Weekend Reading for Financial Planners (June 26-27)

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.

Lord Of The Roths: How Peter Thiel Built A $5B Roth IRA (Justin Elliott, Patricia Callahan, & James Bandler, ProPublica) – While it’s a common asset location strategy to place the highest growth assets (e.g., long-term equities) inside of a Roth IRA, for most investors, a Roth IRA can only grow “so large” with the natural compounding of markets. But this week, investigative journalists at ProPublica released a story detailing how PayPal co-founder Peter Thiel has managed to amass a whopping $5 billion in his Roth IRA since the accounts were first available in 1998. In Thiel’s case, the key was not just buying publicly traded stocks in his Roth IRA, but using his original $2,000 Roth IRA contribution to buy 1,700,000 shares in Paypal for just $0.001/share (back when it was just a fledgling startup)… and subsequently having the Roth IRA explode in value to $28.5M when PayPal was sold years later for $1.5B to eBay. Notably, in subsequent SEC filings, even PayPal itself acknowledged that certain Thiel founder shares may have been sold at “below fair value” – which would be a violation of the prohibited transaction rules for IRAs. More generally, though, the ProPublica story is casting a new focus on the tax strategy of “stuffing” – where shares of early stage companies are ‘stuffed’ into a Roth IRA at ultra-low valuations, in the hopes that they may subsequently explode upwards in value in the future (which would have been significant for pre-IPO PayPal shares in a Roth IRA even if they had been valued higher than $0.001/share). Which in turn also raises questions about how self-directed IRAs investing in non-publicly-traded securities are valued, and who is responsible for reporting the ‘proper’ valuation (as Thiel’s IRA custodian, Pensco, states that it was simply relying on PayPal’s own self-reported valuation). Especially since Thiel appears to have engaged in the strategy serially – using the proceeds from his PayPal shares to subsequently purchase early stage pre-IPO shares of his next company (Palantir) as well as Facebook (back in 2004, when Thiel invested $500,000 as Facebook’s first infusion of cash from outside investors). And with Roth conversion limits lifted in 2010, establishing large IRAs – which in turn can be invested in even more pre-IPO shares – the strategy appears to have expanded even further, with more and more affluent investors involved in starting and growing companies leveraging the strategy to create Roth IRAs worth $10s of millions.

Rethinking Retirement in the Wake of the Pandemic (Mary Beth Franklin, Investment News) – A recent new Edward Jones/Age Wave study, entitled “The Four Pillars of the New Retirement: What a Difference a Year Makes”, is highlighting how the pandemic helped further shift the timing and funding of retirement, and is leading to a greater focus on well-being versus financial wealth. At its core appears to be how the economic fallout from the pandemic was felt so unevenly by Americans in the first place, including a deepening of the gender gap. For instance, only 41% of women continued saving for retirement during the pandemic, compared to 58% of men. Overall, women’s retirement account balances are only 2/3 the amount of their male counterparts’. Combined with longer life expectancies, and often other demands like caring for parents, women have to work that much harder to achieve financial freedom. But these challenges in turn appear to be spawning an increasing interest in advice and guidance – that goes beyond ‘just’ pure retirement planning, as 77% of those planning to retire desire more help beyond finances. And notably, the study offers up material differences between what retirees say is actually important, versus what pre-retirees (ages 50+) think will be important, with the biggest gaps including “how to maintain or improve family relationships” (94% of retirees vs. 12% of pre-retirees), “activities that will give a sense of purpose, meaning and fulfillment” (94% vs. 16%), “what to do to maintain a healthy life” (95% vs. 21%) and “how to save enough to last through retirement” (93% vs. 37%). Which in turn builds on earlier Age Wave research centered on what it means to live well in retirement, which it defines by the four pillars as Health, Family, Purpose, and Finances, with Ken Dychtwald (founder and CEO of Age Wave) emphasizing how important it is to have a clear sense of purpose, and how the benefits include reducing the risk of cognitive decline, cardiovascular disease, and depression. Similarly, with Americans averaging 12.4 years of poor health in their senior years, the study points out that wealth without health is a hollow victory, and the opportunity we have to help clients address the intersection of health and wealth. Specifically, the fear and impact of Alzheimer’s Disease plays an outsized role within both retirees’ and pre-retirees’ greatest worries about retirement: healthcare costs (not to mention quality of life). In fact, Alzheimer’s is the top condition feared by a significant margin (41% vs. 21% for cancer), as currently one in three individuals 85 years of age and older will live with dementia. From the advisor perspective, though, the point is simply that conversations with clients about retirement are increasingly about far more than just their retirement portfolio and retirement income/spending plan itself.

FPA Brings In Outsider To Reverse Its Membership Decline (Karen DeMasters, Financial Advisor) – In its latest quarterly update to Members, new FPA CEO Patrick Mahoney is setting a stark new tone for the membership association amidst its recent membership decline, openly acknowledging that the FPA has had a lack of clarity in who it serves, a muddy value proposition, a lack of relevant benefits that make membership attractive, and a recent history of questionable organizational decision-making… and pledging to tackle the issues head-on, citing playwright and producer Aaron Sorkin who said: “the first step to solving any problem first recognizes that you have one”. Accordingly, Mahoney notes how he has been connecting with board members of FPA’s various chapters, working with staff to more clearly define FPA’s “Core Member” and “Value Proposition”… and announcing the hire of Leslie Whittet, who was formerly the senior vice president of chapter operations for the Association for Corporate Growth, and will take on a new role of “Chief Membership Experience Officer” (CMEO) for the FPA, responsible for both membership strategy and operations going forward. In an environment where FPA has struggled with significant chapter-National tension, Whittet’s hire – and her deep experience working with local chapter systems – is a notable nod in support of FPA’s local chapter system, and a remarkable shift from the prior FPA leadership’s attempts to dissolve and nationalize its chapters just 2 years ago. Though in the end, with FPA’s market share of CFP certificants down by more than 50% since it was established in the IAFP/ICFP merger 20 years ago, the ultimate question is not whether FPA has the desire to grow, but whether Mahoney and Whittet can actually execute the improvements in membership experience necessary to get back on a growth track and capitalize on its base of passionate local chapter leaders. Still, again, as Sorkin notes, “the first step to solving any problem first recognizes that you have one”, which means FPA is at least off to a promising start!

PFI’s Matt Sonnen Takes COO Consulting Downstream With New Digital Offering (Diana Britton, Wealth Management) – This week, PFI Advisors (which provides operations consulting to independent advisory firms) announced the launch of the “COO Society“, which is being framed as a “training and educational platform” for RIA owners and their operations staff to better address their operations and human resources challenges, with core learning paths built around technology, human resources, and business administration (e.g., business processes and workflows, and compliance). As the reality is that while there is a substantial amount of continuing education for financial advisors on the technical topics of financial advice, there is remarkably little when it comes to the operational aspects of actually running and scaling an advice business. At its core, the COO Society is a series of training videos recorded by Sonnen, with interactive Q&A to reinforce the key concepts, along with interviews with some outside consultants, and a chat function where users can bounce questions off each other to interact with the community. Pricing is $600/month for firms to engage (or $6,000/year if paid annually), and is primarily intended for advisory firms with $250M to $750M of AUM that have enough size and systems to feel the pain points of scaling operations in a growing advisory firm, but do not necessarily want to fully engage a consultant on retainer.

Herbers & Company Rolls Out Mobile Training App For [International] Practice Management (Janet Levaux, ThinkAdvisor) – As advisory firms ‘inevitably’ continue to grow (the natural result of steadily attracting clients while maintaining 95%+ retention rates), the demand for practice management content to manage increasingly complex advisory firms continues to grow as well. Accordingly, practice management consultant Angie Herbers announced the launch of Herbers & Company Academy, which will provide online instructional videos and course materials on a wide range of practice management issues for advisory firms, covering the core areas of Business Planning, Client Experience, Digital Innovation, Operations, Employee Management, Technology, Sales, and Marketing. Intended to be consumed in smaller ‘bites’, the Herbers Academy offering is being launched both via desktop (browser) and as a smartphone (iOS and Google) app, and will also include opportunities to engage with other Academy members in discussions, in addition to live biweekly training events, and downloadable tools and templates for advisors to use. And notably, because Herbers’ own client base of advisory firms is international, the practice management tools are intended not just for US advisors but for those running independent advisory firms in other countries (e.g., Australia and the UK) as well.

The Path To RIA Ownership On The Operations Track (Matt Sonnen, Wealth Management) – Creating a pathway to ownership/partnership for new financial advisors has been an increasingly common approach to retaining top talent, as the reality is that if an advisory firm attracts advisors who add significant value to the firm but doesn’t at some point give them a chance to participate in that growth, they’re at risk to leave and start their own firm instead. Yet the reality is that while it’s relatively straightforward to evaluate the potential for equity ownership for advisors who bring in significant new revenue and manage those ongoing relationships – getting a slice of the pie that they’re helping to make larger – there is a slowly but steadily emerging shift to also give key operations team members a piece of the pie as well, recognizing that roles like a COO can also significantly contribute to enterprise value (by improving the business’ efficiency and productivity, which drives up profit margins and the associated valuation of the firm). For many operations team members in advisory firms, though, the question that arises is how to actually ‘make your mark’ and get the attention of the founder about the value that is being created. Sonnen suggests that the starting point is simply to “care a little bit more [than the founder themselves] about something that is important to the business”, and create a demonstrable impact by doing so, recognizing that the biggest driver sometimes isn’t even “the work itself” that the COO does, but how they restructure the team and resources of the team to get more results out of the investments into team and technology that the firm has already made.

Clients More Open to Sharing Personal Data Than Advisors Realize (Ming Li, Financial Advisor IQ) – The growth of ‘big data’ has led to a growing demand for companies to gather and capture more and more data on the customers they serve… and an increasing reluctance from consumers to share their data out of fear of how it may be used to target them. But a recent EY study found that when it comes to financial advisors in particular, even Baby Boomers are as willing to share their personal data with their wealth managers as they are with health care providers, and Gen Xers and Millennials are more willing to share their financial information with their wealth manager over other institutions; in fact, the results show that wealth managers are more trusted with data than financial institutions themselves, as consumers anticipate that wealth managers will be able to better leverage the data to actually provide more relevant services and experiences for them. On the one hand, the results are a positive statement of the level of trust that exists between consumers and financial advisors in particular (as distinct from the higher levels of distrust that still exist between consumers and the broader financial services industry). But on the other, the willingness to share also raises questions about what, exactly, advisory firms are doing with their client data to turn it into more meaningful services and experiences for their clients, and that having a “data strategy” for an advisory firm will become increasingly relevant in the future to ensure the firm is leveraging all the data its various software and tools already increasingly collect.

Why Every Wealth Management Firm Needs A Chief Data Officer (Craig Iskowitz, Wealth Management Today) – The shift of communication from analog to digital – from in-person meetings to emails and video and interactive portals – has transformed a wide range of interactions from something that merely ‘happened’, to events that not only occur digitally but can be captured and tracked digitally, creating what in the past two decades has been an absolute explosion of “data”. For most advisory firms, the data simply forms the building blocks of the information that the firm uses to serve its clients. But Iskowitz suggests that the data is increasingly becoming a distinct asset of the business unto itself that deserves to be managed as such, with an eye on both how it is Aggregated (in a reliable, trustworthy, and scalable way?), Patterned (i.e., monitored and assessed to identify trends), driving Action (i.e., being able to use the data to actually drive decisions), and supporting Evolution of the firm (by spotting new opportunities). In practice, this is playing out as a battle for the “Advisor Dashboard” that forms the hub around which all the data flows (and is monitored and reported upon), leading more and more advisory firms to delve deeper into their CRM systems and various overlays on top (from Salesforce to Tamarac and more), and focus more on ‘what integrates with what’ via APIs to ensure that the data is flowing. In turn, the existence of centralized data also makes it possible for advisory firms to engage in a deeper level of benchmarking, comparing themselves with other advisory firms to understand where/how to adjust their businesses further. However, the growing focus on data itself means it is becoming increasingly important for advisory firms to have a clear plan and strategy for their data… which Iskowitz suggests means some advisory firms will even need to start hiring a “Chief Data Officer”, who will have the responsibility to monitor the gathering, utilization, and protection of data across the entire firm… just as any other ‘key asset’ of a business must be managed?

The Pros And Cons Of Being A Data-Driven Advisor (Angie Herbers, ThinkAdvisor) – The explosion of data in advisory firms and a growing number of ‘business intelligence’ tools to track and manage that data are making it increasingly possible for advisory firms to make data-driven decisions about everything from their pricing to their services to their operational efficiencies. In fact, arguably the whole point of being a ‘data-driven’ firm is to be able to make better data-driven decisions about what clients actually want and what the business really needs based on their actual revealed preferences and needs (rather than just guessing what they might want, and/or making decisions based on a handful of client conversations and assuming that others feel the same way when they may or may not). More generally, data-driven insights help to (more quickly) identify trouble spots in the business to be rectified. The caveat, however, is that data, almost by definition, only captures what has already happened and the outcomes of what the firm already does… not what it might do in the future. In other words, the cycle of look-at-data, fix-what’s-wrong, look-at-data, fix-what’s-wrong, is a fine approach for iterative improvement, but doesn’t necessarily signal to the firm where the broader industry is going, or where the firm itself might need to go in the future in order to stay relevant. In fact, the irony is that being blissfully ignorant of data is often what fuels some of the greatest innovations (because if it was obvious ‘in the data’, it would have already been done by others!?). And great data in one area – e.g., having a high close rate – doesn’t necessarily signal the impact of improvements in other areas (e.g., what if the firm tried to market faster to get more prospects into the pipeline at that high close rate?). Which doesn’t necessarily mean that firms should swing to the opposite extreme and eschew their internal data. Instead, Herbers suggests that the real approach should be “data-informed” while trying to stay “innovation-driven” at the core.

Remember The Office? 150 Years Of Cubicles, Corner Offices, All-Nighters, And The Holiday Party (Curbed) – The office workplace is such a staple of working life, that it’s still stunning for many that ‘just’ 12 months into a pandemic, it is suddenly becoming an object of nostalgia… notwithstanding decades of humor about office challenges, from depressing fluorescent lights to the sea of cubicles to the awkward elevator small-talk. Yet the reality is that the office in its ‘current’ incarnation really is a relatively recent phenomenon, a result of the industrialization of the country, and the shift from farms to factories and from rural to urban life. Accordingly, it is the very early 1900s in New York City – the ultimate urban mecca – that arguably best marks the rise of the Office itself, which in turn helped to cement much of the early framing of the office as a kind of throne room that emphasized the executive in power and the strength of the company’s brand (with buildings so tall and ostentatious they ‘scraped the sky’). Yet at the same time, the Office was recognized early on as a place that brought people together, forming social connections with co-workers both within and beyond the workplace itself. Accordingly, just as companies are ingrained with a culture, so too did office workplaces over time become representative of (and further reinforce) the culture of the workplace. Yet even as questions now arise about the potential demise of the Office, the reality is that its demise has been predicted for nearly 50 years, with the emergence of the telephone and then the computer making it theoretically possible to ‘telecommute’ and work remotely and never return… except companies seem to have always come back to the Office in the end. Which raises the question of whether this time is really different, or simply another iteration in the complex-but-never-ending relationship between businesses and their office spaces?

The Lindy Way Of Living (Ezra Marcus, New York Times) – When times get difficult for humanity, it’s common to look back to the ancient world for inspiration, and the recent challenges of the pandemic are no exception. Yet the question arises, why is it that certain ideas of antiquity seem so persistent (while countless other ideas fall by the wayside). The phenomenon itself is known as the “Lindy Effect”, first traced to a 1964 article but cited more recently in Nassim Taleb’s “Antifragile” book; at its core, the Lindy Effect is the phenomenon that for something perishable, every day is one step closer to the end, but for a non-perishable, every additional day something survives increases the odds it will continue to do so. Thus, for instance, the more a comedian gets television exposure (and widespread awareness that sustains), the more popular they will ultimately become (the original Lindy Effect), and similarly the longer a play survives on Broadway the longer it is likely to continue (e.g., a play that makes it for 5 years is drastically more likely to stick around for 5 more). Accordingly, one of the reasons why ideas of antiquity arguably hold up is because they’ve survived so long, the very fact that they have done so makes their effect more enduring… which Paul Skallas, the self-dubbed “Lindy Man” has turned into a following of figuring out how to take the ideas of antiquity and apply them in modern life. For instance, Skallas follows a diet drawn from the Greek Orthodox tradition (alternating between veganism and pescatarianism), engages in intermittent fasting (which appears across numerous religious traditions), and focuses on beverages with “deep Lindy” history (e.g., tea), and exercise in the ‘traditional’ manner (eschewing exercise machines in lieu of simple weight lifting). At its core, though, the basic principle is simply that any aspect of living that was a part of life 2,000 years ago, and is still known and recognized today, has truly “stood the test of time” – unlike 20th century trends that, even if they have persisted for ‘decades’, are still a recent blip in the context of Lindy-level history – and that in a world that increasingly seems to swing from one viral fad to another, the best way to navigate them is to just focus on those that have Lindy levels of survival.

On The Link Between Great Thinking And Obsessive Walking (Jeremy DeSilva, Literary Hub) – Charles Darwin spent almost 5 years traveling the world and making observations that ultimately led to major scientific insights… and upon returning home to England in 1836, never set out outside the British Isles again for the rest of his life. In fact, Darwin was an introvert, known to avoid conferences, parties, and large gatherings, spending the bulk of his time in a quiet home 20 miles outside of London and writing in his study; even his limited interaction with the outside world was more commonly by letter than visitor. Though Darwin was known to have done his best thinking on what was known as his “thinking path”, a d-shaped path along the edge of his property, and even stacked rocks at the lap point of his walking pathway so he could simply remove one every time he passed to keep track of how many times he’d walked around (without “distracting” himself by trying to actually remember the count). Of course, the idea that we have ‘revelations’ while taking a walk is not new; many people have experienced the moment of feeling a need to talk a walk and clear their mind, and in the process have some breakthrough insight to solve the problem they’re working on. And walking has actually been long associated with creatives, as everyone from Darwin himself, to poet William Wordsworth, philosopher Jean-Jacques Rousseau, along with Ralph Waldo Emerson, Henry David Thoreau, Jonathan Swift, Immanuel Kant, Beethoven, Friedrich Nietzsche, and Virginia Woolf, all known as obsessive walkers. In turn, DeSilva’s recent book “First Steps: How Upright Walking Made Us Human” documents one Stanford psychologist who recently studied the phenomenon, and found that those who had recently gone on a walk (even via treadmill) for an hour before a test showed a 60% improvement in creativity scores, and subsequent research has also shown walking have positive effects on brain connectivity and memory as well. So for those who feel like they might need to go for a walk to clear their minds… trust your instincts!

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 Rethinking Retirement in the Wake of the Pandemic.