Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with the big industry news that the CFP Board has stated it will “affirmatively oppose” any states that attempt to regulate financial planning, in light of the potential cost and regulatory patchwork that could otherwise emerge with different states that have different standards… but without actually setting forth what the organization thinks the ideal Federal regulation of financial planning would look like, and setting the CFP Board at odds with the Financial Planning Association, which has spent years building and deepening its state-level advocacy relationships and capabilities.
Also in the news this week were several other articles about the CFP Board, including the kick-off of the CFP Board’s public forums discussing the new Standards of Conduct to take effect next October of 2019 (and what CFP certificants want in terms of education, support, or simply clarification regarding those rules between now and then), and another article questioning whether the CFP Board has spent too much in time and resources promoting the high standards of the marks and not enough actually enforcing those standards to clean up bad actors (though the CFP Board indicates that it plans to enforce more effectively once the new standards take effect next year).
From there, we have several articles around cash flow and budgeting strategies with clients, including one on how to help clients better track and categorize their spending (based not on wants versus needs to determine what’s essential and what’s discretionary, but simply by helping them reflect on what they spent that actually brought them enjoyment, and what they subsequently regretted, and focusing there first to figure out what to cut), a second on how retirees might plan their retirement expenses based not on their estimated spending habits in retirement but instead based on how they plan to spend their time in retirement (and then figure out what those lifestyle activities will cost), and the last exploring what it really means to be “middle class” (and the challenges in seeing high-income households as “middle class” even though they work in a high-cost-of-living area that means their dollars really don’t go very far).
We also have a few additional articles around credit cards and borrowing, including a look at whether it’s worthwhile to have all clients freeze their credit reports now that it’s free (by national law) from all three major credit bureaus, the prospective benefits of “credit card churning” to rack up travel points with new-card bonuses, and why parents with college-aged children should be filling out the FAFSA even if they don’t think they’ll be eligible for financial aid (because many discover they actually were eligible after the fact, as even some merit-based aid programs also require a FAFSA to be filed!).
We wrap up with three interesting articles, all around the theme of building relationships (with friends, or with clients): the first looks at how the single greatest driver to turning an acquaintance into a friend and then ultimately a confidant is simply spending enough time (which could amount to dozens or hundreds of hours) to really deepen the relationship; the second offers up some better questions besides “What Do You Do?” to more quickly build rapport with someone you’re meeting the first time (in an effort to create more “multiplex” ties beyond just the context of work); and the last looks at what it really takes to create a powerful mentor relationship, which is about more than just finding someone who wants to mentor you, but finding someone who is just far enough ahead of you on the journey to be able to provide insight about what comes next, but is close enough to where you are now to still remember what it was like to be there, too.
Enjoy the “light” reading!
CFP Board Opposes State Regulation Of Financial Planning Process (Mark Schoeff, Investment News) – This week, the CFP Board issued a formal statement that, as momentum builds for potential fiduciary regulation at the state level, the organization will “affirmatively oppose” any state regulation of financial planners. The primary reason the CFP Board states for opposing state regulation is simply that, in a world where CFP professionals increasingly serve clients across state lines, it can quickly become costly and burdensome to comply with multiple overlapping (and rarely ever uniform) state regulatory requirements… even as a recent survey of CFP certificants found that in fact, only 13% do support state regulation (likely because so many financial advisors have already had frustrating experiences working with clients across multiple state rules and regulations). Instead, to the extent that financial planning ultimately sees more regulation, the CFP Board suggests that Federal regulation – which would be more uniform by virtue of spanning across all 50 states – is the better path to go. However, the CFP Board also failed to institute substantive regulatory reform after the financial crisis in the Dodd-Frank legislation (when there was public interest in regulatory reform), and at this point it’s not clear if or when there will be any new momentum for Federal regulation of financial planning in the foreseeable future, nor did the CFP Board actually provide any guidance on what it sees as an ideal Federal regulatory framework (beyond just stating it would oppose the state regulation as an alternative). On the other hand, the CFP Board’s outright declaration that it will oppose state regulation has now put it at odds with the Financial Planning Association, its partner in the Financial Planning Coalition, that has grassroots connections to a number of state regulators and legislators, and responded this week that it is not ruling out the possibility of a path to state regulation… potentially setting up a conflict between the CFP Board and the FPA in the future if the FPA decides to use its state chapters to support any state financial planning regulatory efforts in the coming years. In the meantime, the CFP Board itself reiterated that, regardless of Federal or state regulatory paths, it will continue to step up the enforcement of its own new standards due to take effect next October of 2019… even as the organization claims it is still not angling to be a regulator itself. (Yet?)
CFP Board Asks Advisors How To Offer Guidance On Revised Standards (Ryan Neal, Investment News) – In the coming month, the CFP Board will be conducting a series of public forums with CFP certificants, with the goal of both educating CFP professionals about the new Standards of Conduct that will take effect next October of 2019, and also to gather feedback for the CFP Board’s new Standards Resource Commission about what additional tools, education, or guidance CFP professionals need to know how to properly apply the new rules in their advisory businesses. Of particular concern in its initial public forums, which kicked off this week, were figuring out when exactly the CFP Board’s new fiduciary standard will apply (e.g., are advisors providing “financial advice” when they are talking to clients about insurance), and firms working in a hybrid broker-dealer-and-RIA environment raised questions about how they are practically supposed to navigate their fiduciary obligation while wearing two hats, and what is expected of CFP professionals in situations where their firm isn’t held to the same standard they are personally (in a manner that puts the CFP professional in conflict with their firm). Other points of concern included: further guidance around the new client disclosure requirements when doing financial planning; how much advisors are expected to explain/disclosure versus what can be assumed to be known by clients; and how disclosures will work for fee-only firms that may not receive commissions but still have some conflicts of interest that ostensibly should be disclosed.
Does The CFP Board Choose Advertising Over Enforcement? (Allan Roth, Financial Planning) – The CFP Board has long positioned the CFP marks as the hallmark of being a financial planning professional, but Roth raises the concern that the CFP Board has spent more time and effort marketing the marks as the Gold Standard for financial planning than actually enforcing its own rules to ensure that CFP certificants actually act like professionals. For instance, Roth cites an example of a client who was being churned by a CFP certificant for both annual commissions and fees, amounting to over 5%/year in costs; the case was so egregious that the insurance company and broker-dealer involved paid a handsome settlement without even requiring the client to go through the trouble of taking legal action… yet after the client also filed complaints with financial regulators and the CFP Board, the CFP Board took no (public) action against the CFP certificant. Subsequently, Roth publicly questioned the quality of the CFP Board’s disciplinary process, in response to which the CFP Board invited Roth to come to watch a disciplinary proceeding and write about the professed integrity CFP Board’s process… only to be asked shortly before the meeting to sign a confidentiality agreement that would give the CFP Board the right to read and approve the entire article in advance (which goes against responsible media guidelines for journalists). In fact, a review of the latest CFP Board disciplinary proceedings found that of 10 certificants who were disciplined, 8 had already been fined, suspended, or banned by other regulators (e.g., FINRA, the SEC, or state securities administrators), 1 had already lost a civil lawsuit, and only one had a case that actually originated with the CFP Board in the first place (and that was for the improper use of the “fee-only” label). Accordingly, Roth suggests that the CFP Board should take a pause and redirect its $10M+ of annual resources spent on the public awareness campaign towards enforcement of the CFP Board’s fiduciary standard instead… or at least, given CFP certificants the option to choose whether their $145/year surcharge be directed towards public awareness or enforcement. Yet the reality is that the CFP Board is not actually a regulator, and doesn’t have the powers of other regulators to compel advisors to turn over client information and client communication in an investigation, which raises the question of how effectively the CFP Board even could enforce if it wanted (although in theory, the CFP Board could work with aggrieved clients directly to request information be turned over for investigation). Of course, the CFP Board has already stated that it intends to increase its enforcement efforts in the coming years as its new standards take effect. Nonetheless, the CFP Board maintains that whatever resources it puts towards enforcement, those will still be separate from what they have already committed towards the public awareness campaign.
I Physically Wrote Down Every Cent I Spent For A Week And Here’s What Happened (Self.com) – Even with a growing range of smartphone budgeting apps and price comparison tools, few people necessarily have a good overall handle on where their money is going in the aggregate from week-to-week and month-to-month. And of course, the situation isn’t helped by the fact that often those who have the least control of their money and spending habits also struggle the most to keep track of where it’s going in the first place. To get a handle on such situations with new clients, advisor Priya Malani advocates taking 1 week to intensively track every dollar, as a way to get some perspective on where their money really goes… either by writing down every purchase, and/or running it all on a credit card to easily track/double-check where it went (as long as the balance will still be paid in full at the end of the month). Once the dollars are tracked, Malani then suggests reflecting on where the dollars actually went, split up into 5 categories: 1) stuff you now recognize you probably shouldn’t have bought; 2) stuff you bought that just wasn’t worth the cost (in retrospect); 3) stuff you bought that you probably could have gotten cheaper (i.e., “I can’t believe I spent $X on that!”); 4) stuff that was worth it; and 5) everything you had to buy (i.e., essentials like food, rent, and utilities). For the individual involved, personal spending for the week added up to a little over $500, of which about 45% went to “necessities” (food, transportation, etc.), 20% was “worth it”, and 30% probably could have been purchased cheaper, and the last 5% just wasn’t worth it. A key point of this approach to cash flow tracking, though, is that it’s not necessarily about judging what is and isn’t appropriate spending – i.e., that “it was worth it” budget may still include gratuitous Uber rides, drinks, or luxury services – but instead by simply letting clients reflect for themselves on what they could have spent less on, or not have bought at all, and adjust their own behavior accordingly. Especially since, for many people, what was once an enjoyable spending time doesn’t actually even bring much happiness anymore… but it takes a moment of reflection to recognize it’s now in a category that could be cut.
Why Most Retirees Will Spend More Than They Think In Retirement (Dan Ariely & Aline Holzwarth, Wall Street Journal) – The most common approach to determining what clients will need to spend in retirement is simply to look at what they currently spend (usually about 70%-80% of their pre-retirement income, after subtracting out taxes and savings), and assuming that spending will continue in retirement. In other words, clients are assumed to simply maintain their current pre-retirement lifestyle in retirement itself… both because it’s ostensibly already reflective of their habits, and also simply because it’s too time-consuming and challenging for most to try to think through exactly what their detailed retirement spending would be anyway (Will you take walks in the park or join a gym? What kind of wines will you order at dinner? How often will you attend the theater? Or do trips to see the grandkids?). To bridge the gap, Ariely and Holzwarth suggest simply asking clients about how they want to spend their time in retirement, and what they will be doing… and then make some reasonable estimates of cost to figure out what that would take financially. Notably, approaching retirement spending this way often produces significantly higher estimates of retirement spending, though, as people don’t necessarily realize how much more free time they’ll have – that can be consumed by new activities that may cost additional dollars – until they are really prompted to consider all the time they have in retirement once the workday is gone. To the extent that clients want to get a little more detailed about their budget, Ariely and Holzwarth break up spending into 7 core categories: basic needs (housing/utilities/healthcare), dining (eating in and eating out), recharge (salons, country clubs, golf memberships, gyms, etc.), travel (both local and far), digital services (cable, internet, smartphones, etc.), entertainment (events, books, museums, parks, etc.), and shopping (clothing, electronics, home goods, as well as gifts and donations). The reason expenses are framed this way is that they’re still ultimately reflective of time – those who tend to do a lot of travel often do less local entertainment and digital services, for example. And some people consume more luxuries in certain areas (e.g., travel) than others (e.g., kinds of restaurants they eat at, or whether/how often they prefer to eat out versus preparing food at home). Notably, though, once going down this road, retirees may find their anticipated spending in retirement is substantively different in individual circumstances than “just” pre-retirement lifestyle spending; in fact, Ariely and Holzwarth found in one study that the average was actually closer to 130% of pre-retirement income, not the traditional 70% rule of thumb (which would have substantial implications on how much they need to save for retirement in the first place!).
The Definition Of A Middle Class Lifestyle Is The Same As It Ever Was (Financial Samurai) – One of the common challenges of modern living in dense metropolitan areas is that they can be substantially more expensive than living in suburban or rural parts of the country… a world where a $1.5M home might actually be a “modest” home in the city, and even earning $300,000+ may provide only a limited opportunity for retirement saving after city expenses from rent to transportation to childcare. Yet despite the reality that a $300,000 income in New York City might actually afford a similar lifestyle to making “just” $80,000 in Des Moines, in practice there is often very little sympathy for those making $300,000+ in income (even living in an “expensive” city) who are struggling to save, because most people don’t think of being “middle class” relative to the actual cost of living in that area. Yet when reflecting on varying costs of living from one area to the next, the Urban Institute finds that “middle class” equates to roughly $50,000 to $100,000/year of income, while “upper middle class” has a phenomenally wide $100,000 to $350,000 of income. Which helps to explain why there is so most disagreement about what it really means (and how much it takes) to be “middle class.” More generally, Financial Samurai suggests that being “middle class” is really about being able to afford a “middle class lifestyle,” which means having a job that can comfortably support a family, being able to afford a safe car to commute to work, being able to take a few weeks of vacation with the family every year, being able to go out on dates and spend time with friends without immense financial strain, and being able to reasonably retire by the time Social Security kicks in. Although for those who still struggle to accept that $300,000+ of income in some cities may be the lifestyle-equivalent of barely 1/3rd of that in other areas… perhaps the best option is simply to figure out how more people can better take advantage of that “geographic arbitrage” to increase their lifestyle by maintaining their current income in a much lower cost-of-living area instead?
Freezing Credit Will Now Be Free, So Go For It (Ann Carrns, New York Times) – This month, the major credit bureaus (Equifax, TransUnion, and Experian) will begin to offer free credit freezes (also known as security freezes) as a part of a new consumer protection law signed by President Trump in May as a response to last year’s Equifax cybersecurity breach. Notably, Equifax and TransUnion had actually already abandoned their fees for credit freezes, and some states also had requirements for free credit freezes, but now the opportunity to obtain a free credit freeze is a national law – which is important because, to be truly effective, a freeze must be put in place at all three bureaus (not just the two that were already free). The basic purpose of such credit freezes is that criminals can’t use stolen information to open fraudulent new accounts or borrow money in your name, because any inquiry to confirm your credit-worthiness will be denied until you “thaw” your credit freeze first (using a special PIN issued to you). Although even after last year’s high-profile Equifax breach compromised information on 145 million people (nearly 50% of the entire U.S. population), recent surveys estimate only about 14% of consumers have actually taken the steps to freeze their credit files (anticipating that they still weren’t likely to be personally targeted, or incorrectly assuming that, because they had such poor credit or limited wealth already, they wouldn’t be targeted). In theory, removing the typically-$10-per-bureau charge to place a freeze may increase adoption slightly at least (which would include another $10 each time the credit file needed to be thawed) will help increase adoption, although there is still concern that the process of freezing and thawing isn’t as easy and convenient as it could be, even as companies like TransUnion are now rolling out a smartphone app to ease the process. In the meantime, consumers should also look to freeze their file at the National Consumer Telecom and Utilities Exchange as well, as identity thieves can sometimes still open fake cellular accounts even if the other bureaus are frozen). Of course, it’s also important to remember that even credit freezes don’t protect against certain types of outright fraud, like stealing the number of your current credit card, but free credit freezes should make it easier to at least cut down on some identity theft, and are “easier” with the cost barrier eliminated.
The High-Risk High-Reward World Of Credit Card Churning (Drew Housman, The Simple Dollar) – For those of limited means, who occasionally need to borrow to make ends meet, the “revolving credit” available through a credit card can be invaluable to help smooth out household cash flow demands. For those who already have the financial wherewithal to pay their bills, though, credit cards have increasingly become popular anyway, both as a sheer payment convenience and for the ability to accumulate various types of “points” rewards that can be used for (sometimes very cost effective) travel. In turn, the demand for credit cards that offer points has led to credit card companies offering increasingly lucrative “sign-up bonuses” of additional points (as long as you make an initial required spend on the card) to entice new credit card users. Which is now leading to the proactive strategy of “credit card churning” – deliberately signing up for a new credit card and using it just enough to get the sign-up bonus, then canceling the card, signing up for a(nother) new one, and repeating the process again. In the extreme, active credit card churning can be surprisingly lucrative, with one couple reportedly taking $195,000 of vacations over a few years based on only $14,000 of actual spending on their credit cards, with the sign-up bonuses providing far more perks than “just” racking up the rewards offers on existing cards as dollars are spent each month. (Not to mention the David-vs-Goliath exhilaration feeling to know you’re successfully playing the “game” well!) The caveat, however, is that many such cards have substantially higher interest rates, which means if you do accidentally (or through an unfortunate change in circumstances) end out carrying a balance, the interest charges can rack up quickly (which in turn can impair your credit score). And more generally, it’s not necessarily a good idea to put yourself in a position to spend more (to qualify for the bonuses) that actually compromises your otherwise-good spending behaviors. And in the extreme, a high volume of new credit cards and churning can itself adversely impact your credit score (which matters if you also want to buy a house sometime soon!), while some credit card companies are also beginning to fight churning by limiting the offers (or simply not providing the full bonuses) for those who have already opened several other cards recently. Which means, at a minimum, modern credit card churning should probably be done with some moderation, and requires otherwise excellent discipline, credit scores, and organizational skills. Nonetheless, for those with a strong love of travel (as using points for travel is generally more leveraged than “just” cash-back rewards), there’s still a lot of appeal to playing the game… at least a little.
Why You Should Fill Out The FAFSA, Even If You Think It’s A Waste Of Time (Karen Wallace, Morningstar) – The Free Application for Federal Student Aid (FAFSA) for the upcoming 2019-2020 school year will become available next week (on October 1st). Yet despite the fact that filling out the FAFSA is free (it’s literally part of the name!), many people simply don’t bother, under the assumption that they earn too much or make too much to be eligible for student aid anyway. Yet by some estimates, as many as 1 million students last year failed to claim a Pell Grant of up to $6,095 (which, as a grant, doesn’t even need to be paid back!), by simply failing to file the FAFSA to verify their eligibility in the first place (with nearly 50% of those who were eligible but didn’t file, incorrectly assuming they would not be eligible when they actually were!). And beyond the Pell Grant, a number of other non-Federal grants (from states, private entities, and colleges themselves) may also be determined through the FAFSA, even including for some high-income students. In addition, some merit-based scholarships offered by colleges and universities also require applicants to file the FAFSA (even if the award itself is ultimately merit-based and not financially based). And despite fears of time-consuming complexity, the Department of Education has found that the average student takes just 30 minutes to fill out the FAFSA, a relatively modest time commitment even if just for an optimistic chance at some financial aid. And the process is even easier now that the application uses prior-prior-year income that should already be readily available by the time the FAFSA application window opens, and the IRS Data Retrieval Tool can further expedite the process by automatically importing relevant tax information. The bottom line: take a few minutes and try if there’s a child going to college, just in case it turns out well. And remember that even if a child wasn’t eligible in the past, the FAFSA can (and should) be re-submitted every year, to see if the outcome might be better next time!
How To Make Friends, According To Science (Ben Healy, The Atlantic) – While it’s human nature to want to connect to other human beings (as we are herd animals at the core!), the reality is that our brains can only handle “so much” of a social network, in part because it takes a lot of time and mental energy to form and support those relationships. As a result, while people may have hundreds or even thousands of acquaintances, the average person’s “friend” group is only about 120 people, and the average American only deeply trusts about 10-20 people in their “inner circle” of close friends. Yet despite the fact we have lots of acquaintances, fewer friends, and even fewer close confidantes, the starting point is always the acquaintance first. Accordingly, one study found that it takes about 50 hours of socializing to go from an acquaintance to a casual friend, another 40 hours of time together to become a “real” friend, and a total of 200 hours in the relationship to become a “close” friend. Which means, simply put, that one of the best ways to build a deeper friendship and connection is literally just finding ways and opportunities to spend more time together. Which helps to explain why financial advisors form such deep relationships and friendships with long-term clients – as the sheer number of hours spent together accumulate over the years – but also helps to emphasize why it’s so important to communicate regularly with clients, not just for the sake of communication itself, but because the cumulative time of those interactions are part of what help to literally cement the friendly relationship beyond just acquaintance alone!
8 Questions To Ask Someone Other Than “What Do You Do?” (David Burkus, Harvard Business Review) – It’s a common challenge for financial advisors, in particular, to need to build rapport quickly with new clients or even prospects, whether at a networking event or conference, a dinner party, or some other social-professional scenario. For which the most common question is usually “So, what do you do?” Yet the problem with this approach isn’t just that a discussion about a job or work isn’t always all that interesting, but simply that personal connections get deeper when we connect across multiple domains, whereas asking about “what do you do” at a work or professional function simply cements you into the “work-acquaintance” zone instead. Thus, the goal instead should be finding a common point of connection outside of the work/professional context (since you ostensibly already share some work/professional connection by virtue of the meeting/event you’re already at together). Accordingly, Burkus suggests a number of questions that help to shift the context, increasing the odds of creating a “multiplex” tie to connect to the individual beyond just the what-do-you-do work domain, including: What excites you right now?; What are you looking forward to?; What’s the best thing that happened to you this year?; Where did you grow up?; What do you do for fun?; Who is your favorite superhero?; Is there a charitable cause you support?; or simply “What’s the most important thing I should know about you?” Notably, a key aspect of these questions is that they are deliberately very open-ended, allowing people to give a wide range of responses, and increase the odds you can find a non-“what-do-you-do”-for-work-related point of connection.
What Makes Mentorship Work, Based On 100 Mentor-Mentee Matches (Whitnie Low Narcisse, First Round) – While most people working towards greater professional or business success report they want a mentor, in practice, it’s often difficult to find and execute an effective mentor-mentee relationship, as even with the best of intentions from all parties, mentorships can go “sideways” sometimes. The starting point is simply to find the right mentoring match, which means not just finding someone who is more experienced than you (in whatever you want to be mentored on), but also finding a mentor who is willing to accept that relationship (given that established successful individuals may themselves be receiving a lot of requests for mentoring and can’t possibly serve them all). Narcisse suggests a few key questions for both to consider in evaluating the match, including whether the mentee can be completely open and honest and whether he/she is really prepared to make good use of the time, and whether the mentor will be able to give actionable relevant advice (ideally, the mentor is 5-10 years ahead of the mentee, which provides enough experience to be helpful, but is close enough for the mentor to still remember what it was like in the mentee’s position). Once the right person is found, it’s also important to set the ground rules; Narcisse suggests kicking off a mentoring relationship around specific problems of challenges the mentee is facing, having a schedule of when meetings will occur (while being flexible, if necessary), and building in “off-ramps” that make it easy for the mentor to disengage when the relationship runs its natural course (as mentors may be wary to commit to a “perpetual” open-ended commitment). Ultimately, Narcisse suggests 10 “commandments” of a good mentoring relationship, including: don’t treat it like a one-way transaction (the mentee should be trying to get to know the mentor, too); show up prepared with questions to make good use of the mentor’s time; ask your mentor to check your blind spots (as one of the key values of mentoring is someone who can provide input to your situation from a different perspective, and see what you can’t see); be honest and transparent; and don’t use the word “mentor” (as for mentors, it actually sounds like a heavy-lift time commitment, so again, ask for more limited-scope help instead, and let the relationship sustain from there if it makes sense for all involved).
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.