Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with the big news that State Farm is pulling the ability of over 12,000 of its insurance agents to sell securities products (mutual funds and variable annuities) next April when the Department of Labor’s fiduciary rule takes effect, implicitly acknowledging their agents are not providing (fiduciary) advice, and redirecting customers to a “self-directed” customer call center instead… a precedent that may or may not be repeated in the coming months as more major firms reveal their DoL fiduciary plans as the April 2017 effective date looms. Also in the news this week was an announcement the Financial Engines, the massive provider of 401(k) managed accounts and retirement investment advice, is pivoting fully into financial planning as it rebrands its 125 Mutual Fund Store branch locations into “Financial Engines Advisor Centers” to provide personal financial advice.
From there, we have several technical articles this week, including a reminder that with open enrollment coming on October 15th it’s a good time to review retirees’ Medicare Part C and Part D plans, a discussion of why it’s so important to ensure that retirement account beneficiary designation forms are up to date (and how it may be impossible to fix a botched stretch IRA after the fact), and a look at all the different ways that long-term care insurance can potentially be deducted for tax purposes (depending on whether it’s purchased directly as an individual, or under various types of business entities).
We also have a series of articles on retirement trends around spending and (continuing to) work, from one study that found we’re materially happier when we have a substantial account balance in a checking or savings account (even if the cash is ‘idle’ and not invested), to another that notes new research studies are finding the ‘traditional’ even spending plan throughout retirement is actually a terrible way to maximize our happiness, how more and more advisors are talking about at least part-time work in “retirement” to help handle today’s low-return environment and the uncertainties of a long retirement time horizon, and a look at whether the growing number of retirees choosing to continue work suggests that perhaps a multi-decade retirement shouldn’t be the goal in the first place and that instead it’s better to simply plan for a series of “Acts” punctuated by “Work Intermissions” instead.
We wrap up with three interesting articles: the first is an article by John Bogle about how the DoL fiduciary rule is here, it’s time to get used to it, and its arrival was really just the inevitable culmination of growing consumerism as businesses increasingly have to respond to consumer demands; the second is a fascinating profile of Robert Moses, who was arguably the most powerful figure in the history of New York City, responsible for building many of its most famous bridges, parkways, and landmarks, and who simultaneously exhibited an incredible Competence to achieve results and terrible personal behaviors that made him widely hated (yet still incredibly successful); and the last is a look at the rising role of technology in financial planning, and how artificial intelligence may be able to help advisors have better conversations and create more engagement with clients… an inevitable future that we’ll eventually get used to, despite the fact that now it still seems a bit “creepy”!
And be certain to check out Bill Winterberg’s “Bits & Bytes” video showing the awards announcements for all the Best In Show winners of the 2016 Orion Fuse hackathon, including Best Work Saving Development from Orchestrate, Best Business Intelligence from industry newcomer Sisense, and the overall Best In Show winner from compliance provider RIA In A Box!
Enjoy the “light” reading!
Weekend reading for September 17th/18th:
State Farm, Citing DOL Fiduciary Rule, Cuts Agents From Mutual Fund And Variable Annuity Sales (Greg Iacurci, Investment News) – This week, State Farm announced that it will eliminate the ability of its insurance agents to sell securities products (including mutual funds and variable annuities), impacting about 12,000 of its agents. Instead, beginning next April of 2017 when the new Department of Labor fiduciary rule takes effect, State Farm customers who want to purchase investment solutions will be sent to a “self-directed” customer call center where representatives will “make information and resources available to customers who will make their own decisions regarding their investments” (though fixed annuities will still be sold directly by State Farm agents). The move is a significant shift for State Farm, which has sold investment products since the early 2000s and manages over $11B in its proprietary mutual funds, though efforts by State Farm to avoid fiduciary duty obligations for its agents is not new (as in 2009, State Farm was one of the few that backed away from the CFP designation after the CFP Board began to require CFP certificants to be fiduciaries as well). More broadly, State Farm’s decision suggests that the DoL fiduciary rule may be successful in re-asserting the dividing line between order-taking salespeople (now in State Farm’s call center) versus actual advisors, and raises the question as to whether other companies with insurance agents and brokerage salespeople will also back away from the fiduciary rule and simply re-focus on being non-advisor salespeople (and more clearly hold out as such). Expect to hear more announcements in the coming months, as large insurance companies and broker-dealers make decisions on their fiduciary path going forward, as the DoL rule and its April 2017 implementation date loom closer.
America’s Biggest 401(k) Adviser Has A Plan To Manage All Of Your Money (Ben Steverman, Bloomberg) – Financial Engines, the largest provider of investment advice into 401(k) plans (and sometimes called the “original robo-advisor” given its automated managed account options), has announced that it’s about to roll out a new personal financial planning service that will be delivered directly to workers at employers’ offices, factories, and retail locations. In other words, Financial Engines is broadening its focus beyond “just” retirement plans, as workers will be assigned their own personal financial advisor at the firm’s new “Financial Engines Advisor Centers” (a rebranding of the roughly 125 physical office locations that Financial Engines obtained in last year’s acquisition of The Mutual Fund Store). And Financial Engines has the potential to rapidly scale up its offering, given a “captive” audience of 10 million workers already using the company’s services through their employers, especially since only about 10% of those workers currently use Financial Engines’ managed accounts service (which nonetheless already gives Financial Engines a whopping 60% market share of all managed 401(k) accounts!). Of course, the question remains as to whether even a firm of Financial Engines’ size and scale can deliver personal financial advice profitably to this segment of workers, and final pricing hasn’t been announced yet, though it’s anticipated to be “from a third to half of the 1.5% to 2% or more” that middle-class Americans pay to other providers (implying pricing around 0.5% to 1%, where the median Financial Engines account is $55,000).
Now Is The Time For An Annual Medicare Check-Up (Katy Votava, Investment News) – The Medicare Annual Enrollment Period starts next month on October 15th, and will remain open through December 7th. While this open enrollment period is most familiar to advisors as the time that clients can add themselves to Medicare if they had previously opted out, it is also a time when clients can re-evaluate the features of their current Medicare coverage and decide if they’d like to switch to another Medicare Part D plan, or change Medicare Part C (Advantage) plans. And the issue of effectively matching Medicare plans to the client is substantial; one estimate is that as many as 90% to 95% of beneficiaries overspend on Medicare costs due to having the wrong Medicare coverage, from having a Part D plan that doesn’t offer the best payments for their particular prescription drug needs, to having relocated and needing a plan with better local coverage options. Accordingly, Votava suggests that it’s a good idea to revisit Medicare plans annually – at a minimum, the Part D plan to see if current (or new) medications are covered at the most favorable rates (as having a medication placed into a higher more expensive drug tier is a common reason to need to switch plans). Other scenarios that can trigger a need to revisit Medicare coverage include major new health conditions diagnosed (that may necessitate visiting new providers), poor customer service from the current plan, a carrier that has discontinued their Medicare plan, or simply because the current plan has crept up its premiums and out-of-pocket and co-insurance or co-pays over time, such that it’s appropriate to shop around for new better-priced coverage. And notably, you may even find that with a client couple, it’s better to put them on different/separate plans, to more precisely match their coverage needs to the available plans. For advisors who aren’t very familiar with the Medicare plan options, consider cultivating a relationship with a local Medicare broker, or check out Eldercare.gov (a Federal government resource that connects people to service providers).
Avoid This Disastrous IRA Blunder (Ed Slott, Financial Planning) – While mistakes happen, it’s especially important to avoid them when it comes to a client’s IRA beneficiary designation forms, because problems discovered after the fact may be impossible to fix and can have multi-million-dollar tax consequences when considering the decades’ worth of tax-deferred growth benefits that can be lost. In particular, if a retirement account is ‘accidentally’ made payable to an estate, it may be impossible to correct the situation if it’s not discovered until after the IRA owner’s death. In fact, in one recent set of private letter rulings, when such a mistake occurred the beneficiaries had to go to court to make the case that the IRA owner “meant” to name certain see-through trusts as the IRA beneficiary instead of his estate; ultimately, the court actually agreed that it was the owner’s intent to name his trusts, but the IRS still insisted on recognizing the original estate beneficiary (which eliminated the ability of the beneficiaries to stretch the IRA over their life expectancy). Ultimately, the mistaken beneficiary designation had occurred because the client’s advisor had changed advisory firms, and in the process a properly updated beneficiary designation form was lost in the shuffle. Which means if you’re an advisor who’s changed firms in the past and brought clients along, it’s probably a good idea to do a thorough review of client beneficiary designations and ensure they’re still accurate. And frankly, that’s realistically a good idea for any advisor to review from time to time!
The Ever-Increasing Tax Deductibility Of LTC Insurance (Tom Riekse, LTCI Partners) – Any individual with long-term care insurance is potentially able to deduct the premiums, though the deductible amount is subject to age-based limits, and that portion of the premium that is deductible can still only be claimed to the extent that it exceeds 10% of AGI (or 7.5% of AGI for 2016 for those who are age 65 or older). Fortunately, though, there are other ways that LTC insurance premiums can potentially be deducted for tax purposes. For instance, employers that can deduct 100% of the premiums paid, though for self-employed business owners, partners of partnerships, and 2%+ owners of S corporations, the deduction is still limited to the age-based thresholds (but is still deducted as self-employed ‘health insurance’ premiums rather than as a medical expense itemized deduction, which eliminates the 10%-of-AGI threshold requirement). In addition, those with Health Savings Accounts can also pay LTC premiums with funds from their account, which by definition means the LTC premium will be paid entirely pre-tax (since the HSA contributions were tax-deductible in the first place). Other tax-preferenced opportunities to buy LTC insurance includes funding it via a 1035 exchange from an existing life insurance or non-qualified annuity policy, and claiming state tax incentives (which includes premium deductibility or even outright tax credits in some states). And of course, remember that as long as it is a “tax-qualified” LTC insurance policy, all benefits will be received tax-free with no limit (though “cash” LTC plans can be taxable to the extent the payments not actually reimbursing for LTC expenses exceed $340/day).
The More Cash People Have, the Happier They Are (Andrew Blackman, Wall Street Journal) – Conventional wisdom that is cash is an ‘idle asset’ that should be invested to maximize long-term wealth. Yet a recent study sent out surveys to bank customers about their happiness, correlated it back to their account balances and bank behaviors, and after controlling for a wide range of other factors, found that having substantial “cash on hand” (the balance of your checking and savings account) is actually a better predictor of life satisfaction than most other financial metrics! Having a substantial bank account balance was more predictive of happiness than increasing income and aggregate wealth, as it appears that having more money in our bank accounts makes us feel more financially secure, leading to an increase in happiness… and the effect held even for a very wealthy person (not just those living paycheck to paycheck). Notably, there is still a diminishing benefit to the effect as account sizes grow (i.e., going from $1 to $1,000 as a cash balance helps more than going from $1,000 to $10,000, etc.). Nonetheless, the point remains that building up a cash balance appears to have a significant psychological benefit, even if it’s not the “rationally optimal” approach.
How to Get More Pleasure Out of Retirement Spending (Shlomo Benartzi, Wall Street Journal) – Research shows that people tend to feel happier when the rewards they get change over time, particularly when they start out low and get progressively higher. Yet most retirement plans are not set up this way; instead, they assume level spending and a consistent lifestyle throughout retirement… or ‘worse’, assume higher spending early on and diminished spending later. Of course, the reality is that for many, retirement itself is meant to be the greater reward that comes at the end of spending nearly 1/3rd of our lives working and saving and accumulating. Nonetheless, the length of retirement still suggests that maintaining a level spending environment will be unsatisfying in the long run; we adapt quickly to our current state, and if we don’t have improvements (changes) to react to, it can become very unsatisfying. In fact, some informal surveys have suggested that many people really would prefer a retirement spending plan that slopes upwards over time (i.e., spending that starts lower in early retirement and increases over time), with only a minority preferring a downward sloping alternative (likely associated with those who fear a shorter life expectancy or looming health declines). Another alternative is to recognize that since we enjoy occasional “spikes” in something – including spending – perhaps a strategy where retirees occasionally enjoy a “luxury summer” (a one-off summer where they travel in first class luxury) would be very psychologically rewarding. One recent Harvard survey found that retirees would be interested in a retirement plan that plans for a “bonus month” of income every year, to enjoy occasional luxuries. Notably, though, one of the greatest challenges with these alternative retirement spending approaches is that now it’s even more complex to figure out which one would be preferred by any particular retiree – which might be facilitated by technology to track our preferences, or perhaps is a conversation that financial advisors could help to facilitate?
Why More Advisers Are Telling Clients Not To Retire (Andrew Welsch, Financial Planning) – It’s becoming increasingly popular to talk to prospective retirees about having a job in retirement, with one recent AARP survey finding 37% of Americans expect to continue working after they “formally” retire. For many, it’s a way to improve the stability of the retirement plan, where even just a little bit of extra income from part-time work in the early retirement years can help reduce portfolio withdrawals (and sequence of return risk) given a potentially multi-decade retirement time period. Especially given a potential low-return environment for stocks, coupled with today’s low bond yields, not to mention children that stay home longer than they used to (even after college), and even the possibility of financially supporting elderly parents too. And for those who haven’t retired yet, working a few more years can actually be an easier way to bridge the retirement gap than trying to save more (which simply may not be feasible). Notably, though, many retirees may not be sure what kind of work they want to do in retirement, or even what types of jobs are available with them; one advisor actually connects retirees to career coaches to help make the decision, and then uses the retirement projections to help show how the job change or part-time “retirement work” is feasible and still improves the retirement situation in the long run. And of course, some clients may find new/different work so personally rewarding, they continue it even after it’s no longer financially “necessary”, too!
Life Intermissions (Mitch Anthony, Financial Advisor) – While the traditional view is that retirement is the ‘rest’ that comes at the end of a career of working, Anthony notes that many people who “retire” end out going back to work again after a year or two of recharging. Which raises the question of whether retirement should really be the goal at all, or if the reality is just that we need occasional “intermissions” for a year or two to fully recharge our batteries. In fact, a recent Age Wave study found that a whopping 52% of retirees are actually just taking a “career intermission” and simply view their current retirement as a pause while they recharge and retool for their next act (which helps to explain why the highest percentage of entrepreneurs today are from the retirement age group!). Though notably, what retirees pursue after their intermission varies greatly; some are “Continuers” who pursue or extend their existing skills and interests, while others are “Adventurers” who seek out entirely new endeavors, and a few are “Searchers” still exploring new options to find the next fit. Ultimately, the timing of these transitions are impacted by many factors, from family to current work engagement (or disengagement), expectations about retirement, health and financial security, and overall happiness. Still, Anthony emphasizes that for more and more retirees, the time it takes to check off all the items on their bucket list is turning out to leave a lot of time left over, and that the future is going to look less like “End work/Begin Retirement” and more like “Act 1/Intermission/Act 2/Intermission/Act 3…” instead. Though be cautious of taking too long of an intermission, or existing work contacts and job connections can disappear or move on, or some job skills and industry acumen can slip, which may make it more difficult to re-engage after the intermission.
Vanguard’s Bogle: Ready Or Not, An Expanded Fiduciary Rule Is Coming (John Bogle, Investment News) – On April 6th of this year, the Department of Labor issued its new fiduciary rule, a principle that Bogle notes he has personally supported for 65 years(!), since he wrote his senior thesis at Princeton in 1951 on “The prime responsibility [of mutual funds] must always be to their shareholders”. Bogle suggests that the ongoing rise of “consumerism”, which is increasingly intolerant of conflicts of interest or even their mere appearance, was the basis for the fiduciary rule finally taking shape. Of course, Bogle acknowledges that actually codifying the concept of fiduciary duty in formal regulations is a challenge, and that the DoL rule is “remarkably complex and detailed” with costs of complying that “are likely to be substantial”. Though notably, the implementation issues are less an issue for registered investment advisers already subject to a fiduciary duty, and more so for stockbrokers who are facing it for the first time; in fact, Bogle suggests that it would be best if the SEC took parallel fiduciary action to the DoL, to more clearly apply a uniform fiduciary standard for both brokers and RIAs, though this may still be a long battle. Still, Bogle suggests that the outcome is inevitable, and paraphrases Adam Smith in saying that “The interest of the investor must be the ultimate end and purpose of our financial system, and the interest of fund distributors ought to be attended to only so far as it may be necessary for promoting that of the investor.”
Robert Moses And The OxyGen Of Pure Competence (Shane Parrish, Farnam Street) – There are a small number of people out there who are extremely Competent, with a capital C. The kind of people who have a strong work ethic, always get things done as asked, usually go “above and beyond” the call of duty, and do it in a reasonable time, coming up with creative solutions as necessary to keep the process moving. Parrish notes that people with this level of Competence become major drivers – “pure oxygen” – that fuel organizations and teams, and tend to rise to the top… even when, sometimes, their other traits are quite negative. For instance, Robert Moses was arguably the most powerful man in the history of New York City, responsible for building a huge number of beaches, bridges, tunnels, highways, parkways, and housing developments (many of which still bear his name), including 7 of the major bridges connecting Manhattan to its boroughs, 416 miles of parkways, and 658 separate playgrounds… and much of it was done during the Great Depression, when most other cities weren’t building anything. Yet the interesting dynamic is that Robert Moses appears to have been one of those people who were Competent with a capital “C”, and with a renowned work ethic… and also was “kind of a bastard” known for not treating others well, with cited personality traits including “verbally abusive, racist, classist, demanding, elitist, difficult, [and] insufferably arrogant”. Which in turn raises striking questions – does Moses’ success suggest that as long as someone is Competent enough, good results can be accomplished despite other character flaws? Or might Moses have been even more celebrated and recognized as a great historical leader, if he had also been more humble, empathetic, fair, and good-tempered? And for those who already have those “soft skills” down, at what point is it time to just focus more Competence and pure hustle to really get ahead?
It’s Not Creepy, It’s The Future (Jason Zweig, Wall Street Journal) – The financial advisor of the future appears increasingly likely to be a combination of half human, half machine. In chess, they are called “centaurs“, where it’s been recognized that a human and computer teamed together seem better than either the best human or the best computer playing alone. And now, the centaur concept appears to be coming into the world of financial planning, where humans and computer capabilities blend together to form a centaur (or “cyborg”) financial advisor. For instance, a human financial advisor can talk with clients and perceive their stress or fear… but only if the advisor and client talk that day, while a computer might parse emails and social media posts to identify a potential problem situation before the advisor is even aware. Similarly, a computer might look at an investor’s history of saving, borrowing, spending, and other behaviors, see how they correlated to economic conditions, and attempt to predict how the individual will likely react to events going forward. Accordingly, a number of companies are now exploring such tools, from “robo-advisor” Wealthfront, to Vanguard’s Personal Advisor Services group that is “exploring a range of possible artificial-intelligence and machine-learning enhancements” to serve clients better. And the IBM Watson wealth management initiative reports that it is being increasingly adopted by firms offered financial advice, to do everything from spotting dissatisfied clients to detecting major changes in life circumstances that might necessitate a conversation. Ultimately, the potential of the technology is to help make financial advice less expensive and more accessible, by enabling human advisors to spend more time at what they excel at: understanding a client’s personal needs and goals, and building a bond of trust.
I hope you enjoy the reading! Please let me know what you think in the comments below, and if there are any articles you think I missed that 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. You can see below his latest Bits & Bytes weekly video update on the latest tech news and developments, or read “FPPad Bits And Bytes” on his blog!