Weekend Reading for Financial Planners (May 29-30)

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.

Bank of America’s Merrill Lynch to Ban Trainee Brokers From Making Cold Calls (Rachel Louise Ensign, Wall Street Journal) – In what is being heralded as “the end of an era”, this week Bank of America officially declared that its Merrill Lynch Wealth Management unit will be barred from having its trainee brokers making cold calls, after decades of having cold-calling as the standard practice for new brokers trying to generate clients. In large part, though, the ban on cold calling is simply a recognition that the tactic really is no longer effective, in a world with both a Do Not Call list and fewer and fewer people who even have home phone lines (such that Merrill found fewer than 2% of people who were cold-called even answered the phone), not to mention that fewer and fewer “unattached” consumers who don’t already have an advisor or a brokerage relationship and would be likely to respond to a cold call in the first place. In fact, Merrill’s own internal data showed that not only was the attrition rate of its cold-calling-based trainee program incredibly high, but those who succeeded were more likely to leverage their own personal networks and natural markets and not actually rely on cold calling, anyway. Which is notable because when wealth is not racially distributed evenly within the country, forcing new advisors to rely on their natural markets also results in a less-racially-diverse base of financial advisors. Accordingly, Bank of America Merrill Lynch indicated that going forward, it will rely on a combination of LinkedIn marketing for digital outreach, and better leveraging its own internal bank referrals to seed newer advisors with clients, which makes it feasible to pay those advisors a base salary (now $65,000/year), and attract a more diverse base of advisors (who will no longer need to come from a family or neighborhood of affluence in order to have a leg up on marketing themselves). In fact, it anticipates that the majority of trainees will come from the Bank’s existing Financial Advisor Solutions team (who currently help self-directed MerrillEdge clients), which has already been hiring more than 50% female and 60% non-white over the past 6 years. On the other hand, it’s also notable that if Merrill Lynch advisors are increasingly reliant on Bank of America referrals for new clients, it’s also easier for Merrill to retain those clients if the advisor leaves, and in general, is more likely to attract less entrepreneurial employee-minded advisors who are more likely to stay in the first place, an indirect nod to the ongoing toll that the “breakaway broker” movement is taking on the wirehouse. Nonetheless, the point remains that as so many financial services firms large and small struggle to attract and retain talent in an ‘eat-what-you-kill’ approach, the new Bank of America Merrill Lynch approach is arguably far more likely to attract advisor talent that can actually survive and thrive (albeit in an ’employee’ model where they service clients of the bank instead of building their own practices).

Biden To Unveil $6 Trillion Spending Plan (Kate Davidson, Wall Street Journal) – This week, President Biden announced that he is about to release a new $6 trillion budget proposal for the coming Federal fiscal year, which would increase defense spending by 1.7% (to $753B), but increase non-defense spending by 16% (to $769B), along with an 8.4% increase in discretionary spending (to $118B). Of particular focus, though, are new investments in some of the Biden administration’s stated priorities, including infrastructure spending, education, healthcare, research, and renewable energy, as well as new social programs to support paid family leave and universal preschool. In the aggregate, the proposal would increase debt as a percentage of GDP to as much as 117% of GDP (exceeding the levels that occurred even after World War II), as part of a broader economic policy shift that the government should focus on keeping its debt interest payments in check but not necessarily paying down its debts but trying to run a budget surplus. Notably, a key aspect of the budget proposals includes a number of Biden’s proposed tax increases, with one report noting that the current budget proposal assumes that Biden’s capital gains tax rate increase could even start retroactively as of the end of April (given fears that delaying the implementation until next year would simply result in an onslaught of capital gains harvesting this year to avoid the higher future tax rate). Ultimately, though, the final budget has not yet been released (though it is expected to publish this weekend via the White House’s official 2022 Budget page), and in the end, it’s up to Congress to decide what it will actually approve or not, which means everything from Biden’s new infrastructure and other spending proposals, to the timing of various tax increases (and whether they even happen), is still up in the air and will still need to be hashed out in Washington over the coming months.

How The Pandemic Has Changed Attitudes Towards Wealth (Paul Sullivan, New York Times) — The bank wealth management firm Boston Private recently conducted a survey of 400 HNW investors ($1mm+ investable assets) dubbed “The Why Of Wealth” that revealed how perceptions of wealth vary across generations, and how the pandemic in particular has impacted wealth attitudes. Most notably, the study found that 78% of Millennials and 73% of Gen Xers reported that the pandemic has changed how they plan to use their wealth, while just 26% of Baby Boomers and Silent Gen felt that way. Furthermore, 89% of Millennials and 75% of Gen X indicated that the pandemic has affected the way they define wealth, versus only 24% of boomers and older investors. More generally, the study also found substantively different definitions of wealth across generations in the first place, with younger investors defining wealth in terms of happiness, success, power, and influence, while older investors viewed it in terms of peace of mind, security, and independence. Notably, the largest post-pandemic attitudinal shifts about what wealth affords younger (Gen X and Gen Y) investors include social life and standing, as well as the ability to indulge in hobbies and passions. In turn, while financial wealth still equates to comfort, fewer equate it to peace of mind. Pandemic-driven attitudinal shifts have also led to an increase across all age groups – but most pronounced in the younger segments – in working with financial advisors. Across the board, the percentage of HNW investors using financial advisors increased from a pre-pandemic mark of 63% to a post-pandemic rate of 77%. Gen Z usage doubled from 33% to 67%, Millennial use increased from 55% to 82%, Gen X from 72% to 83%, and older investors shifted from 62% to 67%. Interestingly, the parallel adoption of robo-advisor solutions has also increased among HNW investors, from 16% pre-pandemic to 27% post-pandemic, with the biggest increases among older client segments (16% to 34% among Gen Xers and 6% to 11% among Boomer/Silent Generation investors). Pandemic-based behavioral shifts also included increased charitable/philanthropic giving, as well as increased savings rates, and the survey also revealed material age-based differences in terms of business ambitions, with 44% of Millennials reporting a goal of entrepreneurial success versus just 12% of Boomers.

Vanguard To Offer Private Equity Access To Qualified Retail Investors (Jeff Schlegel, Financial Advisor) – While for many years there has been an open debate in the industry about whether “alternative” investments like private equity are really a better pathway to invest with a new high-risk/high-return asset class, or simply a higher cost alternative that ultimately provides market-like returns (or worse, after costs), it’s notable that this week Vanguard itself announced that it is launching a new private equity strategy (in partnership with $76B private markets specialist HarbourVest). Given the limitations on private investments, though, Vanguard investors who want to participate must either be a Qualified Purchaser (with at least $5M in investments), or be an Accredited Investor with a net worth of at least $1M or more than $200k/year of annual income (or $300k+ if married). The rollout to individual investors is an extension of the private equity strategy, which was originally rolled out by Vanguard and HarbourVest last year to institutional investors (e.g., pensions, endowments, and foundations) that work with Vanguard Institutional. The move is somewhat controversial, though, not only for the dynamics of what has historically been known as a low-cost index provider moving into the world of private equity (though Vanguard is pledging to do so in its ‘usual’ low-cost fashion, at least to the extent it can in the private equity format, and its own internal research suggests that companies IPO’ing later means there is more wealth creation opportunity to tap through private equity investing), but also because the move is being seen by some as an attempt of Vanguard to compete for more HNW investors (historically the domain of independent advisors, many of whom use Vanguard funds themselves and are concerned about direct competition). In fact, while the private equity offering will initially only be available to self-directed advisors using Vanguard, it is expected to be made available to clients of its own mega-corporate-RIA Vanguard Personal Advisor Services later this year. Though at this point, there’s still no word about whether Vanguard’s private equity strategies will be made available to independent advisors who may otherwise use its funds.

Why Index Funds Should Tell Us How They’re Voting (Boris Khentov, Bloomberg) – As proxy voting and shareholder activism takes on an increasingly central focus in an increasingly ESG-centric investment world, while at the same time index funds and ETFs continue to increase their own market share of investable dollars, there is growing attention on how index funds are (or are not) voting their shares in situations where they could actually be the “swing vote” in shareholder resolutions. Yet the challenge is that at best, index funds are not required to share their proxy voting decisions until months after the fact, which creates a very lagging accountability system for investors to express their displeasure with a particular index fund provider (e.g., by taking their portfolio to a different fund provider that may have the same index holdings but vote them differently), and at worst can actually make it harder to build momentum towards key shareholder resolutions (where it may feel like a ‘lost cause’ to even try… unless it’s known that key investors are on board with the initiative). The issue took on a central focus this week, as Exxon Mobil faced a major shareholder proxy battle that would push the company to embrace and create plans for a future without oil, and Blackrock voluntarily disclosed that it would cast its vote largely with the ‘dissidents’ pushing for Exxon to change. Still, though, the “Big Three” of indexing – Blackrock, Vanguard, and State Street – now collectively oversee nearly $15 trillion in investments, and are generally given a full year before they have to disclose how their proxies were voted. Point of fact, though, in March then-acting SEC Chair Allison Lee made several suggestions to modernize proxy-voting rules, including “timelier disclosure” by funds. Which raises the question: given the rise of FinTech, could proxy voting reporting soon become a “real-time” exercise (at least if the SEC forced such disclosures), and if so, would that impact which index fund providers investors choose? Could proxy voting of index fund holdings become one of the next big differentiators of ‘undifferentiated’ index funds?

The Safe, High-Return Trade Hiding In Plain Sight (Jason Zweig, Wall Street Journal) – In the current environment, money market funds are only paying about 0.02%, bank savings accounts are averaging just 0.13%, 3-month T-bills yield only 0.15%, and even the 30-year Treasury bond pays only 2.25%. Yet at the same time, an inflation-protected US Savings Bond – the so-called “Series I Bond” – is currently paying 3.54%! First introduced in 1998, I Bonds pay a combination of a fixed rate for the 30-year life of the bond, plus an inflation rate that adjusts every 6 months. Which is appealing both because if inflation rises, the I Bond’s yield will as well, but also because I Bonds have a ‘floor’ that they can never pay a yield below 0% even if the inflation rate is negative (which effectively makes them a deflation hedge, too). In addition, interest on I Bonds is exempt from state and local taxation (making their effective after-tax yield equivalent even higher), and for Federal tax purposes the I Bond interest can be deferred until maturity or until it’s redeemed (and may even be tax-exempt when used to pay college tuition for certain lower- and middle-income families). On the other hand, I Bonds can’t be liquidated until they’ve been held for at least 12 months, and if they’re sold within the first 5 years they forfeit the last 3 months worth of interest (though even after the penalty, the yield after 1 year is still far better than most other alternatives!). In addition, I Bonds can only be purchased at an amount of $10,000 per year per account holder. The biggest caveat, though, is that I Bonds can only be purchased directly from the government via a TreasuryDirect account, and as a result can’t be held directly in an advisor’s managed account (which from a business model perspective, makes it easier for advisors who bill on ‘assets under advisement’ including held-away assets). Still, though, in this environment I Bonds are mathematically far more compelling than a CD (at least for 1+ years), at least to the extent they can be purchased, and given their government bond backing are arguably a compelling component of almost any longer-term bond allocation as well (where the 12-month liquidity constraint would not be an issue).

3 Themes Shaping The Future Of 529 Savings Plans (Madeline Hume, Morningstar) – 529 college savings plans first emerged in the late 1990s, making many of the plans just as old as the students whose graduations they funded this year, and after 20+ years, the 529 plan landscape continues to evolve. In its latest “529 Savings Plan Landscape for 2021” report, Morningstar highlights a number of key emerging and ongoing trends, including: the number of plans offering gradual glide paths that reduce equity exposure over time is on the rise (with 3X as many such offerings today as there were just 5 years ago), though such changes are shifting from age-based glide paths that make big (e.g., 10%+) shifts at set ages to more target-date-style funds that make smaller more frequency changes (which reduces the timing sensitivity); popularity is still rising as 529 plans themselves become more flexible with recent changes from Congress (as the list of qualified expenses continues to grow to a wider range of options than ‘just’ traditional college education, from adding K-12 expenses in 2017 to the ability to cover up to $10,000 of student loan debt under the 2019 SECURE Act); fees for 529 plans have been trending down (though not surprisingly, advisor-sold plans are still more expensive, by an average of 0.54%, as the advisor is compensated for their own services); and thus far 529 plans continue to skew towards wealthier clients (in part because couples with <$80,000 of income don’t pay taxes on capital gains and qualified dividends anyway under the current 0% bracket, so there is little additional value in a tax-free college account), such that some states are seeking to further broaden accessibility with new child savings accounts initiatives (e.g., Pennsylvania seeds a 529 college savings account with $50 or $100 for every baby born or adopted by in-state families).

No, Millennials Aren’t Poorer Than Previous Generations (Nick Maggiulli, Of Dollars And Data) – Recent media coverage has presented a litany of articles around how the Millennial generation is ‘poorer’ than prior generations were at the same age/stage of life, with Millennials owning ‘just’ about 5% of all wealth (according to Fed data). However, Maggiulli notes that this is in large part distorted by the relative size of the generations compared to their predecessors (e.g., the Baby Boomers were a much larger percentage of the total population when they were young than Millennials are relative to the current world population); in fact, if the analysis is adjusted to look at financial assets per capita (i.e., adjusted for how many people there are in the population), the reality is that Millennials appear to be ‘right on track’ for their wealth accumulation relative to previous generations. Of course, financial assets alone can be distorting – given the impact of debt, especially with the rise of student loan debt – but Maggiulli finds that even on a net worth basis, Millennials are still almost precisely on track with where Gen X was at a similar age, and trending in line to where Baby Boomers were (when the data on them begins in their late 30s). Similarly, when drilling down to the data on income, and adjusting that for inflation, the results similarly show that real (inflation-adjusted) household income for those under age 35 (i.e., Millennials today) is still slightly higher than it was 30 years ago, and that outcome holds up and down the income deciles (except notably at the higher top-90% earners, who did have slightly higher real income in 2007 before the financial crisis than they do today). And the numbers aren’t substantively different when broken out by educational attainment as well (though for those with at least some college, income levels are higher than they were in the 1990s but slightly lower than they were in the 2000s). Nonetheless, there is one area where Millennials do seem to be faring far worse than prior generations: non-home debt per capita (in particular, driven by student loans, as debt loads for those with at least some college really are exploding upwards), which is leading to Millennials with college degrees having slightly lower net worth than prior generations (though at the bottom decline, net worth levels for Millennials are much lower). Which suggests that in the end, Millennials as an overall generation really are not much worse off than prior generations… though there is a clear trend emerging that at least a segment of Millennials really are struggling with massive student loans that aren’t translating into higher income and wealth after college (though on average, investing in a college education with student loans is still resulting in a wealth path similar to prior generations).

Advisor Launches ‘Onramp’ For Advisory Firms To Access Bitcoin And Other Cryptocurrencies For Clients (Christopher Robbins, Financial Advisor) – One of the biggest challenges for financial advisors who want to support their clients investing in cryptocurrency is that most traditional RIA platforms can’t hold crypto assets, and may not even be able to feed in data from external cryptocurrency platforms to track and monitor all of a client’s ‘off-platform’ crypto investments in one place. To address this gap, Onramp Invest has announced the launch of a data platform that will funnel data from crypto-custody providers, Gemini and Prime Trust, and CoinDesk into advisor software platforms like Wealthbox and Advyzon, making it possible to see a client’s cryptocurrency holdings alongside their other household financial information. In addition, Onramp is offering advisor education on cryptocurrency, including Interaxis’ Certified Digital Asset Advisor (CDAA) designation, though ultimately the platform is positioning itself as a single centralized source for integrations between “crypto” providers and traditional advisor software solutions. As ultimately, even if very few advisory firms are currently actively recommending cryptocurrency into client portfolios, it’s still appealing for advisory firms to at least be able to track clients’ outside holdings to help monitor their financial situation.

The Visible Expert: How Ordinary Professionals Become Thought Leaders (Aaron Taylor, Hinge Marketing) – In almost any domain of professional services, there are a wide range of professionals who have expertise… and a smaller subset who are more recognized industry thought leaders that have become “Visible Experts” in their particular domain. Yet as it turns out, many of the most prominent Visible Experts were not necessarily the most brilliant people with the highest IQs – despite now being broadly sought out in their industries, quoted in the media, and invited to speak at conferences. Instead, Visible Experts usually share just three core traits: 1) a willingness to teach; 2) good communication skills; and 3) a commitment to see it through. In other words, Visible Experts are simply teachers who build their reputation by teaching and sharing their knowledge, which then feeds on itself as the expertise is recognized and more sought out, which leads to more visibility and additional growth. The key, though, is not about becoming an expert in “everything”, but instead gaining prominence by narrowing their scope of expertise and becoming really known for one particular thing; in other words, Visible Experts focus on some kind of niche or specialized area they can truly master, study the audience of people who care about or are impacted by it, sharpen their expertise by studying that particular matter thoroughly, and then sharing the expertise they develop in a way that builds their visibility by either being a Contrarian (who is noticed for their alternative views), a Curator (who is known for collecting all the best thinking together and sifting through it), or a Bridge Builder (who makes the connections that others don’t see). The end result is still a wide range of levels of Visible Expertise, from Resident Experts (who can charge 2X what the average person does), to Local Heroes (who charge almost 3X), the Rising Stars (who charge 3.5X), the Industry Rockstars (who charge an average of almost 6X), and the Global Superstars (who charge an average of more than 10X the average individual). Notably, this suggests that building expertise doesn’t just add to the ability to charge premium fees, it compounds exponentially instead, making focused expertise in a particular area far more valuable than remaining a generalist.

On the Benefits of Curiosity (Ben Carlson, Wealth Of Common Sense) – One of the interesting effects of curiosity is that it can result in discoveries and opportunities that no one ever anticipated. A case-in-point example was an incident in the early 1980s during the Cold War when the Reagan administration was concerned that the Soviet Union was using chemical warfare against Laos and Kampuchea, based on the discovery of “yellow rain” on their local plants (i.e., tiny yellow spots that were presumed to be the aftermath of chemical attacks)… which an independent researcher who had been studying the patterns of Asian bees realized was not the remains of chemical warfare but the excrement of local honeybees (resulting in the State Department dropping their chemical warfare accusations and a de-escalation of Cold War tensions!). More generally, the key point is simply that often success isn’t driven by those who possess the best ‘natural smarts’ or who embody the best ‘natural sales skills’, but instead those who are lifelong learners who stay curious and in the process ‘discover’ their way into opportunities that they may not have been specifically looking for, but never would have found had they not stayed curious. Or stated more simply, “the subjects you’re curious about can have unintended positive consequences on your life. You just have to pull the thread to see where your curiosity takes you.”

Bet On Yourself (Thomas Kopelman) – One of the hardest things for most people to do in life is to take a career leap into the great unknown, from taking the leap into the financial services business as a career changer, breaking away and going out as an independent to launch an advisory firm, or making a jump from one advisory firm to another; as a result, even when we’re substantively unhappy, it’s hard to accept that the risk of the unknown is really better than what at least is a known certainty (even if not currently an ideal one). Yet Kopelman notes that after going through a similar challenge himself – from starting at a ‘previous employer’ that pushed a certain sales-based approach (that it insisted has “worked” for many prior advisors, but also had an 80% failure rate and didn’t align to how Kopelman wanted to serve clients), to taking the leap and “betting on himself” that switching to another firm would afford him a better opportunity to survive and thrive and put in action his ideas. A year later, Kopelman has been able to launch a podcast, a newsletter, and a blog, begin to accumulate an audience of his own, and grind it out after months and months of seeing no results at all (but is now seeing 10-12 new prospects every month that are coming through referrals and his content creation). The key, though, was simply about making a bet on himself – and sticking with it even when he wasn’t good at what he was doing initially – trusting that with time and practice comes momentum. Because in the end, you won’t be good at anything you’re trying for the first time – and neither were any of the people you likely look up to as being masters of that craft now. Even the best only get there with time, practice… and a willingness to bet on themselves.

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 How The Pandemic Has Changed Attitudes Towards Wealth.