Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with the huge news that Merrill Lynch is fully pivoting its retirement advisors to become level fee fiduciaries, eschewing commission-based retirement accounts entirely by April of 2017, and redirecting self-directed investors who still wish to trade to its Merrill Edge online brokerage platform or a new “robo” platform called Merrill Edge Guided Investing (though notably Merrill Lynch taxable brokerage accounts may still remain commission-based and are not subject to the new fiduciary rules). Also in the news this week was a decision from the DC Court of Appeals that has made a final ruling in favor of the CFP Board over the Camardas, which should end the ongoing lawsuit once and for all… and with the CFP Board’s recent change to require mandatory arbitration, will likely be the last dispute any CFP certificant ever has with the organization that sees the inside of a courtroom.
From there, we have a few practice management articles specifically on the topic of hiring and retention, including: tips for hiring and retaining Millennial advisors; how to find the “right” team members by focusing first on cultural fit and passion (as long as the minimum technical skills are there); the importance of managing expectations for new employees to retain them going forward; and how “client-centric” firms aiming for high retention may be too client-centric, driving away their best employees (and ultimately damaging the firm’s retention) in the process.
We also have several more technical articles, from a look at how to set “retirement guardrails” to determine when retirees may be spending too much (due to higher spending or poor market returns), to a discussion of how the community property rules interact with retirement accounts (and how a spouse’s community property interest doesn’t automatically ensure he/she can do a spousal rollover after death!), and an overview of how to use the IRS’ Data Retrieval Tool (DRT) now that the 2017 FAFSA season is open.
We wrap up with three interesting articles: the first is a call-to-action for younger planners that despite being the “next generation” of financial planners, the time to lead is now (allowing for more time to build a foundation and enjoy the fruits of their labor!); the second is a look at the idea of practicing “radical generosity”, giving especially deep and thoughtful gifts to clients, prospects, and referral sources, as a way to enhance the relationship; and the last is a look at how despite all the ongoing technological progress, the next 20 years may actually be far less disruptive than the past decades have been, as even “innovative” technology in recent years has actually been more incremental than truly revolutionary, and could actually drive consumers even more towards health care, education, and financial advising sectors, that remain uniquely human in their needs.
Enjoy the “light” reading!
Merrill Lynch to End Commission-Based Options for Retirement Savers (Michael Wursthorn, Wall Street Journal) – This week, Merrill Lynch announced that it is eliminating commission-based retirement accounts for its financial advisors next April, when the new Department of Labor fiduciary rule takes effect; going forward, advisors will only be available for retirement accounts if clients opt for an advisory account that pays an AUM fee. Consumers who wish to keep their commission-based trading accounts will need to shift them to become self-directed trading accounts under Merrill Edge, but would no longer be able to receive advice. The end result of this shift is that Merrill Lynch will actually be able to avoid the onerous Best Interests Contract Exemption (BICE), and instead will qualify as a Level Fee Fiduciary instead. To facilitate smaller retirement accounts that may not meet the minimums for a Merrill Lynch financial advisor, this week Merrill also announced that it will soon be launching “Merrill Edge Guided Investing”, a new online “robo-advisor” solution that will charge a 0.45% annual fee with a $5,000 minimum account size. Also in the news this week was the decision that John Thiel, head of Merrill Lynch Wealth Management, is stepping back from his role, shifting to a newly created role that will focus on strategy, public policy, and regulatory matters, while the former head of Global Wealth and Retirement Solutions, Andy Sieg, will take over Thiel’s former leadership position. The end result of these announcements is that Merrill Lynch appears to be putting itself at the forefront of wirehouses adjusting to the new fiduciary rule, appointing their former head of Retirement Solutions to run all of Wealth Management, becoming a Level Fee fiduciary, shifting brokerage clients to becoming self-directed, and rolling out a hybrid “robo” solution for small accounts. Though notably, it’s important to recognize that the fiduciary rule still only extends to retirement accounts; a Merrill spokesman specifically noted that non-retirement accounts are not impacted by these changes, though Merrill also notes that the transition was not challenging because the new fiduciary rule was only going to impact less than 10% of their $2 trillion in client assets anyway (the rest ostensibly having already been converted to level AUM fees in the past, and suggesting that a total shift to fiduciary for Merrill may be looming in the future as well).
CFP Board Prevails Over Camardas; Court Denies Appeal (Ann Marsh, Financial Planning) – After a battle that has literally lasted for years, this week a Federal Court of Appeals handed the CFP Board its final win in the now-ended court case with the Camardas. In its written opinion, the Appeals Court systematically declined each of the Camardas’ legal arguments, noting that what was arguably “selective enforcement” by the CFP Board still does not constitute a breach of good faith and fair dealing (any more than laxity in enforcing the speed limit is a defense to actually getting a speeding ticket), and that ultimately the CFP Board has a right to enforce its rules according to its contractual agreement with CFP certificants and its established rules and procedures. Notably, though, while the ruling ultimately vindicates the CFP Board’s existing processes and its ability to enforce its standards, the Camarda case also represents the last possible public lawsuit that can ever occur against the CFP Board in the future, as its recently updated Terms and Conditions now include a Mandatory Arbitration agreement that will prevent any CFP certificant from disputing a disciplinary outcome in court going forward. Which means it’s more important than ever for CFP certificants to demand that the CFP Board make any changes to its Exam, Education, Experience, or Ethics requirements with public comment periods in the future (an area where the CFP Board has recently been very weak), because we will only ever have very limited means to dispute outcomes after the fact in the future.
6 Recommendations for Successfully Hiring (and Retaining) Millennials (Cynthia Joyce & Davis Barry, Journal of Financial Planning) – Despite the popular perception that Millennials are quick to jump ship and change employers, research finds that Millennials are actually less likely to change employers than Gen X was at the same age (likely driven at least in part by the amount of student loan debt that so many Millennials are carrying today). Notwithstanding the fact that Millennials are at least somewhat more likely to stick around than the prior generation, adopting good hiring and retention policies in your firm are still crucial to attract and retain quality talent. Suggested recommendations to help facilitate this include: Offer work/life balance (for instance, provide flexible Paid Time Off [PTO] policies rather than traditional sick/vacation time as young healthy Millennials are less likely to get sick anyway, or allow for at least some work-from-home options on some days); clearly define job expectations and growth opportunities (from tuition reimbursement for those who pursue additional education, to painting the picture of what a future career track might look like at the firm); aggressively screen candidates up front to assess compatibility (e.g., working with a corporate psychologist or recruiter to do personality and work style assessments); build a pipeline by creating a strong internship program (as it can be easier to retain an intern and turn them into a full-time employee than trying to hire a new employee from scratch); enhance the firm’s social media presence (as it’s not just for clients and prospects… your future employees can find you there, too!); and be certain to occasionally throw in at least a little bit of fun (from firm-sponsored birthday lunches to happy hours, or occasional sports outings or charity races for co-workers to bond).
Why Finding The Right Team Members Doesn’t Have To Be So Hard (Julie Littlechild, Absolute Engagement) – In the early stages of building an advisory firm, the focus is all on growth, but as success comes, so do new challenges… including building a team, which involves finding the “right” team members that can help to sustain and grow the business. But how do you find the right people… or even define who is “right” in the first place? Littlechild suggests that the starting point is to define the baseline technical skills needed to do the job, along with some assessment of soft skills (particularly for those who will be on the “front lines” with clients). But remember that in the context of an advisory firm, your team is a reflection of the entire firm and your brand, which means it’s equally important that they have the same passion and commitment to work with clients that you do. In turn, this means that the real focus should not just be hiring for skills, but hiring for “fit” – fit with the existing team, with your culture, and with your clientele. So how do you assess this in the first place? Littlechild offers a few exercises. First, try asking each team member to complete the sentences “At <firm name> we work with clients who…” and “The reason we work with those clients is because…” – the answers to both will help you understand if your team is well aligned to the mission of the business. And if your team is well-aligned, Littlechild suggests that they should be a key part of the hiring process, to help you assess whether the next hire will fit in the same way. In addition, it helps to actually try to define your culture – can you truly articulate the key values that the firm holds most dear, to ensure that every new team member espouses that virtue (which also becomes a screening process itself, because those with shared values will be attracted to the business for that reason, while those who are not a fit may helpfully excuse themselves!)?
No Great Expectations (Angie Herbers, Investment Advisor) – Advisory firms often like to hire experienced employees, both because it’s easier to get new people up to speed when they already have the experience to know what they’re doing because they’ve done it before, and also because many firms don’t hire until they absolutely need to (and by then there’s not enough time to train and develop a newer, younger employee). However, Herbers notes that one major challenge of hiring experienced employees is that they tend to have much bigger expectations, particularly when they see the change to your firm as a path to something bigger and better (which is likely the case, or they wouldn’t be leaving where they were previously!). Which means it’s absolutely crucial to set and manage realistic expectations up front. For instance, if you’re hiring an advisor, be clear about whether the advisor will have the autonomy to do things “their way”, or if the requirement is that the advisor has to fully adopt the company’s financial planning philosophy and approach; while there isn’t necessarily a right or wrong answer about which is best, having a mismatch (e.g., the employee advisor expects autonomy but finds out they have to do it the founder’s way) is a recipe for disaster. Similarly, for financial advisor hires, be certain the firm is clear in setting expectations about how much support the advisor will get, how their compensation will be calculated, how performance will be evaluated, and the path for advancement or even partnership. Because the reality is that not setting expectation still means there will be expectations – it’s just that now the expectations will be set in the mind of the employee, and may not align with what the business owner anticipated, setting up future conflicts. And notably, ultimately most of these conversations – about support, training, development, compensation, performance evaluation, and the path for advancement – are important for non-advisor employees as well. In fact, even brand new junior employees coming straight out of school still need to have their expectations managed. While they may have less context for what kinds of expectations they “should” have (which may make some more patient), they could also have overly grandiose and unrealistic expectations (which will prove problematic when they don’t come true).
Who Do You Love: Employees Or Clients? (Mark Tibergien, Investment Advisor) – Most advisory firms proudly proclaim that they are “client-first” in everything they do, as a means to differentiate through service, retain clients and attract referrals, and simply because the clients are the ones who pay the bills. Yet Tibergien points out that in the end, for any advisory firm that goes beyond its solo founder and actually operates as a business, the health of the enterprise depends on its employees. After all, a lack of qualified employees ultimately becomes a lack of capacity that prevents the firm from growing, and can even undermine the ability to service existing clients. Which raises the question: in the end, how much do you really value and show appreciation to your employees? Of course, most firms will say they value their employees as well. But Tibergien sets forth an interesting thought experiment: Imagine that you’re in the middle of a serious conversation with a top employee who is facing challenges, and your biggest client calls… what do you do? Or your top client comes into the office one day and is verbally abusive to your best employee… who do you side with? For many “client-centric” firms, their gut response is automatically “of course the client comes first”, but consider what that communicates to your most valued employees… who might ultimately be responsible for and impact dozens or more of the firm’s clients. So if you’re a firm that has happy clients but unhappy staff, and is struggling with turnover, consider the possibility that a clients-first attitude, at the expense of diminishing the value of employees, could actually be a factor that’s limiting the growth and success of the firm! In fact, if you want to turn the dynamic around, consider working with your employees to rate your clients… and then fire a few of the worst (abusive, disrespectful) clients, which may pay you back far more in employee morale and gratitude than it will ever cost you in lost client revenue!
Guardrails To Prevent Potential Retirement Portfolio Failure (William Klinger, Journal of Financial Planning) – The “typical” approach of retirement research is to set a spending target, and then evaluate how likely that spending plan is to succeed or fail, either using linear retirement projections, historical bootstrapping, or Monte Carlo analysis. However, the reality is that in practice, retirement spending plans don’t just get used consistently until one day the retiree is broke; instead, there will be “early warning signs” where the retiree’s current withdrawal rate begins to rise, signaling a potential problem if the rise is happening too early (i.e., rising when there’s still a substantial time period left for retirement itself). Which means an alternative approach is to set “guardrail” targets for where retirement spending is deviating too far from where it safely should be, and then making mid-course adjustments based on those guardrail targets. For instance, targets might be set at plus-or-minus 10% of the initial withdrawal rate (e.g., if the initial rate was 4%, then targets would be set at 3.6% and 4.4%), and if that floor or ceiling withdrawal rate threshold is reached, the retiree makes a 10% spending change (e.g., cutting spending by 10% if 4.4%-or-higher is reached, and boosting spending by 10% if the rate has fallen below 3.6%). Another approach might be setting guardrails based on the value of the portfolio itself; for instance, making a spending adjustment if the portfolio’s original value falls below 70% of its original balance (which again triggers a 10% spending cut). Ultimately, Klinger tests these “guardrail” approaches with varying thresholds, and generally finds that using +/- 20% of the initial withdrawal rate, or a portfolio balance within 80% of the initial value, to be good “early warning signs” of needing to make spending changes in the first 10-15 years.
Community Property Tax Traps For Retirement Accounts (Ed Slott, Financial Planning) – The standard rule of community property is that assets of one spouse are assets of both, including IRAs (to the extent that contributions were made and/or earnings accrued during the marriage itself). Which means even if an IRA owner forgets to name a surviving community property spouse as a benefit, he/she may still be entitled to 50% of the account. However, under the Internal Revenue Code, for a spouse to roll over an inherited IRA, the spouse must actually be named as the beneficiary. Accordingly, in one recent private letter ruling, a surviving community property spouse who was accidentally dis-inherited was ruled to be entitled to 50% of the IRA, but still couldn’t roll over her 50% share, and instead the money reassigned from the original beneficiary to the surviving spouse was treated as a taxable distribution (and in other situations at best might have been relegated to the less favorable rules for non-spouse beneficiaries of retirement accounts). In the case of a divorce, separating a community property IRA can also trigger a taxable distribution if not done properly. Fortunately, many (but not all) community property states (and the IRA custodians who operate in them) require an IRA owner to get a spouse’s written consent to name someone else as the beneficiary of the IRA; in addition, if a spouse truly intends to waive his/her right to the community property interest in the IRA, it may be a good idea to execute a separate waiver as well, specifically to acknowledge that the community spouse is releasing rights to his/her share of the account (now and in the future).
FAFSA And The IRS Data Retrieval Tool Process (Fred Amrein, EFC Plus) – As of October 1st, the FAFSA process to apply for student financial aid for those matriculating in the fall of 2017 has begun, and this will be the first time the FAFSA is completed using the new “prior-prior year” (PPY) process, which will look all the way back to the 2015 tax year to submit income information from the tax return. The shift in timing is aimed to ease the application process, as in the past, the FAFSA would have used the prior (2016) tax year data for a student going to school in the fall of 2017. Which meant the family would have to submit a preliminary FAFSA in 2016, then use the IRS’ Data Retrieval Tool (DRT) to update the FAFSA after the close of the year when tax numbers were final and filed, and then have a very narrow window to affirm the updated financial aid results before making a decision that spring for school beginning in the fall. Now, however, the DRT can be used up front in the FAFSA process, because families should have already filed their 2015 tax returns as they begin the FAFSA process now (in the fall of 2016) to prepare for school next fall (in 2017). To use the DRT, first the family (both student and parent) must set up their FSA ID, which is the login to the FAFSA’s electronic process, and is necessary to subsequently link the family’s FSA ID accounts to their IRS data (in addition to completing electronic signatures for actual Federal financial aid documents). Notably, to complete the FSA-DRT link, you will still need a physical copy of your 2015 Form 1040, as the link is made by electronically affirming the actual data on the originally filed tax return. Unfortunately, for those who cannot use the DRT link – for instance, due to amended tax returns, still being on extension, or unusually complicated returns – it may still be necessary to file with the college manually, which includes requesting an official Tax Transcript from the IRS (as a mere photocopy of a paper Form 1040 will typically not be enough to verify information). Notably, if you’ve had a substantial change (i.e., drop) in income, such that prior-prior year income is not a realistic reflection, it is still possible to appeal (in what is called a “Professional Judgment” request), though it’s still necessary to link and submit the DRT information first, and then submit the appeal for a valid reason (e.g., job loss or downsizing, separation or divorce, death in the family, etc.).
For Young Planners, The Time To Lead Is Now (Rianka Dorsainvil, Journal of Financial Planning) – While younger planners are often referred to as the “next generation” of financial planners, Dorsainvil notes that the time to lead is not merely in the future, but now, today. Because similar to compound interest, the more that the next generation of advisors get involved in leadership roles today, the more time they will have to build a foundation and enjoy the subsequent fruits of their labor. Notably, “leadership” can be fit into many contexts and roles; it could be volunteering with the FPA’s NexGen community (which has created several new leadership positions, including coordinators for local leadership, social media, membership, and the NexGen Gathering conference), or your local FPA (or NAPFA or other membership association) chapter by offering to help implement the NexGen Toolkit, or simply agreeing to be a mentor for even-newer planners than you (within your own firm, your community, or via programs like the FPA’s Mentor Match. And it’s important to recognize that ultimately, the benefit of getting involved is not just about the volunteer and leadership effort itself, but the potential to advance your career (or find new/better opportunities), to acquire new skill sets you don’t get to exercise in your own firm, establishing new professional relationships, and even potentially gaining new clients as your personal network grows.
A Radical Idea For Gifting To Clients And Prospects (John Bowen, Financial Planning) – Giving gifts to clients and prospects can be a powerful way to boost referrals and retention rates, effectively generating a Return On Investment (ROI) on giving. The strategy works because of what research (most cited via Robert Cialdini’s “Influence: The Psychology of Persuasion”) has dubbed the “reciprocity rule” – that when someone does something for us, we often feel obliged to do something for them in return. In turn, Bowen suggests not only being a giver, but a form of “radical generosity” developed by John Ruhlin in his book “Giftology”. The idea of radical generosity is to not just send holiday cards or even an especially nice gift basket, but to go above and beyond in providing gifts – not necessarily monetarily, but at least in terms of relevance and sentimentality. Accordingly, Ruhlin espouses 9 key rules for radical gifting, including: Send gifts that are valuable not just to the client but his/her whole family (think gifts that people can enjoy and use frequently, not ones that just add to clutter and take up space); send best-in-class gifts (not just mass-market tchotchkes but customized/specialized solutions); send gifts that are visible (something that would be seen by others and commented [favorably] upon) and that will last (i.e., don’t send food that will be enjoyed but soon forgotten); give at the “wrong” times (e.g., during Memorial Day or Labor Day) when they wouldn’t normally occur, which makes the gift a more memorable event; be targeted in your gifting (obviously you can’t give radically to everyone, but you can to a small subset of top clients and prospects or referrers); make the gift personal to the client, not you (which means watch out for putting your branded logo on everything, that just makes the client feel like a walking billboard ad!); give to the client’s inner circle (i.e., if your client is a business owner, give to his/her partners, too); and set up a schedule to remember to give regularly and not let planned gifts slip through the cracks. (And of course, remember that the value of your gifts should still be within the client gift giving limits sets by your compliance officer, too!)
Why The Next 20 Years Will See A Lot Less Technological Disruption Than The Past 20 (Timothy Lee, Vox) – The popular view of technology, as embodied by Wired co-founder Kevin Kelly in his new book “The Inevitable“, is that the internet is still in its early stages and that “cognifying” everything (adding machine intelligence to everyday objects) will be far more disruptive than anyone realizes. Yet not everyone is convinced. Noted economist Robert Gordon has recently published a new book, entitled “The Rise and Fall of American Growth“, noting that while incremental progress will continue, there’s nothing on the horizon of similar scale to the key productivity breakthroughs of the 20th century, from electricity and cars to indoor plumbing and antibiotics. In fact, many of the core components of the economy, from food and clothing to transportation and health care, have really not substantively changed since the 1970s, and aren’t likely to in the next few decades either. In fact, the slowdown is already evident in some industries, from health care to education, where technology is leveraging some aspects of the consumer interaction, but is fundamentally limited by the fact that much of what the consumer buys is still predicated on a relationship with a human; similarly, RedFin largely failed in replacing real estate agents (even though it was a fraction of their cost), and arguably, the struggling growth of robo-advisors embodies the same dynamic amongst financial advisors as well. In addition, the reality is that even in industries where potential technological change is viewed as “revolutionary”, it’s arguably still more incremental; for instance, food delivery startups make it easier to order takeout, Uber makes it easier to get a cab, and Zenefits provides a cheaper way to manage payroll, but none of those fundamentally changed the transactions of ordering takeout, getting a cab, or managing payroll. In fact, one of the most interesting phenomena today is that our demand for many relationship-businesses is increasing so quickly, it’s outpacing the supply of people, leading to dramatic price increases – health care and education are the two sectors that have experienced the most inflation since 1980, in part because consumers have more money to spend in those areas, as technology scales the cost of manufacturing traditional goods. Which means the boon of technology to free up household dollars (by lowering costs in other areas) may not lead to technology shifting to replace service sectors (like financial advising) next, but instead could drive more consumer spending to those sectors instead (which will be delivered by leveraging technology to serve consumers efficiently)!
I hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think I should highlight in a future column!
In the meantime, if you’re interested in more news and information regarding advisor technology, I’d highly recommend checking out Bill Winterberg’s “FPPad” blog on technology for advisors as well.