Weekend Reading for Financial Planners (Mar 20-21)

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.

IRS Delays Tax-Filing Deadline Until Mid-May (Richard Rubin, Wall Street Journal) – This week, the IRS announced that the standard April 15th tax-filing deadline is being extended until Monday, May 17th, giving households (and their tax preparers) an extra month to complete their tax returns. The short-notice extension appears to be driven by an IRS that was already stressed by the extent of tax law changes that occurred with the Consolidated Appropriations Act that was passed in December of 2020, which put the system to a breaking point with last week’s coronavirus relief package (the American Rescue Plan of 2021) that retroactively changed the tax rules for unemployment benefits in 2020, not to mention the determination of eligibility for the latest round of Recovery Rebates that may be triggered based on 2019, 2020, or 2021 tax returns (a series of last-minute changes that IRS systems were simply not currently built to accommodate, and would be difficult to adapt with less than a month to go before the April 15th deadline). Notably, though, the Corporate tax filing deadline remains in place with a due date of March 15th (and in fact, commentators have suggested that the IRS was specifically waiting until the deadline for business returns had passed before announcing the additional-month extension for individual tax returns). In addition, Q1 estimated tax payment obligations for 2021 have not been extended, and will still be due on April 15th (creating some complications for those who typically follow the safe harbor rule of paying current-year estimated taxes based on the prior year’s tax liability that may not yet be known if they haven’t completed their 2020 return by April 15th!). Nonetheless, the tax filing deadline for individual returns, as well as the obligation to pay whatever is due alongside their 2020 tax return, is delayed until the new May 17th date (and states impacted by recent winter storm disasters, including Texas, Louisiana, and Oklahoma, have already been separately extended to June 15th). The IRS has not yet issued guidance for those who may have already filed their tax returns and now need to adjust them (especially those who had included 2020 unemployment benefits as taxable income), beyond directing files to not send in an amended return yet. And it remains to be seen whether states will also extend their tax return due dates for individual households to conform to the IRS’ short-notice extension.

Quirks In Requirement Minimum Distributions This Year (Ed Slott, Investment News) – The past several years have witnessed a number of changes to the Required Minimum Distribution rules, from the CARES Act waiving RMDs for 2020, the SECURE Act increasing the starting age of RMDs to 72, and the IRS separately issuing new life expectancy tables for RMDs, the confluence of which is resulting in a number of ‘quicks’ in 2021… and a great deal of confusion about exactly which rules apply when. As a starting point, it’s important to understand that RMDs are “on” for 2021 (after having been eliminated for 2020 under the CARES Act), and should be calculated as though the RMD rules were still in effect last year (e.g., for non-spouse beneficiaries taking stretch distributions, where the life expectancy factor is reduced by 1 every year, if the last RMD occurred in 2019, this year’s RMD would occur by subtracting 2 for the 2 years that have passed since 2019). In addition, 2021 RMDs should still be calculated using the “old” existing life expectancy tables, as IRS regulations have announced new RMD tables but they will not actually apply until 2022 (though non-spouse beneficiaries will be permitted to calculate their 2022-and-beyond RMDs by determining what the RMD factor would have been originally under the new tables, and then subtracting 1 for each year since to arrive at the 2022 factor). In the meantime, the SECURE Act’s change for RMDs to begin at age 72 has taken effect, for anyone who was otherwise reaching age 70 1/2 after 2019. Though notably, in practice this means that no one will actually have to take their first RMD in 2022, as anyone who had turned age 70 1/2 prior to 2020 would already be taking RMDs, and anyone who turned 70 1/2 in 2020 would only just be turning 71 or 72 this year, which means at best their first RMD will be due by April 1st of 2022 (and won’t actually have to be taken this year, unless they want to take their first age-72 RMD in 2021 for tax purposes).

Brokers And Investors Face A Crazy Quilt Of State Regulations (Bailey McCann, Wall Street Journal) – In 2019, the SEC decided to implement its new “Regulation Best Interest”, which decidedly did not apply a uniform fiduciary standard to broker-dealers and investment advisers, and instead opted to allow brokers to be held to a lower (albeit still higher than they were previously regulated) standard of care for the recommendations they made. In response, a number of states declared that if the SEC would not hold brokers providing advice to a higher standard, they would act to protect their citizens by doing so themselves, setting off a bevy of new state fiduciary rules. The challenge, though, is that not all state regulators view the matter the same way – even amongst those who agree that a fiduciary rule is necessary – resulting in what appears to be an increasing likelihood of a patchwork of different state fiduciary rules, which is challenging even for well-intentioned advisory firms to navigate, from larger enterprises that may have to comply with multiple different state rules at once, to smaller firms that still trigger multi-state rules once they cross the relatively low de minimis thresholds for the number of clients in that state to trigger registration. Still, though, with higher standards for financial advice still stalled at the Federal level, states from Massachusetts to Nevada to New Jersey and New York have either passed or are poised to enact their own fiduciary rules (and in the case of New Jersey, insurance agents would also be included in the uniform rules). On the other hand, some fiduciary advocates have noted that in practice, one state leading to several states leading to more states enacting new rules can actually create the impetus for a uniform Federal fiduciary rule, if only to simply and standardize the fiduciary rule momentum now building at the state level.

Leading Highly Productive Teams Means Keeping Them Focused On What Matters Most (Karin Hurt, Advisorpedia) – For most financial planners, our working hours are a continuous flow of commitments and obligations, from tasks and work to be done, emails to respond to, meetings with team members, and, of course, meetings with clients themselves (and responses to their various emails and phone calls and other inquiries). The end result for most people is to try to figure out how to “get more efficient” and cram more emails, more meetings, and more activity into their limited amount of time available. But Hurt suggests that instead, the better approach is to acknowledge that there will always be more that could be done than there is time to do it, and the first step to end the feeling of overwhelm is to accept that, embrace it, and then recognize that the real key to success is not cramming more activity into the available time, but instead better focusing what is the most productive use of that time – i.e., the Most Important Thing, or “M.I.T.” Or stated more simply, when you make peace with the fact that there’s always another thing, and that you can’t do it all and never will, it frees you to get clearer on what really matters most and focusing on doing that instead. Accordingly, the real key is to get clear on what those M.I.T. items really are, which Hurt suggests can be viewed at three levels: long-term or strategic M.I.T.s (e.g., the big objectives, typically measured in years, that you have to make sure you’re making progress towards); short-term M.I.T.s (e.g., in this week/month/quarter, what is the Most Important Thing we can do to move us closer to our Strategic M.I.T.?); and daily M.I.T. behaviors (e.g., what are the 3-4 specific, observable activities you need to engage in from day-to-day or week-to-week to get to where you want to go?). So what’s your M.I.T. today and this quarter?

Our Company Started 5-Hour Workdays In 2015 And Why We’re Still Doing It (Stephan Aarstol, Fast Company) – On June 1st of 2015, Aarstol told his employees that in appreciation for their fast growth and success (as #239 on the Inc 500 list of fastest-growing companies), he was going to adopt a 5-hour workday for his 7-person team for the coming summer months. But at the end of the summer, Aarstol found that his team did such a good job maintaining its productivity – and was happier – that he decided to make the temporary program a permanent one. However, not long after he made the switch permanent, 4 of his 9 employees left in quick succession – generally for personal reasons, but at the least calling into question the idea of whether a greatly shortened workweek would really help improve retention (as Aarstol had hypothesized it would). In fact, after some additional (albeit unrelated) business speed bumps, Aarstol decided to abandon the 25-hour-per-week schedule in mid-2017 (and just kept it as a summer practice). In the rebound after COVID, though, Aarstol decided once again to bring the policy back, but with an additional layer to help balance business productivity and employee satisfaction: the 5-hour workday would be instituted from August 1st to November 30th of each year in which the company powers higher revenue than the prior year. In other words, like any reward incentive system, it’s still important to align team members to company goals and objectives in order to generate the desired outcomes. Nonetheless, nearly 6 years after the initial “experiment” (and no small number of ‘normal’ business bumps along the way), Aarstol reports that his company has continued to grow and operate in a highly profitable manner, where the 5-hour work week helps his team members focus their now-even-more-limited time to do the things that matter most in moving the business forward.

Steinbeck’s Productive Inactivity (Cal Newport) – John Steinbeck was highly “productive” by any practical sense of the word, having written 33 books and won a Nobel Prize for his efforts. Yet famously, he was not busy, and in fact, was known for splitting his time between the Upper East Side of New York City and spending time at his home at Upper Sag Harbor Cove on Long Island, which famously included his “writer’s house” – a 100-square-foot hexagonal little building on the property overlooking the water – where Steinbeck would do most of his writing. In fact, the convenience of his writer’s house alongside the water meant that he would often step away from that space into his fishing boat, bringing along a little table and yellow pad and some pencils and then doing his writing while anchored out in the harbor where “nothing else can intervene”. In turn, after a morning of writing, Steinbeck would then often socialize with other writers in the area (including Truman Capote and Kurt Vonnegut), or wander over to the nearby docks and chat up the local fishermen. Arguably, Steinbeck did live in a ‘different era’ than today’s busy Zoom-centric world. But the underlying point remains that Steinbeck achieved nearly epic levels of productivity not by always being busy, but instead by creating space to isolate himself for what were actually relatively limited periods of time – just a few hours every morning in his writer’s house or out on his boat – and spending the rest of the time socializing and relaxing, having leveraged his limited-but-highly-productive focus time to achieve incredible results.

The Best Password Managers To Solve Your Login Problems (Nicole Nguyen, Wall Street Journal) – Password management is becoming a uniquely necessary survival skill of the 2020s, as the online/digital world has become nearly ubiquitous, but a seemingly never-ending stream of announcements of security breaches means that it’s essential to not only have strong and secure passwords but also to have different passwords for each site so that even if one is comprised, it won’t open the door to any others. Yet in practice, it’s hard enough to remember that one complex secure password; remembering all of them, when they’re all different, quickly becomes nearly impossible. Enter Password Managers, whose job is to collect and maintain (and populate) all of those various passwords into their respective websites, controlled by one (and only one to remember) “master password” to access them all. This is especially important in a world where passwords are increasingly not used “just” for browsers, but other apps on our desktops or smartphones, which means browser-based password managers aren’t as practical as independent password management services that can work across devices, operating systems, and types of applications. And given that recently one of the most popular password managers – LastPass – announced that Free users are now required to upgrade to the company’s Premium Plan (normally $36/year but now being offered at $27/year) if they want to continue syncing passwords across devices, which is stoking many to take a fresh look at password manager options. The primary alternatives include: 1Password, which is similarly priced at $36/year for individuals ($60/year for families up to five), emphasizing that it is intentionally not free (as “free software almost always involved compromises”), but does boast “a user-friendly design and multiple layers of security baked in”; and Dashlane, which is a bit more expensive at $60/year for individuals (and $90/year for families up to 5), but boasts additional features such as built-in VPN, and a dark-web monitoring service (that watches out for and notifies you if your credentials appear to have been compromised). Notably, Dashlane (and LastPass Premium) also include the ability to designate a “trusted contact” who can access your vault if you’re dead or incapacitated (typically with a delay, from 3 hours to 30 days, during which you can deny their access if you’re able and not actually dead or incapacitated!). For those who don’t want to pay and are simply looking for something free, Nguyen suggests Bitwarden, which has a full-featured free plan for individuals (which supports key basics including end-to-end encryption, a secure password generator, and two-factor login support, with a premium membership of $10/year for the bells and whistles).

Decluttering The Filing Cabinet: What To Save, What To Move To The Cloud, And What To Shred (Julie Jargon, Wall Street Journal) – As tax season rolls around and we sort through our tax documents for the year, it’s a particularly opportune time to consider what needs to still be kept, and what can be thrown away, as the “family filing cabinet” becomes inevitably overstuffed with old bills and statements and records and documents. Especially because in the modern era, there’s not only the question of what-to-keep-and-what-to-shred, but also what needs to be kept as a physical document, and what could at least be scanned and saved to the cloud (with the physical file shredded to clear up space). So what really needs to be kept (physically or digitally): tax documents, but only within 3 years of the date the original tax return was filed (as after that you’re generally past the statute of limitations, and the IRS can’t come back and change the results beyond that point, so documentation won’t be necessary any longer), although it’s a good idea to keep longer documentation (at least digitally scanned) of any home-related expenses (from home improvements to repairs to major appliances) as those can be added to your cost basis when you sell the home in the future; estate planning documents, which absolutely must be a physical copy (or there are a lot of hoops to jump through to prove that a digital version of a Will or trust is actually valid); bills and receipts and financial statements generally don’t need to be physically kept at all anymore, as they’re virtually all available online (unless it’s specifically for something that is not available online, or an expense you want to hold and document for many years and the provider might not offer ‘unlimited’ archives of old statements years from now); vital and legal records (e.g., birth certificates, marriage licenses, adoption papers, Social Security cards, etc.) should be kept physically, but a digital copy as a backup can be useful (and permissible to use in at least some cases). For those who want to go digital, smartphones often have notetaking apps tied to their cameras, or you can buy a scanner (ideally with a built-in sheet feeder for higher volume) like the Epson FastFoto 680W.

What Happened To Mint? (Rob Pegoraro, Fast Company) – In 2009, Intuit (which at the time was the leader in personal finance tools from Quickbooks to TurboTax) acquired Mint.com for a whopping $170M… but in the more-than-10-years since seems to have done remarkably little to capitalize on its acquisition. A decade later, the platform is still rife with obvious gaps it has not fixed – from still pulling raw credit card statement data like “SLING TV – ENGLEWOOD, CO” and not simply converting it into “Sling TV”, to routinely miscategorizing transactions that would seemingly be easy to correct (especially if dozens, hundreds, or thousands of users all make the same corrections), and the inability to export key Mint data over a set time range (e.g., over the last calendar year, for tax preparation purposes!). In fact, even Aaron Patzer – Mint’s original founder who sold Mint to Intuit and ultimately left the company in 2012 – states that it appears the platform has largely been in maintenance mode for the past 8 years, and Mint’s own “updates” blog category reveals no new features since April of 2019. Fortunately, Mint has at least moved forward with a broader shift in account aggregation away from login passwords and screen scraping and towards using a (more secure) OAuth sync approach. Still, though, while Intuit’s core programs like Quickbooks and TurboTax are so profitable, it appears that Mint has struggled for resources as it has struggled for revenue, in a world where simply pushing more “financial offers” and ads for products in the Mint platform has yielded limited results. Still, though, Mint has faced remarkably little serious competitor, as its arguably closest competitor – Personal Capital – is still more substantively geared towards investment management (given Personal Capital’s own monetization model of portfolio management). As in the end, Mint’s core functionality – to consolidate all of your financial information into one centralized dashboard – continues to be fundamentally useful and desirable (as Mint continues to sport a whopping 13 million users!).

Getting Rich Versus Staying Rich (Blair DuQuesnay, The Belle Curve) – The wealth management business is largely one of wealth management, focused more on helping clients hold on to their wealth and preserve it (and perhaps to grow it to keep pace with inflation and achieve their goals), but typically only works with those who have already achieved a substantive level of wealth. Fortunately, there are many ways to become wealthy, from “simply” spending less than you earn and saving and investing the rest (which over a few decades, really adds up!), to building and owning a business, being compensated for building a business (e.g., as an executive), moving into a particularly high-earning profession (e.g., medicine or law), or sometimes inheriting it from someone who did so. Yet with all the paths to getting rich – which often take years and decades – one can lose their wealth remarkably quickly with an especially poor decision. Leading Morgan Housel to quip in his recent book “The Psychology Of Money,” that: “There are a million ways to get wealthy , and plenty of books on how to do so. But there’s only one way to stay wealthy: some combination of frugality and paranoia.” Which is especially relevant in the current world of high-flying concentrated wealth creation – from building a business, to get the timing right on a stock like Tesla or GameStop, or Bitcoin or an NFT – where the brain can quickly get hooked on the addiction of wealth creation (as the value flies higher) and fail to recognize when it’s time to transition from getting rich (where concentration often does produce outsized wins) and staying rich (which in the end is far more boring and mundane, through pathways like diversification). Which means, especially for those who have created wealth, it’s important to remember that when you’ve already won the race, you don’t have to keep running at the same pace. So for affluent clients who still want to participate in the race, do so if you must – but only with the amounts you truly can afford to lose, which may still be a sizable chunk of money, but should still only be a small slice of the total.

Who Feels Rich Really? (Nick Maggiulli, Of Dollars And Data) – Most human beings are wired to want more than they have, which on the one hand can stoke a desire to grow and achieve something great (and leads to much positive in the world), but can also make us miserable in a relative pursuit of never being satisfied that what we have is “Enough” and always wanting more (even and especially more than we ever really need). For instance, ex-Goldman CEO Lloyd Blankfein, in a recent interview, claimed that he is not really “rich”, suggesting instead that the current billionaire is still just “well-to-do” and that he doesn’t feel rich or “behave that way”. Of course, the reality is that when you often hang out with people like Jeff Bezos and David Geffen and count hedge fund managers Ray Dalio and Ken Griffin amongst your peers, having “just” $1B may not seem like much. And notably, the phenomenon of being objectively affluent but not feeling that way isn’t unique to Blankfein; a recent study from the MIT Press finds that most households in the upper half of the income spectrum don’t realize (at least on average) how good they have it, persistently underestimating their position on the income distribution relative to where they actually stand (from the median household still believing they’re only the bottom 1/3rd, and even the 90th percentile household “just” thinking they’re in the 60th to 80th percentile). In part, this is simply because we virtually all know at least one person who is far better off than we are, and if we see frequent reminders of their wealth, it quickly seems like there are regular instances of feeling less wealthy than others, which we steadily misinterpret into thinking ‘everyone’ (or at least a lot of other people) are doing better on average than they really are. In fact, even in the context of the US, the median (50th) percentile of net worth is $93,170, which may feel like the “average American”, but would still put you in the top 10% globally (which we rarely see, spending most of our time ‘just’ with other Americans). Ultimately, though, the reality is that “rich” is a relative feeling, which means there isn’t really a purely objective quantitative answer; Blankfein can still feel not-rich by hanging out with those who have far more than even he does. Which may mean that in the end, feeling rich (or not) is less a function of what you really have, but more about who you (choose to) compare yourself to?

Do You Know the Difference Between Being Rich and Being Wealthy? (Jason Zweig, Wall Street Journal) – In his recent new book “The Psychology Of Money”, Morgan Housel tells the story of a technology multimillionaire who handed a hotel valet thousands of dollars in cash to go buy fistfuls of gold coins, who then flung the $1,000 coins like skipping stones into the Pacific Ocean one at a time “just for fun”. By contrast, another man spent his career pumping gas and working as a janitor… and after he died at the age of 92, left more than $6M to local charities because he had scrimped and put every spare penny into stocks that he held for decades. Which helps to highlight how creating and accumulating wealth is less a test of intelligence than a test of character; the janitor was far better at deferring gratification, and “didn’t need to spend big so other people wouldn’t think he was small”, which led him to a superior financial outcome (as the tech millionaire did in fact ultimately go broke). Similarly, it’s notable that even as many view Warren Buffett as a brilliant investor, the reality is that a significant portion of his wealth is simply a function of compounding over very long periods of time… as Buffet has just turned 90, but in practice accrued more than 95% of his wealth from the compounding on his portfolio after he turned age 65, and if had earned his world-beating returns for “only” 30 years, he would be worth 99.9% less than he currently is! Which means that, in the end, the secret to being rich (like the multimillionaire) may be about having a high income, but the secret to being wealthy is about having the freedom, and the ability, to choose not to spend money (as did the janitor, and Warren Buffett). Thus why many rich people aren’t wealthy, and why many can accumulate wealth even without ever being rich.

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, and Craig Iskowitz’s “Wealth Management Today” blog as well.