Weekend Reading for Financial Planners (May 16-17)

Author: Michael Kitces

Team Kitces

Michael Kitces is Head of Planning Strategy at Buckingham Wealth Partners, a turnkey wealth management services provider supporting thousands of independent financial advisors.

In addition, he is a co-founder of the XY Planning Network, AdvicePay, fpPathfinder, and New Planner Recruiting, the former Practitioner Editor of the Journal of Financial Planning, the host of the Financial Advisor Success podcast, and the publisher of the popular financial planning industry blog Nerd’s Eye View through his website Kitces.com, dedicated to advancing knowledge in financial planning. In 2010, Michael was recognized with one of the FPA’s “Heart of Financial Planning” awards for his dedication and work in advancing the profession.

Goldman Sachs Acquires RIA Custodian Folio Institutional (Oisin Breen, RIABiz) – The big industry news this week is that Goldman Sachs is acquiring Folio Institutional, an RIA custodian that had an estimated $11B on its platform amongst 450 independent RIAs, for what’s rumored to have been as much as a $250M purchase price. The deal has some speculating about whether Goldman is about to make a bigger push into the RIA custody business to compete with the likes of Schwab, Fidelity, and TD Ameritrade, especially with questions looming of whether the prospective #Schwabitrade deal (of Schwab acquiring TD Ameritrade) could create an opening for new competitors, and Folio’s existing focus with small firms (with only 17 RIAs at >$100M of AUM and the 400+ remainders at <$100M). Yet in practice, it’s not clear that Goldman intends to repackage Folio as a direct competitor for the RIA custody business. On the one hand, Goldman acquired United Capital and its $25B of AUM last year, which means “just” shifting its existing United Capital assets (not to mention additional Ayco assets) onto an “in-house” RIA custodian would more-than-triple the current Folio business. And in practice, Goldman isn’t even placing the Folio acquisition into its Wealth Management division, but instead its Global Markets division (in what appears to be a desire to scale up its institutional trading desks with retail volume). Not to mention using Folio as its framework for a rumored-to-be-coming Goldman robo-advisor to pair with its Marcus bank offering. Though some are suggesting that the real prize opportunity of Folio, which was the first custodian to offer fractional share trading for advisors, is to leapfrog past the current ETF environment (where Goldman has struggled to compete) and into the next generation of investing: Direct Indexing (where size, scale, and technology are crucial for execution) as an ETF competitor. In addition, Goldman will be well-positioned to compete for wirehouse breakaways, which may be attracted to Goldman’s premier brand and Private Wealth capabilities packaged in an independent RIA (on Folio) chassis, and paired with United Capital’s FinLifeCX front-end.

TradingFront And Interactive Brokers Launch Holistic Tech And Custodial Platform (Christopher Robbins, Financial Advisor) – This week, TradingFront (which offers a white-label robo-advisor-for-advisors solution) announced a deal with Interactive Brokers, effectively providing an all-in-one package of RIA custody and portfolio management and trading tools to compete in the once-again-popular RIA custodian channel. The new custodial-plus-advisor-tech platform will be available for a cost of $100/month for up to 100 client accounts or $10M of AUM, thereafter shifting to a per-account fee of $1.50/month ($18/year) for every account over 100, up to a maximum of 8bps/year for AUM over $10M, and TradingFront is targeting smaller advisory firms that don’t have the time and capacity to weave together their own solution from disparate parts in an open architecture environment, and instead simply want something that ‘works’ out of the box (which TradingFront aims to accomplish with deep integrations into Interactive Brokers). From the Interactive Brokers end, the deal with TradingFront marks an opportunity for the platform to compete more aggressively in the RIA custody business (for what has historically been a more retail-trader-oriented platform), and the firms report that 35 RIAs are already on board with the solution after having beta-tested the joint TradingFront/Interactive Brokers platform since late 2019.

To Leapfrog Ahead In Direct Indexing, Schwab To Buy Motif Technology And Hire Its Staff (Brooke Southall, RIABiz) – After the news just two weeks ago that Motif Investing was shutting down and selling its existing accounts to Folio Institutional (which itself was just acquired), Charles Schwab has announced that it is buying Motif’s technology and intellectual property, and acqui-hiring most of its staff, including founder Hardeep Walia. The deal is being viewed as a leap forward for Schwab in its move towards Direct Indexing, where Motif’s technology was already capable of packaging together bundles of stocks (which Motif itself used to create its 30-stock “Motifs”) but that Schwab could use to offer an entire self-packaged or client-customized index, potentially with an SRI/ESG or other investing theme, or extend its own just-announced “Slices” offering (10-stock bundles of fractional shares for zero fees), and runs parallel to Fidelity’s recent investment into competitor Ethic Investing (which similarly is packaging together SRI/ESG-based direct-indexing solutions). The fact that Schwab sees a big opportunity for Direct Indexing in its existing retail clients and RIAs also helps to explain why the firm did not acquire Motif’s accounts but did acquire their technology and team, as Schwab may be preparing to disrupt itself (as Schwab is already the industry’s third-largest index mutual fund provider, fifth-largest ETF provider, and fourth-largest SMA provider).

U.S. Retirement Savers Stayed Calm While Stock Markets Plunged (Ben Steverman, Advisor Perspectives) – According to a Morningstar analysis of more than 635,000 retirement plan participants, only 5.6% of investors made changes to their portfolio allocations in the first 3 months of 2020, even as the coronavirus pandemic was unfolding with record stock market volatility in March and the market had at one point troughed down 31% year-to-date (and overall, the median 401(k) plan lost 11.2% of its value in the first quarter). Notably, though, the tendency for portfolio shifts varied by how investors had allocated their portfolios in the first place and their investment styles, with only 2.4% of investors using target-date funds actually touching their portfolios, compared to 10.8% of those who had created their own self-directed allocations. In fact, a separate study by Empower Retirement found that most investors appear to have simply tried to ignore the volatility altogether, as only 16% of their 9.4 million retirement plan participants even logged in to check their retirement account balances in the 30 days from late February through late March.

Vanguard And Fidelity Investors Didn’t Flinch As The Market Tanked (Ethan Wolff-Mann, Yahoo Finance) – Despite the ongoing fears of investors that may commit behavioral mistakes and sell in the midst of market volatility or right at the market bottom, data from major retail investment firms including Fidelity, T. Rowe Price, and Vanguard, suggests that in practice, the overwhelming majority of individual investors did effectively stay the course. In fact, Vanguard found that only 10.7% of households traded from mid-February to mid-April, and amongst investors who were trading on their platform, 7 out of 10 were moving dollars into equities, not selling out into bonds and cash, while only 0.6% of their investors moved into all-cash positions. Similarly, while there were significant concerns that the new CARES Act provision permitting “coronavirus-related distributions” might cause investors to raise their retirement accounts, in practice Fidelity reports that only 0.7% of its retirees took such a distribution in March, and the median amount was just $5,500, and in practice, 15% of Fidelity savers increased their retirement plan contributions (whereas only 3% stopped buying stocks).

Advisors Report They Are Succeeding In Calming Clients (Karen Demasters, Financial Advisor) – According to a Fidelity survey conducted in April, “Financial Advisors Share Their Perspectives”, a total of 89% of financial advisors reported they have been “successful” (64%) or “completely successful” (25%) in calming client fears in the midst of the coronavirus pandemic. Ironically, the data is in line with other reports of self-directed consumers also staying the course – without financial advisor intervention – but in reality, may simply highlight the fact that financial advisors disproportionately end out working with clients who are prone to making such investment mistakes. Accordingly, for financial advisors keeping clients on track, doing so has entailed substantial additional time in order to provide that counseling to clients, with advisors reporting an average of 14 hours per week (up from 4 hours per week during the preceding bull market) dealing with clients’ worries. On the one hand, the uptick in time spent in client-facing conversations is arguably a positive in advisors “moving up the value stack” away from tasks that technology alone can automate; on the other hand, with Fidelity’s study reporting that the average advisor spends as much as 40% of their time “managing the money”, the uptick in client communication demands has also squeezed advisors’ own available time… and raising questions of whether/how advisor outsourcing trends may shift in the future if/when/as advisors increasingly focus on the subset of clients that may need the most hand-holding in the first place?

The History Of The FI/ER Movement (Early Retirement Dude) – For most of the history of financial markets, dating back nearly 800 years, the average person didn’t have access to invest in the first place. From informal financial exchanges for private bank debt in 12th century France to the first formal stock exchange (the Amsterdam Exchange) for the Dutch East India Company in the early 1600s, investing was limited to only ‘Persons of Quality’ that had the opportunity to participate.  It wasn’t until the late 1800s that individuals first began to form “Investment Clubs”, where dollars of the average investor could be pooled together to gain access to early stock market investing; still, though, in 1900 a mere 1-in-100 Americans owned stocks, and by the 1950s it was still only 1-in-25. However, by the mid-20th century, the idea of accumulating wealth to the point of becoming self-sufficient was beginning to take hold, from “The ‘Have-More’ Plan” by Ed and Carolyn Robinson (financial self-sufficiency by owning just a few acres of land!), to a Life Magazine photo-essay on “Early Retirement”, and the early Investment Clubs began to band together to form associations (e.g., the National Association of Investors Corporation, now known as Better Investing, which by the early 1980s supported 14,000 investment clubs across the country). At the same time, though, the mutual fund was beginning to emerge as an alternative to Investment Clubs as a way to own a diversified portfolio, and while mutual funds did expand the accessibility of stock market investing for the general public, they too struggled to beat the markets themselves. Which in turn ushered in the emergence of Vanguard and the index fund, as a way for even more investors to more directly access the available returns of the markets (which still hadn’t been accessible for most for more than 700 of the 800 years of financial markets history!). And from there, the increasing accessibility of participating in the returns of markets – from index funds to ETFs, the IRA and the 401(k), and the rise of ever-cheaper online brokerage platforms – was suddenly making Financial Independence and Early Retirement (FI/ER) more accessible to all, built further on the back of ‘pioneering’ books on financial self-sufficiency of the 1980s like “The Tightwad Gazette” (promoting thriftiness as a positive lifestyle choice) and “Your Money Or Your Life” (on the benefits of no longer tying your life to the need to earn money). The key point, though, is simply to understand that the recent emergence of the Financial Independence/Early Retirement movement isn’t just a random coincidence of timing… instead, it’s the natural outcome of increasing access of the average investor to the potential returns of the stock market that make more substantial wealth accumulation and the potential to use money to grow more money actually feasible in the first place?

The Emotional Benefits Of Getting Older (Susan Pinker, Wall Street Journal) – One of the unique challenges of the coronavirus pandemic is that it has forced most of us to stay at home and forgo many of our usual activities, while also opening up far more unstructured time than most are accustomed to having… and raising the question how we most effectively manage the urges and impulses we may get with all the newfound free time? A recent study published in the journal Emotion shows that by far, the biggest predictor of our ability to successfully resist our desires is our age. And not because our impulses and desires diminish with age – instead, desires for everything from leisure to sleep to sex endure until at least age 55, and in general the research finds that older adults may actually experience even stronger desires than younger people; nonetheless, we still seem to be much better at resisting or managing those desires in our later years as well. Notably, the study also found that in general, people at older ages tend to have more positive emotions and fewer negative emotions, a more stable and consistent emotional experience. But from a financial planning perspective, the fact that we tend to get more control of our desires – and effectively get better at our ability to delay gratification – may help to explain why so many prospective clients suddenly seem to ‘get serious’ and ‘come to’ on their financial planning challenges in their 40s and 50s… perhaps not just because their potential retirement date itself looms closer, but also because more broadly we become more effective at what it takes to actually plan and save for retirement at that age in the first place?

Updates Coming To The Federal Government’s Thrift Savings Plan (Christine Benz, Morningstar) – The Federal government’s Thrift Savings Plan (TSP) is the largest defined-contribution retirement plan in the world, but is perhaps even more well known for its sparse utilitarian menu of ultra-low-cost index funds for plan participants to invest in, from the special G fund (which buys government bonds for better-than-cash yields but has principal protection like a Stable Value fund) to the F fund (Fixed Income), the C fund (Common stock), the S fund (Small Cap stocks), and the I fund (for International stocks), along with the L funds (Lifecycle funds, which are target-date funds comprised of the other index funds). Notably, the TSP fund lineup changes very infrequently, but does have some notable changes looming that advisors with Federal government clients should be aware of, including: currently the L funds are only offered in 10-year increments (L 2020, L 2030, etc.), but will soon be shifting to 5-year increments (resulting in the new launch of L 2025, L 2035, etc., to fill in the off-cycle years); the L funds are going to become tilted more aggressively and stock-heavy than they were in the past (i.e., a more aggressive glidepath, that will start with 99% in equities for the youngest L fund investors, up from 90%, and will increase for those in retirement from 20% up to 30%); the L funds will include a higher allocation to foreign stocks as a percentage of equities (up from 30% to 35% going forward); and the I fund will be expanded to include Emerging Markets (by shifting its benchmark from the MSCI EAFE Index for developed markets to the MSCI All Country World ex-US Index that includes emerging markets countries). On the other hand, other notable ‘idiosyncrasies’ of the TSP remain, including that its F fund tracks the Bloomberg Barclays Aggregate Index and therefore holds no TIPS or high-yield bonds (and in general overweights government bonds).

Majority Of Remote Workers Are More Productive And Communicative (Vala Afshar, ZDNet) – A recent study of firms working from home amidst the coronavirus pandemic has found that on average there has been only a 1% reduction in work productivity and that a majority of workers appears to be slightly more productive at home (offset by a smaller subset of employees who have been significantly less productive and are struggling). Not surprisingly, the shift has resulted in substantial changes in worker behavior, though, including 44% using more video conferencing, 37% that have attended a virtual event, and 27% of remote workers getting new technology tools. On the other hand, the data also shows that 35% have reported working later than usual, and another 32% are starting work earlier than usual. The biggest challenge appears to be trust between employees and their managers, though, with 58% of workers indicating it’s very important that firms demonstrate more trust of their employees and/or earn their employees’ trust as a firm managing remotely, and 55% are calling for more regular communication in a virtual environment. In addition, 32% reported challenges with the distractions of social media, and 24% reported challenges with the distractions of children (likely compounded by schools also being shut down). Still, though, overall 86% of remote workers rate their virtual productivity as good or excellent, and a whopping 40% of workers would prefer to work remotely full-time in the future (though notably, that still means a majority are looking forward to returning to an in-office workspace?).

Can We Keep The Sweatpants On After Lockdown Ends? (Katherine Bindley, The Wall Street Journal) – One of the indirect shifts of the transition to a virtual work-from-home environment has been the change in “work attire”, where at best we may have to wear a presentable shirt or blouse, but no one can see that we may have ditched the suit pants or dress for a pair of comfortable sweatpants. Yet the question of what we wear when working from home is meaningful unto itself. On the one hand, what we wear can affect our mental state – to the point that sometimes “dressing up” for work (even if we’re not going to work) can help us focus. And on the other hand, at some point, we just want a change of pace from a daily routine… even if that daily routine is a pair of comfortable sweatpants. Which is leading to everything from a surge in buying of ‘higher-quality’ sweats (e.g., Lululemon or even Brooks Brothers), to some who are hungering for the opportunity to return to work and a resurgence of the desire to dress up. Still, though, from the comfort of more comfortable clothes to just the sheer time savings of not needing to primp ourselves to the same degree every morning, the question remains: when we can finally all go back to work, what will become of the workplace dress code?

How Would You Manage Your Business Differently if Shelter-In-Place Lasted 18 Months Or More? (Tomasz Tunguz) – While the primary focus of most business owners (that weren’t already shut down by the coronavirus pandemic) over the past two months has been to adapt as quickly as possible to a virtual work environment to maintain productivity until employees can return to the office, Tunguz notes that there is still a possibility that the shutdown could extend far longer than most people have acknowledged (especially with the possibility that after re-opening, a resurgence of the virus could cause a new wave of closures). Accordingly, this week some companies have already begun to announce longer-term plans, from Google and Facebook declaring work-from-home through the end of 2020, and Twitter empowering employees to work from home ‘forever’. And while not all businesses – including advisory firms – may be equipped for an ‘indefinite’ work from home environment, the possibility of a long-extended period does raise important business questions, from the firm’s real estate/rent budget (and the future use of an Open Office floorplan or not?), whether it needs a different internal communications structure, how it will support relationship-building amongst team members (with no more water-cooler and ‘lets-go-out-for-lunch’ impromptu conversations), to its hiring practices (from virtual interviewing to figuring out the best way to onboard new employees in an entirely virtual environment)? The bottom line, though, is that while it’s still entirely possible that we really will be able to return to an in-person workplace sooner rather than later, prudent business owners must at least consider the possibility of what happens if this does extend far longer than anyone today is anticipating?

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.