock Options Among Tax Breaks Democrats Target in Budget Talks – With a Congressionally-self-imposed December 13th deadline looming for a budget deal, the lines are starting to be drawn around potential focal points, as the Republicans seek spending cuts and the Democrats suggest some tax revenue raises. Key targets may include some farm subsidies, taxing hedge fund and private equity carried interest as ordinary income instead of long-term capital gains, limiting corporate deductions for “excessive” executive stock options, and ending preferences for corporate jets and subsidies for corporate yachts and vacation homes. Also on the table is a proposal that would require S corporation dividends to be taxed as self-employment income, ending the practice of S corporation owners paying themselves a modest salary and avoiding payroll taxes (including potentially the new 0.9% Medicare surtax on earned income) on the rest. The goal of the Democrats appears to be raising about $70 billion to $100 billion to replace the currently-in-force automatic spending cuts for at least a year or two, though Republicans continue to oppose the revenue-raising provisions.
Judicial Challenge to Premium Tax Credit on Federally Run Exchanges Continues – For those who hadn’t heard, amongst the various challenges to the rollout of the Affordable Care Act is a lawsuit that’s been filed against the Federal government that is seeking to invalidate premium assistance tax credits for those who live in the 36 states with a Federally-run health insurance exchange. The case – Halbig v Sebelius – notes that the original wording of IRC Section 36B(b)(2)(A), which authorizes the tax credits, technically states that it is applied against “the monthly premiums for… qualified health plans offered in the individual market… which were enrolled in through an Exchange established by the State.” In guidance from the IRS, this provision was expanded to apply to both state-created and Federally-facilitated exchanges, but the lawsuit is challenging the IRS on this, and calling for a strict interpretation of the rule, noting that if people in Federally-facilitated-exchange states weren’t eligible for premium assistance tax credits, the employer mandate would not apply (and therefore that the IRS’ expanded regulations are “causing” the employer shared responsibility tax obligations), and also that the individual mandate would not apply to many people as well (as the individual shared responsibility tax does not apply if coverage costs more than 8% of income, which would be extremely common without the premium assistance tax credits). Ultimately, if the plaintiffs prevail in Halbig, it would throw a significant wrench into the works for the implementation of the Affordable Care Act (which is the deliberate intent of the lawsuit); the problem could be fixed by adjusting the appropriate section of the tax code, but given the pressures on Congress at this point it’s not clear that legislation to make the “correction” could be passed. Stay tuned.
Avoiding The Financial-Aid Trap With Grandparent 529s – This article by 529 guru Joe Hurley looks at the potentially devastating financial aid consequences of grandparent-owned 529 plans; while the good news is that grandparent-owned 529 accounts are not reported as assets on the student’s FAFSA at all, the problem is that distributions to the student from a grandparent-owned 529 plan must be included in the student’s income in the following year (which can be even worse, as income counts even more against financial aid than assets do! Accordingly, Hurley suggests four strategies to help mitigate this effect: 1) only take distributions from a grandparent-owned 529 plan after the student has filed the final FAFSA (any distributions taken after January 1st of the student’s junior year are free and clear, as they wouldn’t be reported until the following year, but by then the student will already be a senior and have qualified for whatever aid he/she will get), but realize that this only works if the student otherwise doesn’t need the money for the first 2.5 years of college and that there isn’t so much in the plan it would result in a large leftover balance after the last 1.5 years of college spending; 2) if the 529 plan allows it, have the grandparents change ownership of the 529 plan to the student, which avoids the income impact on the FAFSA but will require the 529 plan to be reported as a FAFSA asset (but under current law, 529 plans are counted as parental assets reducing aid by 5.64% of the account balance, regardless of whether the 529 plan is actually owned by the parent, the student, or a UTMA account for the student); 3) have the grandparents withdraw the money from the account and gift it to the parents and let them pay for college (as long as the student incurs qualified college expenses that year, the distributions are still tax-and-penalty-free!); and 4) have the grandparents take distributions from the 529 plan every year equal to qualified college expenses, hold the money in their own checking account, and then gift it once the student passes January 1 of junior year when there’s no more FAFSA impact to repay the loans (but beware of the annual gift tax exclusion limits and the fact that this may count as a double-gift for the same assets, once to the 529 plan and again to the student directly). Hurley does caution that there is still some risk that financial aid administrators or the IRS may challenge these strategies at some point.
Why Eat (Pay) More Donuts (Money) for the Same Gym Membership (Investment)? – From the blog of financial planner Jon Luskin, this article draws a fascinating analogy to explain the consequences of high-fee investments and the uphill battle they can trigger. Imagine an alternate universe, where gym memberships do not cost money, but instead as a requirement to patronize a gym’s services, management requires everyone who works out there to indulge themselves and eat a few donuts (strange analogy, but bear with for a moment!). Obviously, if you exercise a lot, and the donut requirement is modest, you’ll be able to lose a lot of weight; on the other hand, if the donut requirement is high, you may eat so many that at best all the exercise will just let you break even by the end of the year. So now envision two such gyms, one with a low donut eating requirement of only 5 donuts per year – we’ll call that the Vanguard Group gym – and the other with a higher eating requirement of 150 donuts per year. While it may be fairly easy to lose weight and succeed at the Vanguard gym, it’s going to be a lot more difficult at the second, especially if the second gym has an additional donut eating “load” just to walk in the door every time you want to work out! The end result is that while the Vanguard gym may have a lot of potential to lose weight, with the second gym it may be difficult to avoid gaining weight and moving in the wrong direction! Notably, the second gym may claim credit for the fact that it’s getting people to exercise… but it doesn’t change the fact that with a higher donut requirement, the odds the gym patrons actually progress towards their goals are rather low. Of course, in Luskin’s example the gyms are the same in every other way besides their donut eating requirement – while in practice in the mutual fund world, there may be some further differences between the alternatives available. Nonetheless, it’s an interesting way to illustrate and describe the potential consequences of high-cost investing versus a low-cost (indexing) alternative!
Does Your Practice Need Some Coaching? – This article makes the interesting point that while there are a lot of “business” coaches out there to help financial advisors “succeed” and grow their businesses, there are relatively few that help advisors run a successful business without killing yourself, getting a divorce, losing your soul, or being a terrible parent. As the author Matthew Halloran puts it, the key is that it’s not just about having a business coach, but a life coach; someone who will look at not just the business issues, but also the spiritual, familial, marital, and health issues as well. Halloran suggests that the life coach can be that key confidential confidant, and that the typical way of working with life coaches – via telephone meetings – can actually aid the process, as it may be even easier to talk about what’s troubling you the most when you don’t have to your coach in the eye while discussing something you may be uncomfortable or ashamed about but need to face. While the article is obviously biased – a discussion from a life coach about the importance of having a life coach – Halloran nonetheless makes a compelling point. After all, if we counsel clients that financial planning is about more than just making money but about using that money to achieve goals and find meaning, then shouldn’t we consider our own coaching needs with a similar perspective?
10 Questions Consumers Should Ask When Choosing A Robo-Advisor – From the blog of startup company WealthBase (a Q&A tool aiming to pair consumers in search of financial advice with financial planners to provide it to them), this article provides some tongue-in-cheek advice to consumers about the key issues they should consider to properly vet a “robo-advisor” before hiring one. The questions include: What services do you provide (passive investing with portfolio rebalancing only, or comprehensive financial planning advice?); How many color can you show in your asset allocation pie charts (as the signature tool for robo-advisors to emotionally connect with clients is through colorful displays!); Can we schedule an in-person meeting (or will the robo-advisor insist on merely fitting you into its web-form questions without any conversation to understand the nuances of your real world challenges?); Can you tell me the story behind an investment thesis (being able to tell a story is essential to explaining an investment process, as Warren Buffett illustrates, but can the robo-advisor tell a compelling one?); What is your investment instruction (you might say investment “approach” but that would imply human thinking, decision-making, skills, processes, and a worldly awareness not contained in a robo-advisor algorithm!); Is the algorithm that animates you regulated by any entity (human investment advice is overseen by the SEC, state, and FINRA rules… who regulates the algorithms to protect consumers?); What licenses, credentials, or other certifications do you have (is your robo-advisor a CFR – Certified Financial Robot?); Do you have a clean record (and is there even a way to find out, until FINRA launches “AlgoCheck” to complete their “BrokerCheck” service for humans?!); How much contact do you have with your clients (how will the robo-advisor stay in touch, or communicate with you when markets are tanking?); and Will you adhere to the Three Laws Of Robotics (from Isaac Asimov) to do no harm (and if you are harmed, do you have a robo-lawyer to help you fix the issue?). Ironically, Wealthbase points out at the end that even the fact we’ve decided to call these online services “robo-advisors” acknowledges our human tendency to anthropomorphize and our desire to make anything/everything more human to better connect with it… suggesting that the computers really aren’t about to replace the humans anytime soon! On the other hand, Wealthbase does acknowledge that while the robo-advisors may not replace humans anytime soon, we are clearly adopting more and more technology tools in our world, which means advisors may still face the challenge to “digitize or die” in the foreseeable future.
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 new Bits & Bytes weekly video update on the latest tech news and developments, or read “FPPad Bits And Bytes” on his blog!
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!