Enjoy the current installment of “weekend reading for financial planners” – this week’s reading kicks off with the latest on the ongoing CFP Board woes, as the organization has now reinstated its “fee-only” search function on its website after resetting the compensation disclosure for all fee-only advisors last week, but in the process has raised the question of whether it was fair to effectively grant “amnesty” to a number of advisors at broker-dealers after publicly sanctioning former chair Alan Goldfarb for a similar offense last year. Also included is the latest analysis from Cerulli, suggesting that the number of advisors will continue to fall in the coming years, attritioning by nearly 10% by 2017 due primarily to the fact that the industry is simply not attracting enough next generation advisors to replace those who are retiring.
From there, we have several financial planning technical articles this week, including a discussion of the ABLE Act that may create 529-style tax-free investment accounts for those who have disabilities (possibly replacing the need for Special Needs Trusts at some point in the future?), a look at the current environment for long-term care insurance, a discussion of some of the challenges of making claims on long-term disability insurance policies (especially for high-income clients), and an overview of the newly launching “SHOP” health insurance exchanges for small businesses and why virtually every small business should participate (especially those that currently don’t offer health insurance at all). There are also two retirement planning articles: the first looks at how Deferred Income Annuities (DIAs) might be even better than immediate annuities as a part of a retiree’s portfolio, and the second examines how holding one year of cash reserves to mitigate transaction costs can slightly improve retirement income sustainability (though a large cash reserve bucket actually reduces retirement success).
There is also a trio of practice management articles: the first looks at how too often, the best thing an advisor can do in their business is nothing, though too often there is a temptation and desire to “do something” even if it’s a bad idea; the second takes a fascinating look at the challenges of succession planning not from the perspective of the founder looking to exit but the successor who has taken over; and the third looks at how to focus an advisory practice on a client’s “Return On Life” (ROL) and in the process provides one of the best descriptions out there of the 5 core value propositions that financial planners bring to the table for their clients.
We wrap up with a nice article on personal productivity that makes the simple point that in the end you should focus on what you can control, which means spending less time setting long-term goals and tracking your accomplishments and more time focusing on the efforts you must take to follow your path to success; not only does focusing on the effort instead of the results better focus your attention on what you can control, but ultimately it can help to sustain motivation in the midst of a difficult environment for the business. Enjoy the reading!
(Editor’s Note: Want to see what I’m reading through the week that didn’t make the cut? Due to popular request, I’ve started a Tumblr page to highlight a longer list of articles that I scan each week that might be of interest. You can follow the Tumblr page here.)
Weekend reading for September 28th/29th:
CFP Board Reinstates Fee-Only Search Function On Its Website – Late last week, the CFP Board removed the ability for consumers to search for a “fee only” advisor from their “Let’s Make A Plan” website for finding a CFP professional. At the same time, the CFP Board issued a “grand reset” of all advisors who had indicated they were “fee only” on the website, reverting their compensation disclosure to “none provided” and inviting all fee-only certificants to re-enter their compensation disclosure (and affirm that it was/is correct and in compliance with current CFP Board guidelines). The removal of the search functionality came after Financial Planning magazine published an article finding 486 advisors at wirehouses who were using the “fee only” label despite the fact that CFP Board’s rules declare that is inappropriate compensation disclosure due to the advisor’s affiliation to a related party (the wirehouse employer) that accepts commissions. While the CFP Board declares this is simply a step taken to ensure that all fee-only advisors are properly disclosing compensation, critics point out that the decision to reset the advisors’ compensation disclosures without taking enforcement action amounts to granting amnesty to a large swath of advisors, despite the fact that Alan Goldfarb, Tina Florence, and at least one other DEC member were privately or publicly censured for what they claim were similar offenses and without the opportunity to just correct their website disclosures. In fact, given the disparate treatment, some are even calling on the CFP Board to issue a public apologize to Goldfarb in particular.
Next-Gen Advisor Crisis: Numbers to Shrink by 2017, Cerulli Says – The latest industry projections are out from Cerulli Associates, and the outlook isn’t good: Cerulli believes that by 2017, the number of advisors will decline by 25,000, down to just over 280,000, due primarily to the ongoing retirement of existing advisors (and to a small extent, trimming of advisors with low production from major firms) and the simple fact that the industry is not attracting enough next generation talent to replace those who are leaving. Cerulli finds that the advisor headcount has already declined by about 32,000 advisors from the peak in 2005, and that ongoing and future losses are accruing primarily from the wirehouse, independent broker-dealer, bank, and regional firm channels, while the RIA and dual-registered channels continue to grow (although combined they amount to only about 15% of the advisor total. In fact, the report finds that while many advisors desire a pure fee-only business, and the allure of independence, autonomy, flexibility, and ownership continues to support RIA growth, it’s the hybrid advisor environment with a mix of fees and commissions that appears to be the most rapid-growing channel.
Coming Soon To A State Near You: Tax-Free Investment Accounts For Those With Disabilities – From the blog of 529 guru Joe Hurley, this article looks at the Achieving a Better Life Experience (ABLE) Act currently winding its way through Congress. The idea of the ABLE Act is to allow states to create 529-style investment accounts that would allow tax-deferred growth and ultimately tax-free distributions if the funds are used to support an individual with disabilities. Qualified expenses would include education, housing, transportation, employment support, health and wellness, and more, as long as the beneficiary is receiving supplemental security income payments or disability benefits under the Social Security program (or if the beneficiary is blind, or has certain other severe functional limitations). The ABLE Act would use the 529 plan framework in part because the administrative framework and rules are already established, making it easier to implement the new style of accounts, though it’s not entirely clear if/whether all states would immediately offer the new accounts if the law comes to pass. For the time being, the legislation has not been passed yet, but the article suggests that it has gained substantial momentum with a large number of co-sponsors on both the House and Senate versions, so stay tuned for further developments later in 2013 or sometime in 2014! (Michael’s Note: It also remains unclear how such accounts would impact aid for disabled clients, although given the eligible requirements are tied to Social Security definitions of disability, it seems likely that the accounts would be allowed to supplement disabled individuals without disqualifying them from Federal and state aid, which means the new ABLE accounts could ultimately become a replacement for many Special Needs Trusts.)
Pitfalls Of Long-Term Care Insurance Products – This article provides an interesting overview of the current environment for long-term care insurance, and some of its ongoing challenges. According to the Centers for Medicare and Medicaid Services, almost 70% of people aged 65 can expect to eventually require some level of long-term care need, and Genworth estimates the median cost for a private nursing home is over $80,000/year now; accordingly, a UBS survey finds the cost of providing long-term care to be one of the top two concerns for investors with over $250,000 of assets, and fear seems to be the top driver of long-term care insurance purchases. Nonetheless, for an insurance product that’s been around for more than two decades, the evolution has not been towards wider reach and more stability, but instead significant financial instability of the providers, exploding premiums, different policy terms, tighter qualification standards, and more. As a result, long-term care insurance policy sales seem to have plateaued, and may even be starting to decline, despite the explosion of baby boomers reaching an age they would need the coverage.; overall, about 7 million individuals having LTC insurance, including about 12% of Americans over age 65, but that’s still a tiny amount of coverage given estimates that more than 2/3rds of them may ultimately need care. The challenges for products have been a combination of underestimating the rising pace of health care costs, overestimating the rate at which policies would lapse, and overestimating the rate of return insurance companies will be able to earn on their investments; insurance companies have sought some staggering premium increases, yet the policies were so underpriced it still hasn’t staunched the red ink, especially given that states often approve less of an increase than carriers request. Given these misjudgments, the number of LTC carriers has dropped from over a hundred to just about two dozen key players. Despite the woes, though, most advisors still seem to agree that some coverage is better than none, and continue to consider long-term care insurance or some of the more recent hybrid LTC policies.
Got A Disability? Here’s How to Get Benefits – Just as long-term care insurance has experienced some claims woes over the years, so too has long-term disability insurance, and as a result disability policies often have a great deal of “fine print” that advisors and clients must navigate and understand. Key issues include whether the policy offers residual coverage that pays benefits for a partial-but-not-total disability, given that in professional services, it’s common that the individual might still be able to do some of their job responsibilities, albeit not all of them. In fact, the article suggests that higher income professionals might turn to a lawyer as soon as they anticipate a claim, to ensure that they can maximize their claims, given the dollar amounts involved, especially since engaging in part-time job responsibilities while a claim is ongoing can actually hurt the success of the claim. Ironically, in the past insurers often granted claims quickly and then tried to litigate later if there was an issue, but now in an attempt to be less litigious the insurers are scrutinizing claims much more severely at the time of claim before beginning payments in the first place. s a result, a claims process can last about four months before payments even begin, especially for professionals and business owners whose financial complexity make it less clear about what the appropriate claim amount should even be in the first place (not to mention medically qualifying). Ultimately, the article suggests that given the current landscape, and varying treatment of companies, it’s especially important for high-income clients to get coverage from a specialist, and to work with a broker that can shop coverage amongst carriers. Also, high income individuals should get their individual coverage first, and add group coverage later, not only because individual policies often have better features, but because individual coverage may be limited in the first place if a group policy is already in place.
Why Every Small Employer Should Sign Up For Obamacare’s SHOP Exchange – From her Forbes blog, this article by financial planner and doctor Carolyn McClanahan looks at the coming Small Business Health Options (or “SHOP”) health insurance exchanges for small businesses, which are intended as a health insurance online marketplace for small businesses with fewer than 50 employees. The original intention was to have multiple insurance options available for employees to choose, where the employer would be able to make a single payment to the exchange and the exchange would then route premiums to the appropriate insurers based on the employees’ choices (much easier than one small business contracting with multiple insurers one employee at a time!). Due to implementation delays, most states will only have one option available in the SHOP exchange in 2014, with more options rolling out in 2015 (and employers with up to 100 employees gaining access in 2016). Notwithstanding these limitations, McClanahan suggests that all small businesses should still aim to participate in the SHOP exchange, based on her reading through the Health Insurance Navigator’s Manual from CMS, because it allows employers to provide access to health insurance for their employees without being required to contribute to the premiums. By contrast, in many/most states, insurers won’t even offer coverage to small groups unless the employer pays a significant portion of the coverage, to try to ensure employee participation. With the SHOP exchange, no employer premiums are required (though employers can still contribute up to 100% of premiums if they wish); however, because premiums are paid through the employer, they’re still paid entirely with pre-tax dollars (by comparison, if the employee just paid 100% of their coverage on their own, their tax treatment would be limited to the mediocre itemized deduction for medical expenses with the 10%-of-AGI floor), which makes it a nice option to offer to employees, especially for employers who weren’t already offering coverage. However, it’s notable that if employees are paying 100% of their premiums anyway, and are below 400% of the Federal poverty level, they may wish to opt out of the SHOP exchange and purchase coverage on the individual exchange to qualify for the premium assistance tax credits. It’s also notable that if the small business pays at least 50% of the premium, and has fewer than 25 employees who average less than $50,000/year in wages, the employer is also eligible for a small business health insurance tax credit.
Why Retirees Should Choose DIAs Over SPIAs – On Advisor Perspectives, retirement researcher Wade Pfau looks at the emerging crop of “Deferred Income Annuities” (or DIAs), which are similar to Single Premium Immediate Annuities (SPIAs) except that while the payments from a SPIA typically begin immediately and continue for life, the payments from DIAs may not begin for years or decades to come (but continue for life thereafter). While some clients may be concerned that the payments don’t begin for a long time, the upside of the arrangement is that the cost of guaranteed income for life starting at a distant point is much less costly and expensive. For instance, securing $40,000/year from a $1,000,000 portfolio with a SPIA might require nearly 70% of the portfolio to be annuitized, but producing $60,614/year starting in 20 years (which is $40,000/year adjusted for 2.1% inflation) costs only 18% of the portfolio. Unfortunately, though, the caveat is that the advisor must “guess” the amount of income that is desired to begin years from now, and runs the risk that if inflation turns out to be higher than expected, the purchasing power of that income will be less than desired when the time comes (although some inflation-adjusted DIAs exist, the inflation adjustments only begin after the payments actually start). Nonetheless, the reality is that purchasing power erosion is a problem with SPIAs as well, and while Pfau found in the past that combinations of stocks and SPIAs can produce superior retirement income results to just stock/bond portfolios, using stocks and DIAs appears to be even more efficient, particularly in the range of a 10-20 year deferral period (for a 65-year-old starting retiree).
The Benefits Of A Cash Reserve Strategy In Retirement Distribution Planning – This research article by Shaun Pfeiffer, John Salter, and Harold Evensky in the Journal of Financial Planning looks at how a 1-year cash reserve strategy can help to increase a client’s sustainable retirement income. The basic idea is fairly straightforward: having a cash reserve to draw upon throughout the year can potentially smooth volatility (avoiding “reverse” dollar cost averaging of systematic liquidations) and mitigate the detrimental impact of taxes and transaction costs (not to mention behavioral/psychological advantages for the client). Accordingly, the research evaluates an ongoing monthly systematic withdrawal strategy against a one-year cash reserve approach where volatility, taxes, and transaction costs are incrementally introduced to the analysis to test the impact of each. The cash reserve is used for ongoing spending and is only replenished where either it is depleted down to only 2 months’ worth of spending, or if there is otherwise a need to rebalance and at least one of the asset classes’ prior year returns is positive (if the prior-year return conditions aren’t met, the portfolio is still rebalanced, but the cash reserve is not replenished). The results find that when taxes and transaction costs are ignored, the cash reserve strategy is very slightly inferior to just taking systematic monthly withdrawals, consistent with prior research that has shown how “buffer zone” strategies with large cash reserves reduce retirement success due to the return drag of holding so much cash. However, where transaction costs are included (the study assumes $30 per transaction and a $200,000 account), the survival rate of the portfolio increases by about 5% (from a 70.8% to 75.7% probability of success using their return assumptions), and the improvement is marginally better (about 6% improvement in success rates) when taxation of brokerage accounts is incorporated. The bottom line: using ongoing cash reserves can slightly reduce returns and reduce probabilities of success, but if holding a one-year cash reserve sufficiently reduces transaction costs enough, the benefits of the fewer transactions outweigh the impact of the cash drag. However, the larger the portfolio relative to the transaction costs, the less the benefit, and if the cash reserve is too large (e.g., 2 years instead of 1) the drag is still too great to add value.
The Wisdom of Doing Nothing: 4 Scenarios for Advisors to Consider – From the ThinkAdvisor blog, this article by practice management consultant Angie Herbers makes the simple point that while many business owners equate “doing something” with progress, sometimes the best action is simply to do nothing and let everything continue as is (at least for the time being). Of course, this is often difficult for us, as it’s human nature to want to do something, whether it’s writing, building, designing, fixing, buying, selling, etc. Nonetheless, Herbers notes four classic examples of where an advisor doing nothing might have been better off, whether it’s doing nothing for a while and taking time about making a decision. For instance, do you really need to fire that employee, or take time to recognize that perhaps the issue is one of training or a poorly structured job description? Similarly, Herbers notes that not only do advisors often get into trouble by firing too quickly when a mere modification to the job/situation would have solved it, but similarly advisors are often too quick to hire employees when they feel they’re in crisis mode rather than entering into a slower, more strategic approach to the hiring process and addressing business needs. Having a quick trigger finger can also be an issue for advisors when a new project/venture isn’t producing as anticipated; does it really need to have the plug pulled, or does it just need more time to mature and some focus on what’s working and what’s not to adjust and fix it, rather than just ending it? And if a lot of changes have been occurring, Herbers provides a good suggestion that after a lot of change there should be a quiet period to allow your staff the time to adopt those changes and turn them into business as usual; in other words, a quiet time in the firm doesn’t always mean it’s time to take on something new, as sometimes it’s just time to finish assimilating the change that’s already been underway.
The Key Succession Issues for an Advisory Practice – As the average age of the advisor creeps closer and closer to the traditional retirement age, succession planning is becoming an increasing discussion focus for advisors, according to industry commentator Bob Veres and the conversations at his recent Insider’s Forum conference. Veres notes that most of the conversations around succession planning are aimed at the founder generation looking to exit, from “how to find/select a successor” to “how to train them” to how much equity should be sold to them and at what pace and price. However, one of the most interesting sessions Veres highlights from the Forum was one that looked at the issue from the successor’s perspective, which found that deal terms, equity sharing, and valuation were actually not the biggest challenges at all. Instead, the biggest issue is what one successor calls “Founderitis” or “Founder Syndrome” where the personal identity of the founder is so tied to the business and being the authority figure there, that the founder has real trouble separating themselves from the business and its leadership. The end result is that when the future successor tries to make suggestions for improvements, they often fall on deaf ears, and overall one of the greatest transitional challenges for successors is how to implement their desired changes to the firm while still respecting those who built the company in the first place (and not implying that prior decisions were “wrong”). Ironically, the problem can actually get worse as the founder begins to transition out, and often goes through an existential crisis trying to re-create an identity for themselves separate from and outside of the business. Beyond the “Founderitis” issue, redefining job descriptions for founders can also complicate decisions about compensation, and it becomes crucial to delineate the difference between compensation/returns for ownership (i.e., profit distributions) from returns on labor (i.e., salary/bonuses for services rendered). Other challenges include recognizing the fact that the path for successors today is different than for firm owners years or decades ago (i.e., today’s successors might not go through the same “rites of passage” of veteran advisors, which can create resentment and tension), and differences in beliefs about what clients perceive (e.g., veteran advisors often viewed the big financial plan binder as the ‘value’ while younger advisors sometimes take for granted that the work product is the advice, not the binder of analysis). Ultimately, the panelists from Veres’ session noted that financial issues have their share of challenges, too; simply put, many owners still seem to be putting too high a price on what ultimately is an internal sale to preserve the firm’s legacy, and shouldn’t be viewed (or priced) as a sale to maximize dollar value. Ultimately, though, the biggest issue remains that no succession plan is going to go very smoothly if the founder who is exiting isn’t really ready to start giving up at least some control (but as a successor, be careful about trying to kick the founder out of the door and take control too quickly).
Creating An ROL-Centered Practice – From the Journal of Financial Planning, this article from Mitch Anthony looks at how advisors can create a “Return On Life” (ROL) practice. The idea is to recognize not only that financial planning is an ongoing, living, breathing process and not just a one-time event, but also to understand ultimately it’s not about the money, but about addressing individualized life needs in the context of money. Anthony suggests that accordingly, planners should focus on five core values (and value propositions) they can articulate to clients: Organization (helping to bring order to clients’ lives); Objectivity (providing untainted perspectives that lead to suitable and rational money decisions): Proactivity (helping clients anticipate life transitions and prepare financially); Accountability (helping clients follow through on their commitments); and Partnership (helping clients make decisions that move them forward to the best life possible with the money they have). In the article, Anthony proceeds to provide some further details and examples of how each of these core values and principles might be applied, but even at a high level this is one of the best articulations I’ve seen of the core value propositions that financial planners bring to the table for their clients!
Work Happiness Secret: Track Your Efforts, Not Your Accomplishments – Though written in the context of writers and bloggers, this article has remarkable relevance for financial planners or anyone trying to build a business, who is trying to set goals and track them. The key point of the article is that, rather than celebrating accomplishments, the better and happier path is to track effort instead. In part, this is simply because the reality is that the only thing you can really control is yourself and your efforts, and it doesn’t do a lot of good to track and obsess and measure things outside of your control. But the reason that tracking effort is also important is because it’s more incremental; if you set a 5-year goal and tracked accordingly, you’d probably give up before the first year was even over because the goal and its achievement seems so far away. And even if you reach the goal, you run the risk that there’s so much focus and stress on the goal that you might end out resenting it, or alternatively just finding that the end point isn’t nearly as joyous as it was built up to be in your head. The article wraps up with an especially pertinent example to make the point. If you just measure new clients you’ve gotten, you might become depressed and unmotivated if you go several months and only land one new client; by contrast, if you track how many potential prospects you try to pitch, you can celebrate an increase in how many prospects you’ve approached, how your presentations are improving, and recognize that you may be making significant incremental improvement (and stay motivated) even if the (short-term) results haven’t materialized (yet). Conversely, if you’re having significant success, you might stop once you reach the goal instead of continuing to focus on the effort, which means setting goals could actually limit success rather than leading to it. The bottom line: regular efforts may lead to accomplishments, but that doesn’t mean you should focus on the accomplishments; instead, focus on the efforts.
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!