Weekend Reading for Financial Planners (Apr 10-11)

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.

Biden’s $2.3T Infrastructure Plan Takes Broad Aim (Andrew Restuccia & Tarini Parti, Wall Street Journal) – Over the past week, President Biden unveiled his proposed $2.3 trillion infrastructure plan, dubbed the American Jobs Plan, which covers a wide range of initiatives from fixing nearly 10,000 bridges and 20,000 miles of roadway, building 500,000 electric-vehicle charging stations, replacing the country’s existing lead pipes and service lines, and repairing aging public schools. Other initiatives include $400B to help care for the aging and those with disabilities, $300B to “boost” the manufacturing industry, $213B to retrofit and build affordable housing, and $100B to expand broadband internet access. And notably, the infrastructure plan is still ultimately just intended to be the first half of a two-part plan, with the second focusing more on child care, healthcare, and education, and is expected to be unveiled later in April, and may bring the total cost of the legislation to $3T to $4T. However, the legislation still faces a significant uphill battle, both from more progressive Democrats who contend that Biden’s proposals don’t go far enough (from supporting diversity to addressing climate change), Republican concerns that the infrastructure investments aren’t being targeted appropriately, and a wide range of concerns about how to “pay” for the legislation with various proposed tax increases, from a proposed corporate tax increase (from 21% to 28%), and expanded taxation of foreign income on multi-national companies (which would roll back many of the international-taxation reforms implemented under the prior administration), plus a whole host of potential tax law changes for individuals. Notably, though, Biden is claiming that any tax increase proposals will stand by his campaign pledge not to increase taxes on anyone making less than $400,000, though some Democrats are calling for Biden to go even further and unwind some unpopular provisions from the Tax Cuts and Jobs Act of 2017 (most notably, the cap on the State And Local Tax [SALT] deduction). At a minimum, though, expect several months of debate, and a number of modifications along the way, as the administration tries to ensure it will have the votes to get the legislation through Congress.

CFP Board’s New Spring Public Awareness Advertising Campaign Will Focus On Retirement Planning (Mark Schoeff, Investment News) – This week, the CFP Board announced its latest set of consumer ads for its ongoing public awareness campaign, which this spring will include a series of “With a CFP professional” 15- and 30-second TV ads on major networks (along with streaming video channels from Roku to AppleTV to Hulu), radio spots on shows like NPR’s “Morning Edition” and “All Things Considered”, and various websites and social media platforms. As with prior years, the CFP Board’s ads continue to be focused on a consumer segment dubbed the “Mass Affluent Initiators” (those aged 35 to 64, with $100,000 to $1M of investable assets, and a minimum household income of $100,000). Ultimately, the ads are intended to highlight the value of CFP certification, promote consumer awareness to seek out a CFP certificant when looking for a financial advisor, and drive consumers towards the CFP Board’s “Let’s Make A Plan” advisor search website. Notably, 2021 marks the 10th year of the CFP Board’s public awareness campaign, which launched in 2011 and has spent approximately $10M per year over the decade since, funded by an additional $12/month ‘surcharge’ increase that was applied to CFP certification fees at the time.

More Americans Want To Retire by 55. How Can FAs Help? (Ming Li, Financial Advisor IQ) – Based on a survey of nearly 6,000 Americans, recent research from Hearts & Wallets, a data and analytics company that specializes in how consumers save, invest, and seek financial advice, highlights the material impact the pandemic has had on retirement planning mindsets. In fact, 39% of U.S. adults anticipate retiring (or more precisely, stopping full-time work) by age 65 (up 9 percentage points over the past five years). And a full 1/3 of those under the age of 54 “aspire to retire by age 55”. As the Hearts & Wallets team points out in analyzing the survey results, “it may be that seeing the pandemic disrupt so many lives and jobs has resulted in a renewed appreciation for building financial security, planning for a possible end to work, and frankly just looking forward to a time when they can enjoy life a little more than was possible in 2020.” Yet, few are realistically prepared to do so, with 71% having saved less than $100,000, and only 8% having saved $500,000 or more. Hearts & Wallets goes on to offer suggestions for financial advisors seeking to better connect with prospective retiree clients, including a greater focus on education, and providing not just planning advice but coaching that can help these pre-retirees better align their behaviors with their aspirations, from highlighting peak accumulator behaviors such as homeownership and tax-smart investing via retirement savings plans to reframing retirement goals to talk more about assets-to-income ratios (e.g., have at least 3X your annual income saved by age Y), rather than exclusively focusing on retirement replacement rates to project retirement success. The Hearts & Wallets study also offers some useful data-driven cautions about applying broad-stroke age-based assumptions; for instance, be cautious about lumping everyone in the 55-64 age bracket together as one big “pre-retiree” segment, as in practice only 24% in that age range consider themselves to be pre-retirees, 32% don’t anticipate stopping full-time work within 5 years, and 44% reported that they were already retired! Which also helps to emphasize the need for a more fluid approach to the retirement transition, as opposed to the traditional notion of an overnight full-stop switch from full employment to zero work. The bottom line, though, is simply that if you last completed a financial plan with a client 2 or 3 years ago, there is a high likelihood that their mindset, situation, and outlook, has changed dramatically since the pandemic, and it’s time to recalibrate retirement plans with an update.

Financial Advisor Fees: How To Include Them On Your Website (Blair Kelly, Twenty Over Ten) – When shopping for a product or service online, one of the first things that most people look for is the price. Not that price dictates all – we often, for many reasons, don’t choose the lowest cost solution – but one of the virtues of internet shopping, in particular, is the ease by which we can compare the costs of various solutions to hone in on which one(s) we might want to learn more about. In fact, companies that hide their fees online often end out breeding distrust, raising the question of “do they have something to hide if they’re not showing the cost!?” Yet when it comes to financial services, it’s still common for advisors to state that they prefer to “meet in person to discuss fees and pricing”, often out of fear that clients will have sticker-shock at the cost of advice if presented on a website without an opportunity to give it context and show the value. Still, though, the irony is that in today’s environment, an unwillingness to share the cost on the advisor’s website may imply the firm is even more expensive than it actually is (“why else would the fees be hidden?”), such that showing even “high” fees could still attract more prospects than not showing them at all (and if the advisor is going to lose the prospect to another advisor who listed lower fees, not showing fees and making prospects think the firm is even more expensive will likely just amplify the problem further). Still, though, that doesn’t mean it’s necessary to just write the fee on the advisor’s website with no context. Instead, Kelly highlights a number of firms that are effectively showing their fees – and the associated value – right on their website, with one firm showing their financial planning fees as a series of “packages” that lays out the benefits of each, another that just shows an outright fee schedule of “one-time fees” and “investment management fees”, and a third that shows their fees by client type (e.g., $1,500 for single people and $1,900 for couples). One firm actually set their pricing out in a chart that shows their services as “tiers” and includes checkmarks for which services are included with each tier. The key point, though, is simply to recognize that presenting fees on a website doesn’t necessarily mean just printing “the fee” with no further context; instead, if the concern is whether prospects will appreciate the value that will be provided for the fee that is charged, the key is not to hide the fee but to show the value (right there on the website).

Low Cost Is Better Than Free (Dan Egan) – The transparency of the internet, combined with the relentless march of “software eating the world”, has driven more and more services to become free. In the context of the financial services industry, in particular, this is often lauded (at least from the consumer perspective), as the message of those like Vanguard’s Jack Bogle (that “cost matters“) has driven more and more consumers away from high-priced investments and towards lower-cost choices instead (including Bogle’s own Vanguard funds). Yet, as Egan notes, the human brain handles decisions around “free” in a very different way than “[very] low cost”. For instance, one study found that when consumers were offered the choice between decadent Lindt truffles for $0.15 versus simple Hershey’s Kisses for $0.01, 73% of consumers chose to pay the extra $0.14 for the truffles; however, when the price of each was reduced by 1 penny (so the Lindt truffles were $0.14 but the Hershey’s Kisses were free), suddenly 69% of consumers chose the Hershey’s instead… despite the same $0.14 difference in price. The reason, simply put, is that the brain has to put in the energy to evaluate any cost trade-off… but “free” shortcuts that comparison process by effectively offering a solution that doesn’t require evaluation (free is free!), driving our brains to disproportionately choose the Free solution over even considering a low-cost alternative. However, when it compares to evaluating anything where there can be a material difference in quality – e.g., financial advice – there’s an additional caveat to “free”… when we don’t know the quality, we often use price as a substitute for quality, where “free” implies low value and a ‘real’ price tag implies something “must” be better (otherwise, why would they be charging for it over the free alternative!?). And because “free” rarely is actually free – businesses providing services have to make money somehow – the irony is that “free” can actually end out costing more in the long run (from the indirect costs of Facebook selling your data, to the more direct costs of a “free” brokerage platform selling your Order Flow). Which means that “free vs paid” is really more often just a choice about the more or less transparent ‘currency’ by which you’ll pay… such that in the end, often the better and safer choice is not to choose the free provider, but the one that charges a ‘reasonable’ low cost, as, despite the temptation for “free”, the transparent reasonable cost is often the one that actually turns out better in the long run.

Accountability: An Advisor’s Silent [And Under-marketed] Value (Thomas Kopelman) – While we often lament it, the tendency to procrastinate is simply part of human nature, where we don’t necessarily want to take up a challenging task any sooner than we absolutely have to… sometimes to the detriment of the quality of the work to be done, and occasionally resulting in the task not even being done, despite having acknowledged the importance of doing it. The procrastination challenge arises in both our work and our home life and is especially prolific when it comes to the tasks that we don’t enjoy doing in the first place… which for many households, includes their personal finances, such that financial planning in particular (and improving our financial behaviors) often ends out the last thing done (to the point that it doesn’t get done at all). For most, the key to overcoming procrastination usually comes down to accountability: having something, or someone, to whom we feel accountable, such that we “have to” actually get it done, if only to not let down our accountability partner. Accordingly, Kopelman notes that when it comes to financial planning in particular, a key part of the advisor value proposition is not just analyzing the client’s situation and crafting the advice to recommend, but also helping ensure that clients follow through and implement it by holding them accountable to do what they agreed to do in the first place. For instance, after delivering financial planning recommendations, Kopelman adds a follow-up call a month later to check-in and see if the recommendations are actually being implemented (e.g., “did you get a chance to contact your 401(k) provider and make those allocation changes to your account?”). Similarly, if clients set a short-term goal for something (e.g., pay off a student loan in 6 months, hit an emergency savings goal in 4 months), he will set a meeting on the calendar to touch base and ensure that the goals were achieved. Notably, Kopelman finds in practice that clients often don’t actually follow through on the implementation until just 1-2 days before the scheduled check-in meeting… but in the end, that’s precisely the point of having accountability meetings in the first place? There’s nothing like having accountability and a due date/deadline to make sure that something actually gets done… even if it’s just nudging us to do what we already know we “should” be doing, but need that extra nudge to actually get it done.

The Major Conflicts Advisor Recruiters Won’t Tell You About (Ryan Shanks, Financial Advisor) – When it comes to making the decision about what broker-dealer or RIA custodian platform to be affiliated with, most advisors look to some combination of the platform’s services and capabilities, their costs and benefits, and try to weigh the pros and cons to compare amongst them. Yet as Shanks notes, in the end, independent advisors get to control and design their own businesses, which means the real issue is not a comparison of cost/benefit trade-offs, but looking introspectively to ask “What’s missing in your career? In your life?”, figuring out what your ideal business would look like… and then taking the next step necessary to move in the direction that gets the advisor closer to that ideal vision of themselves. Which in the end, won’t necessarily be a fit for all advisor platforms, each of which has its own strengths and weaknesses that align better to some visions of success and worse to others. Or stated more simply: the key to choosing platforms is “Fit Over Fee”, and you can’t figure out what the right fit is until you get clear on what you want your own future to look like in the first place! Unfortunately, though, Shanks notes that the desire for “Fit Over Fee” doesn’t always align to the recruiters that work with broker-dealers and RIA custodians in the first place, who sometimes have their own fee incentives to steer advisors towards one provider over another. As while the “standard” recruiter compensation is to be paid either 6% of the advisor’s trailing 12-month revenue (known as “T12” for short), or 6 basis points on their advisory AUM, in practice some platforms try to increase the incentives to recruiters to win more business (e.g., by paying out more of the compensation upfront, or offering “accelerator” bonuses to incentivize recruiters to bring them more opportunities). Which can not only incentivize recruiters to steer advisors towards those particular firms paying the most (instead of focusing on Advisor Fit first), but can completely remove a number of small-to-mid-sized platforms, RIA custodians, and super-OSJs that can’t compete because they can’t afford to pay the upfront fees in the first place. So what’s the alternative? Shanks advocates that the advisor recruiting industry itself needs an overhaul, with a flat-fee recruiting model that results in the same recruiter compensation regardless of what platform they go to – the equivalent of a shift from commissions to fees for the recruiters helping advisors who may be shifting from commissions to fees (or more generally from one platform to another). Which in turn can free up more dollars from the platforms to reinvest into transition packages that support the advisors themselves.

Schwab Upends Traditional ‘Basis Point Fees’ For RIA Recruitment And Pushes For Soft-Dollar Cuts (Lisa Shidler, RIABiz) – When financial advisors are recruited to change platforms, most are unaware of the fees that recruiters earn in the process of helping them make the transition. Of course, it’s clear that no one works for free, but because industry recruiters are typically paid by the platforms themselves – not the advisor who’s making the switch – there has been little transparency about either what recruiters earn, or how the recruiter’s economics otherwise impact the economics of the transition deal itself. To drive the change, Schwab announced last month that going forward, it would require that recruiters would have to be paid directly as a cut from the soft-dollar benefits that the RIA custodian provides to advisors on its platform, which typically help pay for compliance, technology, and other in-kind services. The end result may be the same compensation for recruiters, but it would mean that Schwab gets to allocate the cost out of the soft dollar budget it already has (rather than a separate recruiting fee on top), and RIAs may suddenly become much more aware (and potentially, price-sensitive) to the compensation that recruiters receive. From Schwab’s perspective, though, the concern is also that recruiters often try to insert themselves into a deal for an advisor who is already making a change, effectively scalping the recruiter’s fee for an RIA that was going to join Schwab anyway… a practice that is difficult for Schwab to limit (not knowing when and how early the recruiter was really involved, or not), but that the advisor themselves could and ostensibly would limit if the recruiter’s compensation came from the advisory firm’s own (soft dollar) budget. In other words, the open question at this point is whether forcing more transparency on recruiter fees will drive them down, drive recruiters away, or simply force recruiters to be clear about their value (allowing the good ones to succeed but weeding the bad ones out).

As M&A For Advisory Firms Booms, So Does The Use Of Earnouts (Charles Paikert, Barron’s) – As mergers and acquisitions amongst advisory firms continue to boom, and valuations for advisory firms continue to rise, there is a rising focus on how those acquisition deal terms are structured to achieve the valuation that is promised… in particular, how much of the deal will be paid upfront in cash (or at least set at a fixed price that is paid in installments over time), and how much will be structured as an “earnout” that is only paid if the revenue actually sticks around and transitions to the buyer (often with set targets that have to be achieved to secure most/all of the earnout payment). With the COVID-induced market volatility of 2020, earnouts became increasingly popular as a way for acquirers to still offer a “full” valuation, but one with more contingencies that would allow them to end out paying less if it turned out that less revenue transitioned (either because the firm struggled to transition its clients in a virtual environment, or in the event that there was a subsequent market decline and the firm didn’t end out with the same level of revenue as originally projected and anticipated). On the other hand, as the markets – and confidence in advisory firms overall – has rebounded, so too has the balance of upfront/guaranteed versus earnout/contingency payments, with M&A consultant Advisor Growth Strategies noting that today, earnouts are typically no more than 10% – 15% of the total purchase price (with the remainder paid either as cash upfront or via equity allocations in the newly merged entity), and earnouts themselves are getting shorter as well (e.g., where the seller shares in the risk for ‘only’ 1-2 years, not 3+ as was more common in the past). Or stated more simply, as the number of buyers continues to outnumber the sellers, the high demand paired with limited supply is not only driving up valuations themselves but also increasingly shifting the terms of the transaction to favor the seller, too.

Worker, Interrupted: The Cost Of Task Switching (Kermit Pattison, Fast Company) – A recent study of the modern workplace found that the average worker is interrupted every 3 minutes, as the burden and volume of multi-tasking continue to bear down on us. Notably, though, the research finds that this is not only a matter of being interrupted – e.g., by the co-worker knocking on our door or the unexpected phone call – but also that nearly half of the interruptions are self interruptions, where we take it upon ourselves to pause and start surfing the web, or place a phone call, or do something else to pause what we were otherwise in the midst of working on. In part, this appears to be because not all interruptions are entirely counterproductive – it’s the interruption tasks that require us to really think that pull our brain’s focus away, while “mindless” interruptions can actually give our brains a moment to process information and incubate on an answer we’re trying to solve for. Alternatively, some interruptions are still within the same “working sphere” (e.g., from writing a financial plan for a client to pausing and messaging a team member to ask them a question about that client), and when looking across working spheres, the researchers found that people actually “only” task switch every 10.5 minutes (not just every 3 minutes). Still, though, the toll of task switching is significant, with the research finding it takes an average of 23 minutes and 15 seconds to get back on task after a switch occurs. And those who engage in rampant task switching not only struggle with distraction and focus, but actually show more signs of stress, mental effort, and feelings of time pressure and mental work overload. On the other hand, the researchers also found that when we anticipate being interrupted, we actually tend to work faster and more focused (if only to get it done before the interruption), such that those who don’t anticipate interruptions tend to actually work slower (and don’t necessarily get a lot more done without the interruptions!?). Accordingly, the suggested strategy is not to try to carve oneself off into a cocoon of uninterrupted productivity, but instead to structure more “planned interruptions” that form mini-deadlines (e.g., checking email at 10AM and 2PM, and talking a walk at 4PM), around which the day can be structured for productive focus.

How To Keep Focus, And Why We Lose It (Stephanie Bogan, Investment News) – For anyone who wants to achieve the next level of success, whether it’s generating more revenue or income, or more time off or professional satisfaction, business guru Stephen Covey is famous for observing that “the main thing is to keep the main thing the main thing”. In other words, as advisors we often set goals – e.g., to grow revenue, deliver more value, or be more efficient – but then as the year progresses, we get stuck on the task-list treadmill, and never actually find the time to do the things that move us forward. Or even ‘worse’, we try to get “more efficient” so that we can fit more things on our plates, only to find that it feels like we’re drowning even faster as a result. In other words, the key to achieving more is not to try to squeeze in more goals to be accomplished – which in the end just forces the goals to compete with one another – but instead to figure out which goals are really worth pursuing the most. However, the reality is that choosing which goals to pursue actually is a challenge unto itself; as James Clear quips in his recent book “Atomic Habits“, the reality is that “most people don’t have trouble focusing. They have trouble deciding” what to focus on, instead trying to diversify our “yes’s” to the point that there isn’t time to achieve any of them. So the next time you’re considering a new idea to take on, don’t just consider “Is this a good idea?”, but instead as “What is this in service of…?” followed by “At the cost of…?” And consider whether it really supports your Main Thing, or is just a distraction. Of course, that means first figuring out what your Main Thing actually is. But the good news is that once you get clear on what the Main Thing really is, Bogan notes that “when your vision is clear, your decisions are easy”.

How To Become Un-Busy (Brett Davidson, FP Advance) – Business owners and entrepreneurs often have lots of ideas that can drive the growth of the business, but Davidson notes that, in the end, the key to success is not having good ideas to grow the business, but the ability to execute and actually put them into action. After all, entrepreneurs like Elon Musk, Arianna Huffington, and Steve Jobs, aren’t just known for the amazing ideas they had, but how they implemented their ideas in ways that have impacted the world; in other words, it wasn’t their creative ideas that made them successful, but their ability to turn those ideas into something real. Which is important because, for many, it’s difficult to actually execute new ideas because we’re all so “busy” all the time. Even though the reality is that being busy doesn’t necessarily mean we’re executing something new and impactful; in fact, often the curse of “busy work” is precisely that it’s work that keeps us busy and prevents us from actually executing something that can have real impact. Which means the key is not to get more busy work done with your limited time but to figure out how to do fewer things and do them really well, in a way that truly executes with impact. Notably, though, that also means getting better about filtering what you should be doing, even if that means bouncing your ideas off of others and getting feedback – including and especially criticism about what is not really a good idea and use of time – to better focus on those few areas where execution will drive the best results.

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 Craig Iskowitz’s “Wealth Management Today” blog, as well as Gavin Spitzner’s “Wealth Management Weekly” blog.

Gavin Spitzner contributed this week’s article recap on the Hearts & Wallets study.