Weekend Reading for Financial Planners (Oct 26-27)

Posted by Michael Kitces on Friday, October 25th, 12:04 pm, 2013 in Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's reading kicks off with three interesting industry articles: the first looks at some recent strong statements from the FPA at its recent FPA Experience conference against the CFP Board, even while the organization renews its commitment to CFP professionals; the second is an interview with Sheryl Garrett of the Garrett Planning Network and how the network and its advisor members continue to evolve; and the third is a prospective look at how the financial services industry is changing in the coming two decades, heavily influenced by its currently low position on the trust/reputation scale after a decade of financial services scandals and debacles.

From there, we have several practice management articles this week, including: the benefits some advisors are finding in expanding their practices to lower net worth clientele; advice from practice management consultant Angie Herbers about how female advisors need to get comfortable being more "selfish" and acting on their own behalf; and how running a financial planning business is like poker, in that if you're sitting at a difficult table, you can always get up and change tables (and change your business model/target clientele).

There are also a few technical articles, including one about how risk tolerance measures could be improved, another looking at some examples of the size of premium assistance tax credit subsidies for those buying health insurance on the exchanges (which, because the rules are based on income only, can apply for clients even with a very high net worth), and a look at how advisors are increasingly using HELOCs again as home equity levels rise and banks become more willing to lend.

We wrap up with three interesting articles: the first looks at how dramatically life expectancy has increased over the past 150 years, though despite significant medical advances it turns out the driving force of the improvement has been our ability to better manage (and avoid) the spread of disease; the second looks at how you can inspire more creativity and build a "culture of healthy debate" in your advisory practice to encourage growth; and the last is a "manifesto" from blogger and personal finance writer Ramit Sethi, who makes the case that people would be better served by focusing less on traditional financial advice around budgets and trimming little expenses, and more on the "Big Wins" that can really meaningfully impact their finances and more importantly, establish healthy financial behaviors. Enjoy the reading!

Weekend reading for October 26th/27th:

Lauren Schadle Shows Mettle As FPA Stakes Out Turf - On RIABiz, industry consultant Tim Welsh reviews the recent FPA Experience conference, and in particular the comments from FPA CEO Lauren Schadle during the 1,600 attendee event. During the opening general session, Schadle reiterated the FPA's renewed effort to return to its "roots" with a laser-like focus on supporting CFP professionals, starting with a new FPA "Research and Practice Institute" that will do research to support how financial planners operate and navigate their businesses, and a soon-to-be-launched website redesign where members will be able to personalize and create dashboards of member benefits (including the potential to connect with consumers through content designed to drive referrals from the public). Perhaps most notable was the fact that while the FPA (re-)committed to hitching its wagon to the CFP Board, it was not afraid to be vocal about criticizing the CFP Board as well, and FPA Board president Michael Branham stated pointedly that "The CFP Board cannot act as both a regulator for CE providers and as a CE provider themselves" given the CFP Board's "potential proposal" earlier this year to begin offering CE credit directly to CFP certificants. Beyond the statements from FPA leadership, the article also highlights the FPA's Major Firms Symposium that was held before the main conference, which included topics ranging from the latest on the fiduciary standard (originally scheduled to feature Phyllis Borzi who had to cancel due to complications from the government shutdown, but instead driven by fiduciary discussions from Ron Rhoades, Skip Schweiss, and Blaine Aiken) to how to replenish the pipeline of aging financial advisors with the next generation (though notably, the conference had strong participation from students of many major financial planning university programs).

Sheryl Garrett's 'Lifestyle' Planning Network - From Financial Planning magazine, this article is an interview with Sheryl Garrett, founder of the Garrett Planning Network that focuses on delivering hourly financial advice to the middle class, following the network's recent annual conference. Garrett emphasizes that because of this target clientele, a lot of the traditional tools and strategies for advisors - typically focused on the high net worth - are irrelevant, and that in practice the greatest focus is just on simple, efficient solutions - not to mention operating the advisory business in a similar manner, given the small size of so many of the 325 Garrett Planning Network practices. On the other hand, because they all run similar practices, the community and message boards for Garrett planners is very active, and members of the community rely on each other for insight about everything from planning ideas to practice management tips; the balance may be especially attractive for the otherwise-no-support nature of running a small, independent practice. These challenges have led many advisors to leave the network, typically after the first 2-3 years; in some cases, it's because the advisors find they don't really enjoy that much entrepreneurial independence after all, and in other situations it's simply because they run out of cash flow before the business grows large enough to support itself (as it can take anywhere from 2 to 5 years to really ramp up). Once they do ramp up, the average compensation of a Garrett advisor is about $75,000/year, with a "lifestyle" practice balanced between time in the business and time outside; those who wish to reach materially higher levels of income generally either put in significantly more time and hours, or figure out how to leverage themselves with additional staff. Ultimately, the "ideal" Garrett planner tend to be more focused on giving advice than doing sales, may not have much marketing training, but have at least some entrepreneurial spark or desire for independence, and wants to serve the middle market without "rejecting" clients for being too small. In the long run, Garrett still hopes the network will grow to 1,500 planners or more, though arguably that still just barely scratches the surface for middle class needs, and is open to a potential merger or partnership to grow the network further but is highly cognizant of the importance of finding another organization with the right philosophical fit.

The Financial Services Industry In 2030 - From the IMCA Monitor magazine, this article by Matt Lynch of Tiburon Strategic Advisors looks at how the world of financial services will change in the coming two decades, following on what has been a relatively difficult decade to start the 21st century that has left a significant "trust gap" where only tobacco and government rank lower in reputation than financial services. The problem has been exacerbated by the fact that in 2012 there were only about 8.6 million millionaires, down from 9.2 million in 2007, which means the high net worth population has been shrinking even as financial services has been trying to grow. These dynamics are overlaid with several other key industry trends, including: a growing expectation of a fiduciary standard (once educated about it, the overwhelming majority of consumers expect it); a less pronounced wealth gap with the ongoing rise of the middle class, but it may be a middle class built more around small and "micro-cap" businesses (built individually or invested directly as private equity) and less around capital markets investing; the coming intergenerational transfer of wealth from Baby Boomers to Gen X and Gen Y which will create new winners and losers for financial services; the rising dominance of women as financial decision-makers (women are not a niche, but they are expected to inherit a whopping 70% of the estimated $41 trillion in intergenerational wealth transfers in the next 40 years); shifting cultural changes as the US becomes more racially diverse (Hispanic population estimated to be 23% of total by 2030 and 30% by 2050); the ongoing rise of technology, driving both self-directed online investing and also online collaboration with advisors; and more. Ultimately, Lynch projects this out to 2030 in one of two scenarios: the first is continued growth for the wealth management business, driven by independent advisors, online tools and advice companies, and international expansion into emerging markets, with profit margins maintained in part by significant consolidation and the rise of mega-firms and there is clearer acknowledgement about what can be commoditized and what cannot; the alternative, that the industry's trust gap continues to widen, shrinking the market for financial advice as consumers increasingly shift towards self-directed solutions, and dissipating the value of many/most firms as they participate in the smaller marketplace. Overall, Lynch projects that fee-based financial advice will increasingly dominate the marketplace, retail banks will continue to lose power, wirehouses will shift to a greater fee orientation, and direct distribution models to consumers leveraged by technology will also continue to grow.

Find a Payoff From Low-Net-Worth Clients - This article from Financial Planning magazine looks at the various ways that advisors are serving lower net worth clients, and how they are justifying the investment of time and effort. For some, the benefit of serving a broad base of clients is the potential for upscale referrals, as even if a particular clients doesn't have a significant net worth, he/she could still refer another clients who does. For others, the goal is to give back to those 'in need' who aren't served much by traditional advisors, or to work with lower net worth clients simply as a matter of conscience, where some less affluent or outright pro bono clients are served to counterbalance the higher minimums and focus on higher net worth from the core business. In these cases, the advisors offered a simplified, low-cost solution to ensure that some value was delivered, often with a heavy reliance on technology and few face-to-face meetings (though again, in some cases a program for lower net worth clientele may bring forth a few higher net worth prospects, too, as even those who appear to have modest means may have a lot more money than initially implied). While many of the offerings are framed as lower income (for the business) or pro bono, though, it's worth noting that some advisors have determined that the potential to serve lower minimums is a genuine opportunity to profitably expand the business franchise; while the dollar amounts may not be huge, they can be enough to generate reasonable income, and sometimes it turns out that clients use the lower account thresholds as a test before coming on board with higher amounts as well.

Embrace Selfishness for Success, Women Advisory Firm Owners - From Investment Advisor magazine, practice management consultant Angie Herbers looks at the role of women in the financial advisory world, and the duality that the "caretaker" role that women stereotypically may fill can make them great financial advisors, but problematic financial advisory firm business owners. Herbers attributes much of the challenge to the greater burdens often placed on women in families, who may come home to more stress of supporting everything from kids with homework to caring for aging parents, not to mention the financial concerns and relationship issues in between. The end result is that many of the female advisors in Herbers' consulting practice end out trying to structure their days around the needs of everyone else, and ultimately feel out of control over their own businesses and lives. To address this, Herbers suggests four key steps: 1) sometimes the best way to regain control is to be less controlling, do less to try to fill every bit of the schedule, and instead allocate more personal time; 2) take a vacation for some additional personal time, at least a week and ideally two, where the focus is not on hanging out with friends, caring for parents, or taking the kids to Disney World, but just on you; 3) take control of the need to plan, recognizing that while it might be appealing to create a lot of control and structure out of fear of uncertainty and chaos, doing so ultimately leads to an even more chaotic schedule controlled entirely by outside forces and the other people being served (because in the end, we can't really control other people); and 4) stop enabling your clients by telling them everything they want to hear so they'll be happy and stay (if you haven't lost one client in the past 10 years, is that really a sign of a good business, or a sign that you're overservicing the clients in your business and holding on too long to problem clients?). While Herbers wrote the article nominally for female advisors, arguably the advice is pretty good for a lot of men, too.

What Financial Planners Can Do To Make Their Table Bigger - From the blog of Dutch financial planner Ronald Sier, this article draws a parallel between running a financial planning business and the game of poker... specifically, the fact that in poker, you can choose what table you're going to play at in the first place and who the competition will be, and similarly in financial planning you can choose how to structure your business and target clients and therefore who the competition will be. Too often, planners choose a target market where they are competing against a crowded group of competitors, forcing a difficult competition of lower prices and higher service/value that challenges the profitability of the firm. Yet the greatest opportunity come by getting away from direct competition and creating something new instead, such as Southwest Airlines that succeeded in part by attracting those who previously travelled by bus or train (not just other passengers on other airlines). or Zappos that figured out how to sell a commoditized product with such a quality customer experience that they run a profitable business despite having a highly competitive commoditized product. By contrast, staying in a brutally competitive environment places the future of the firm at risk if it cannot stay cutting edge, as occurred to Blackberry that has declined by 47% of the smartphone market to just 2% in the span of only four years. In the context of financial services, Sier suggests that the surprise competition - the Apple iPhone that defeated the Blackberry - could be the rise of robo-advisors, as Wealthfront recently passed $400 million of AUM this year. Ultimately, Sier recommends considering three key questions in your own context: 1) what business are you [really] in (are you just selling financial planning, or are you selling status that makes clients feel important?); 2) what do your clients want from you (do they really want a financial plan, or do they just what to know what to do?); and 3) how do your clients want to feel (what feelings can you instill? Assurance? Excitement? Happiness? Meaning? Responsibility?). In the end, do you need to change your [financial planning] table?

A Better Way to Measure Risk Tolerance - From Advisor Perspectives, this article by Joe Tomlinson looks at the challenges and opportunities of measuring risk tolerance. The most common approach is by using questionnaires, though the most commonly used tools have relatively few questions, questions that overlap between risk attitude and financial capacity to absorb losses, and in general seem to provide limited results; some tools, like the FinaMetrica Risk Profiling System seem to do a better job (the 25-question profiling system is now used by planners around the world), though Tomlinson suggests some further enhancements could still be implemented. Many of the recent criticisms on risk tolerance questionnaires focus on the fact that such tools did not always anticipate client behavior through the 2008 bear market, though FinaMetrica itself notes that such actions appear to be driven more by changes in risk perception than shifts in the clients' underlying risk tolerances. On the other hand, emerging brain science suggests that people literally think with a different part of their brains in times of "hot" emotional stress than they do in "cold" rational states, such that what's measured on a questionnaire really may be entirely different than what clients will actually do in the moment (as though Dr. Jekyll fills out the questionnaire but the emotional Mr. Hyde controls the investment decisions). In turn, Tomlinson recommends not only improvements in tolerance questionnaires themselves, but also a better focus on the structure of the client relationship and understanding client characteristics. For instance, more comprehensive client relationships, where a written financial plan and investment policy statement exist, seem to (favorably) impact client investment decisions; similarly, research is finding that clients under cognitive strain, whether due to aging and cognitive decline or as a result of financial stresses like high debt, may be less likely to stick through equity volatility (and knowing these client characteristics could help anticipate problems in advance). Ultimately, Tomlinson suggests that the ideal may be to not only recognize these characteristics and issues of clients and the advisory relationship, but also incorporate the insights back into better tools and questionnaires to more consistently apply the principles and techniques as the research improves.

Subsidy Amounts By Income For The Affordable Care Act (Obamacare) - From the Financial Samurai personal finance blog, this article delves into how individuals (clients) can potentially qualify for premium assistance tax credit subsidies, including potentially those with very high net worth (by assets) but relatively low income. The article includes charts that show at varying levels of income - up to 400% of the Federal Poverty Level, which is as much as $62,000 for a married couple and $94,200 for a family of four - how much of a premium assistance tax credit subsidy a client may be eligible for, which can amount to thousands of dollars in health insurance premium relief. The subsidy is calculated based on the cost of a Silver plan, and then can be applied against a less expensive plan (e.g., bronze) or a more comprehensive one (e.g., gold). On the other hand, it's also notable that out of pocket limits, while capped, may still be relatively high, such as $12,700 for a family of four making $94,000 of income. Because premium assistance tax credits are based on income (technically, adjusted gross income plus a few add-backs for foreign earned income and housing assistance exclusion, tax-exempt interest, and any Social Security benefits not already included in taxation), the author notes that tax-reduction and/or tax-deferral strategies will become more popular, from maxxing out 401(k) and IRA contributions, to using business entities that can maximize (valid) deductions, to using the tax preferences of rental property. Also be certain to check out private online health insurance exchanges, like eHealthInsurance. The bottom line, though - because the premium assistance tax credits are based entirely on income, and not assets, it pays a lot in tax credits to be "wealthy" with high assets but low (adjusted gross) income, than the other way around.

Time for Advisors to Revisit HELOCs? - In Financial Planning magazine, this article discusses how the Home Equity Line of Credit (or HELOC for short) is coming back in vogue, after several years ago where many banks froze the availability of HELOCs or retracted them altogether in the midst of the financial crisis. Yet as the financial health of many lenders improves (and many homeowners have some equity on the table again as prices rise), so too has the availability of HELOCs, and in an environment where cash yields virtually nothing, it has become increasingly appealing to maintain HELOCs as a liquidity reserve rather than carrying more no-return cash. However, lenders are still more restrained this time around; while prior to the financial crisis, a lender might have allowed borrowing up to 90% or 100% of the appraised value, now lending may be capped at only 80% loan-to-value ratios, ensuring that homeowners still have some "skin in the game." Nonetheless, homeowners who can pass the requirements are paying an average interest rate of only 4.47% right now, and the loan interest is potentially deductible on up to $100,000 of debt principal. Be aware that some HELOCs have a minimum draw - i.e., you must take out part of the balance at closing, so the lender can begin to generate some interest - yet by shopping around, it may be possible to find a loan where the entire line of credit can be purely available as a cash flow contingency. Ultimately, though, HELOCs are still being used primarily for shorter-term needs (e.g., 12-18 months), and some planners still prefer cash to avoid the risk that rates may rise at the time the client needs access to the money (which may make the HELOC more expensive on use in the future than it appears to be now). Also, be aware that some HELOCs have an "adverse conditions" clause now, which may allow lenders to limit new borrowing, limit the HELOC, or even demand payment immediately to retire the debt, in the event of a job loss or medical situation, so clients should check their own HELOCs and be aware of whether this is a risk or not. Also, be aware that because HELOCs typically stay on the banks of a book - they are not securitized - the lending requirements vary from one bank to another, which means some banks may be very restrictive in their income or asset requirements, while others may be more liberal (especially important if that's necessary for the client to qualify in the first place).

Why Are You Not Dead Yet? - From Slate, this article provides a fascinating look at how life expectancy has changed over the past 150 years, roughly doubling from age 40 to age 80. In fact, medical technology has advanced so far, it's actually fairly common for most adults to have already gone through at least one medical condition or incident that might have killed them in the past, from a collapsed lung to complications of childbirth (a risk of death for both mother and child) to now-common heart surgery or insulin-treated diabetes or a ruptured appendix. Despite these miracles, though, there's less consensus than you might expect about what's driven changes in life expectancy over the past century and a half, and where it's going from here. It's clear that in the past, there were a wide range of causes of death, including spoiled food, malnutrition, exposure, and injuries, but the worst problems were diseases (though due to inconsistent diagnoses, we aren't even entirely clear which diseases were the primary killers, and certainly had no idea how to treat or defend against them). In fact, estimates are that European diseases like smallpox, measures, and typhus may have killed as much as 95% of the Native American population, and the introduction of slavery to North America - along with the African microbes that brought malaria and yellow fever - brought more disease. These global pandemics continues until around the 1700s, when most of the world's diseases had finally be introduced to all the continents, though the problems persisted into the 1800s as improvements in transportation made diseases more mobile once again (exacerbated by urbanization that brought people and their diseases into close proximity). While we credit many medical advances for solving these issues, though, the reality is that the bulk of life expectancy increases over the past 150 years came in the first half of the time period (e.g., late 1800s and early 1900s), while antibiotics, chemotherapy, and various drug treatments have only really been around since World War II. In fact, the greatest breakthrough may have simply been establishing clean water (separating clean and dirty water, running it through sand and gravel, and ultimately chlorinating it), to which some historians attribute as much as half of all the mortality reductions. A better understanding of the germ theory of disease (and the usefulness of quarantines), improvements in housing (especially helpful to reduce tuberculosis), and better nutrition helped as well, followed eventually by modern era vaccinations. Ironically, though, one of the primary reasons diseases may have become less deadly is simply because they had to do so in order to survive; after all, less deadly strains actually have more time to spread, though an unfortunate mutation can still wreak havoc, as was the case of the influenza pandemic of 1918-19.

How To Build A Culture Of Healthy Debate - This article from the blog of Scott Berkun makes the important point that businesses often get "stuck" in their culture, such that simply having a good manager or good technology alone isn't enough to instill real change... and as a result, businesses can get stuck in an environment where they are unable to get creative, really move forward, generate feedback, and bring about change. Accordingly, the article suggests three interesting tips about how to really drive change in an organization: 1) recognize that because some people are just naturally and instinctively better at challenging assumptions than others, you should make a point of hiring assumption-checking challengers, and in general recognize that it's easier to hire for traits you need than to try to transform a person who doesn't have them into someone that does (but recognize that if you hire people who challenge assumptions, they may be harder to manage, as they're also likely to challenge [your] authority, too!); 2) assess how you respond to having your assumptions challenged (in the end, do you really demonstrate that you're willing to be challenged, or have you created a culture where people find their [constructive] challenges dismissed or worse?); and 3) separate people from their ideas (to have a healthy debate, ideas have to be challenged, but make sure it's really about challenging the ideas, not the people in a manner that they might take personally). Techniques to help implement this approach include having a postmortem/debrief session after every project, encourage an experimental attitude by being willing to regularly try little experiments with your team, and be willing to talk about these ideas and share books that can encourage such creative thinking.

The Big Wins Manifesto - From the blog of Ramit Sethi, this article looks at strategies to help people improve their financial situation, acknowledging that while it's popular to focus on "typical" personal finance advice like setting a budget, cutting back on daily lattes and other spending, and setting goals to achieve, some of the greatest financial success comes not from focusing on those "little" things but instead by trying to focus on the "Big Wins" instead... those few things that, when done right, have a big impact in terms of both finances, and behavior. In essence, the problem is one of prioritization; given that our brains have limited capacity, those who focus on the minutiae of everything inevitably run out of bandwidth, while those with the greatest success use their limited focus to take advantage of high impact strategies; for instance, by focusing less on the $2/day spending cutbacks, and more on how to better negotiate a $10,000 raise. According, Sethi contrasts traditional advice in many areas, with his "Big Wins" approach, such as: stop trying to keep a budget, because most people can't do it anyway (and asking them to try will promptly end any efforts at financial reform); don't focus so much on all the things you have to cut out of spending (who wants to be told what you CAN'T do with your money!?) when you should be focusing on how to earn more (though few effectively teach how to do so!); spend less time shopping around for the best deal, and instead find a good enough deal quickly from a trusted source and move on; back away from prescriptive advice to "do this and do that" that focuses too much on education, and instead try to figure out what's necessary to really change behavior. Ultimately, Sethi summaries his 7 big wins as follows: automate your finances; start investing early; improve your credit score; land your dream job; negotiate a raise; earn money on the side; and negotiate your rent. For those whose lives are very busy and only have limited capacity to spend time on financial issues (i.e., almost everyone!), it's a pretty compelling list!

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!

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Michael E. Kitces

I write about financial planning strategies and practice management ideas, and have created several businesses to help people implement them.

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Out and About

Thursday, October 15th, 2015

*Future of Financial Planning in the Digital Age *Cutting Edge Tax Planning Developments & Opportunities @ FPA Mid-Tennessee

Monday, October 19th, 2015

*Cutting Edge Tax Planning Developments & Opportunities @ IMCA Advanced Wealth Management Conference

Wednesday, October 21st, 2015

*Future of Financial Planning in the Digital Age *Applying Behavioral Finance in your Financial Planning Practice @ FPA Pittsburgh