Weekend Reading for Financial Planners (July 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.

Has The CFP Board Given Up On Protecting The Public From Unscrupulous Advisors? (Allan Roth, Financial Planning) – The mission of the CFP Board, as stated on its own website, is “to benefit the public by granting the CFP certification and upholding it as the recognized standard of excellence for competent and ethical personal financial planning”. And in recent months, there has been a spate of new enforcement actions, in the aftermath of a July 2019 expose by the Wall Street Journal that the CFP Board had 6,300 CFP certificants with FINRA compliance disclosures who were reported in “good standing” on the CFP Board’s website, which in turn spawned an independent task force on CFP Board enforcement that found the WSJ-reported problems were not new and were systemic, culminating in not only a recommendation for improved enforcement but specifically that “The enforcement program should include proactive elements, including periodic audits of certificants based on: (1) risk factors, history of noncompliance and other systematically applied objective indicators and (2) random sampling.” However, Roth notes that in practice, the CFP Board rejected this recommendation, and that the CFP Board’s latest public awareness campaign has instead shifted its own messaging away from its historical position that CFP professionals are held to a higher standard, and instead now emphasizes ‘the peace of mind that comes from having a CFP professional help to prepare a financial plan’. Which ultimately raises concerns about the Task Force’s finding that “the CFP Board’s enforcement program has not met the reasonable expectations created by its bylaws reinforced by its public characterization of the program”, and whether the CFP Board is actually taking the steps necessary to match its advertising, or if instead it’s simply lowering the bar on its advertising to avoid the issue. Notably, Roth ultimately states that he still intends to renew his CFP marks, because he still believes in the stated mission of the CFP Board (and wants to keep an eye on how they’re implementing it given recent concerns!). But the question remains: is the CFP Board ready to step up and fulfill it… even if it costs the organization by suspending and revoking the marks from CFP certificants who may not actually be meeting the “standard of excellence” the CFP Board professes to set?

Senate Retirement Bill Includes Tax Break For Financial Planning But Only When Paid By Employers (Mark Schoeff, Investment News) – In late May, Senators Rob Portman (R-Ohio) and Ben Cardin (D-Maryland) introduced the Retirement Security and Savings Act, broadly viewed as the Senate companion bill to the “SECURE Act 2.0” legislation winding its way through the House. Unique to the Senate bill, though, is a new provision that would for the first time allow employees to pay for “qualified retirement planning services” (i.e., financial planning advice regarding retirement) on a pre-tax basis when paid directly via employer payroll deductions (akin to deferring salary towards a contribution for a 401(k) plan or making other pre-tax purchases via a Section 125 Cafeteria plan). Pre-tax treatment for financial advice has become a hot issue in recent years, since the Tax Cuts and Jobs Act of 2017 eliminated the entire category of “miscellaneous itemized deductions subject to the 2%-of-AGI floor”, which included the now-no-longer-available deduction for investment advice. Notably, though, the newly proposed provision is different, both in that historically “only” advice on investments was deductible, but the new provision would cover a wider range of “retirement advice” because the deductibility would only be permitted when paid via employer payroll deductions. Which also raises concerns that the new provision may provide an unfair bias towards 401(k) providers offering pre-tax retirement advice – since those plans are typically already connected into employer payroll systems – while excluding independent financial advisors, who generally don’t have any means to bill an employer directly for an employee’s retirement planning advice (in order to get their client the deduction). Furthermore, the payroll-system-based approach to deductible retirement advice would also exclude those who are unemployed, those who have already retired (but may still want and need ongoing retirement advice), and it is not clear how the provision would apply to the self-employed who may want retirement advice (on a pre-tax basis).

House Panel Crafting Bill To Limit IRA Savings (Melanie Waddell, ThinkAdvisor) – After recent coverage from ProPublica on Peter Thiel’s stunning $5B tax-free Roth IRA, the Senate Finance Committee announced that it is exploring legislation that would crack down on “giant tax-free retirement accounts”, noting that the tax-preferences for retirement accounts were intended to support retirement security for the middle-class American, not as an outsized tax shelter for the ultra-wealthy. Notably, Senate Finance Committee Chairman Ron Wyden had proposed back in 2016 a provision that would limit the amount of money that could be held in a Roth IRA, forcing any dollars accumulated above a $5M cap to be forced out of the account over time. Now with the ProPublica report, Wyden’s 2016 proposal may be coming back onto the table, recognizing that Thiel’s actions to use his Roth IRA to buy some of the original startup shares of PayPal, and pre-IPO investor shares of Facebook, was entirely permissible until the prohibited transaction rules for IRAs (albeit with perhaps some debate about whether the PayPal shares were undervalued when contributed, which means the Roth IRA would have been permitted to buy them, but perhaps not quite as many shares as it did). However, a cap on Roth IRA accumulations (with ‘excess’ dollars forced out of the account) would ostensibly limit the potential size of Roth IRAs in the future, in theory allowing them to be “large enough” for the mass of Americans, but not able to grow so large as to become multi-billion-dollar tax shelters. Another potential policy solution may be to bring back the income limits on Roth conversions – which would also limit the amount of dollars that could be turned into a Roth for ultra-wealthy households, thereby limiting their subsequent growth – although notably, Thiel himself appears to have never done a Roth conversion, and instead simply managed to achieve explosive exponential gains with his early Roth IRA contribution by managing to ‘win big, twice’ by investing in both PayPal and Facebook in their earliest startup stages (with his Roth IRA contributions).

When Clients Take the Lead (BCG 2021 Global Wealth Report) – “We started with a radically simple proposition—understanding what clients’ needs are at each step of the wealth management life cycle. By shifting focus from wallets to needs, our analysis revealed whole segments that wealth managers are either underserving or not serving at all.” In its latest Global Wealth Report, BCG projects a $13.5T increase in HNW assets from 2020 to 2025, representing a $44.7B rise in the revenue opportunity for wealth management. Yet within that growth, BCG identifies three segments that are underserved or not served at all, that represent advisor growth opportunities: Mass Affluent Clients With ‘Simpler’ Needs (at least relative to more affluent clients), UHNW Investors with $100M+ in assets, and Affluent Retirees. In particular, BCG suggests a lucrative, underserved market of Mass Affluent investors with $100K – $1M in investable assets, whose portfolio needs are too large to conform to standardized retail offerings, but too small to traditionally attract a lot of attention from private banks and trust companies. BCG notes that succeeding with such clients “requires a radically different business model, predicated on a deep understanding of clients, and optimized for efficiency.” They point to digital solutions as a source of inclusion and revitalization, allowing wealth managers to reach the mass affluent market in a cost-effective and scalable way. To deliver on this hybrid digital wealth model, BCG identifies five key sources of friction that must be removed, including excessive product complexity, limited financial literacy, lack of engaging experience, lack of personalization, and lack of cost transparency, and defines success in serving this market by focusing on hyper-personalization at scale, super-charged advisors leveraging behavioral analytics, contextual and consumable learning, pricing and reporting simplicity, as well as access to what were traditionally UHNW offerings like private equity and alternative investments. Interestingly, BCG suggests the line may blur between discretionary and non-discretionary models, as clients seek out a combination of both advised and self-directed solutions. Other notable highlights include: the “new Ultras” market of $100M+ households have very different expectations, especially amongst next-generation UHNWs, who have a very different profile of an ideal advisor (e.g., “informality is important to me”…”I want the smart awkward guy from The Big Short, not a well-dressed slick talker”); and serving Affluent Retirees, presenting a vision of an advisor-led, digitally-enabled, retiree-servicing and decumulation model addressing their broad set of needs (as distinct from so much of the industry still focused on the accumulation phase). Of course, it’s worth noting that BCG’s primary focus is the large-scale bank and broker-dealer audience, which helps to explain why many of their conclusions are simply ‘stating the obvious’ of what independent advisors have already been doing for the past 20 years. Nonetheless, when major consulting firms are recommending that major institutions move directly into the segments that have long been the stronghold of independent advisors, it presents the potential for a whole new form of competition in the increasingly popular market for financial planning advice.

Clients Are Worried About Their Retirement. Why They’re Not Telling Their Advisors (Sabrina Escobar, Barron’s) – While retirement worries abound, a recent Allianz 2021 Retirement Risk Readiness Study finds that a lot of clients are not actually discussing their biggest concerns with their advisors. Specifically, the study reports that 71% of survey participants were worried about the rising costs of healthcare, 67% were worried about rising costs of living, and 66% were worried that market downturns would affect their savings. When you look at other research showing how the pandemic impacted retirement plans – with many retiring sooner than planned, often involuntarily, especially pronounced among lower earners and the most vulnerable (i.e., 55% of recent retirements for low earners were involuntary, versus just 10% for those in the top 10% of earners) – these ‘newfound’ concerns are arguably quite justified. However, while most indicated they would like financial guidance on navigating these issues, only 49% said they were working with a financial advisor, and even amongst those who do have an advisor, only one-third said they had broached the subject with their advisor, raising concerns about whether advisors “focus too much on finding solutions for their clients and forget to listen to their concerns”. On the other hand, it’s worth noting that the term “advisor” may be applied rather loosely in the context of this research, and may have sometimes simply represented a product salesperson who wasn’t in the business of advice in the first place. Nonetheless, when the widespread consumer perception is that many financial advisors are more focused on what they have to offer than what their clients actually need, the entire profession struggles to gain trust with the public, even as recent studies show there has been an uptick in consumers seeking out financial advice in the aftermath of the pandemic.

Calling For Backup [From An Advisor] (Dennis Friedman, Humble Dollar) – As technology platforms, from online brokers to robo-advisors, make it easier and easier for consumers to manage their own retirement portfolios and automate the process of buying into and rebalancing a diversified portfolio, the question from the consumer perspective is “then why would we need to hire a financial advisor?” Friedman highlights his own journey as someone who was historically a self-directed consumer but chose to hire a financial advisor when he retired. Key factors included: when he realized that his retirement assets were all he was ever going to have upon retiring, he was hesitant to retain the full burden of managing it himself given the consequences of making a mistake; dependability was a major factor, such that one advisor who failed to turn up for an appointment immediately knocked them out from consideration, and having a ‘dedicated’ advisor who could be scheduled as needed was important as well; credentials (e.g., CFP certification or a CFA charterholder) were deemed important for professional credibility; an advisor who doesn’t work on commissions was important, because Friedman didn’t want someone who even might have an incentive to push a higher-cost solution; the portfolio needed to be specifically designed for his circumstances, needs, and goals, but was expected to be built primarily with low-cost broad-based index funds; transparency to go online and see up-to-date information on both performance and costs was crucial; and Friedman did not want to pay for a financial plan upfront, as he wanted the ability to walk away without a fee if he decided it wasn’t a good plan. Notably, Friedman’s ultimate conclusion was to hire an advisor with Vanguard’s Personal Advisor Services, given that he already had the bulk of his assets at the firm, the cost was deemed reasonable (at ‘just’ 0.3% for Vanguard’s advisory fee), and he trusted Vanguard’s customer service and performance.

Money Rules (Morgan Housel, Collaborative Fund) – Last week, Barry Ritholtz posed the question of “what rules of money matter most”, and in this post Housel provides his ’10 money rules’ in response, which include: what money can and cannot do for you isn’t intuitive to most (which is why people are so often surprised about how they feel when they suddenly have more or less than before); getting rich and staying rich are very different things (and require different skills); what’s hard about doing well with money isn’t the formula (which is simple) but the behaviors you battle while implementing the formula (which are hard); expectations move slower than reality (so it’s easy to become frustrated); everything is relative (which is why everyone, regardless of how much they have, still have a tendency to push for “just a little bit more”); debt removes options (while savings adds them); spending money to show people how much you have is the fastest way to have less; and in the end, no one is impressed with your possessions as much as you are!

Overcoming the Frugality Syndrome (Rick Kahler, Advisor Perspectives) – In recent years, there has been a growing movement towards “FIRE” (Financial Independence, Retire Early), often implemented on an accelerated basis with ‘extreme’ levels of frugality that lead to extraordinarily high savings rates and the ability to retire very early (sometimes in one’s 40s or even in their 30s). Yet while there’s nothing wrong with being frugal itself, or even being ‘extremely’ frugal if that is someone’s preferred lifestyle, Kahler notes that when someone imposes extreme frugality on themselves (especially in order to retire very early), it can become such a lifestyle factor that it’s often difficult to stop being frugal once someone does achieve their financial independence. In other words, there’s a difference between someone who is ‘naturally’ frugal, and those who self-impose frugality on themselves nominally as a means to an end (extreme frugality for extreme early retirement)… only to unwittingly find that it becomes their way of life, in a manner that may even limit their ability to enjoy the substantial savings and early retirement that they have achieved, or what Kahler calls a “frugality syndrome”, that ironically just leads the diligent saver to keep saving and even “over-save” far beyond their original goal, unable to stop their own frugal-accumulation momentum. So what can retirees do about this (and how can advisors help)? Kahler suggests that the first key is simply to discuss the frugality syndrome, explaining and normalizing the challenge for clients (especially those who achieved retirement through self-imposed frugality). Next, consider creating a spending plan – not a budget, which limits how much can be spent in each category, but a spending plan to encourage spending right up to the already-determined-to-be-safe target. Because as Kahler puts it, when the path to FIRE is through extreme self-imposed frugality, there’s a real risk that once the FIRE is started, it will be very difficult to put out.

Prudent Ways To Skimp On Emergency Reserve Cash (Jonathan Clements, Humble Dollar) – While having an “emergency fund” is a staple of basic financial planning, near-zero yields on cash makes it especially unappealing to hold any substantive level of cash in the current market environment, both in terms of absolute returns (almost nothing) and the opportunity cost of not getting cash invested and put to more productive use. Accordingly, while the standard approach is to hold 3-6 months of living expenses, Clements offered suggestions on alternative approaches to maintain the necessary emergency reserve, including: if you’ve ever made any prepayments on your mortgage, consider trying to have your mortgage recast for a lower payment, which reduces the amount of fixed costs to be emergency reserved in the first place; take a hard look at what truly are fixed costs, to make sure you’re only emergency reserving what needs to be reserved against (and not holding reserves to cover discretionary payments that in practice would likely just be trimmed out if times were truly tough); remember that having a Home Equity Line Of Credit (HELOC) provides a pathway to borrow against home equity in an emergency (but otherwise doesn’t have the opportunity cost of cash, since it’s not tapped unless actually needed); be cognizant of other pathways to borrow if/when needed, including 401(k) loans or even borrowing on margin from an investment account (which again isn’t ideal, but borrowing in an actual emergency is a reasonable course of action, because you’re only borrowing when you really do need to); contribute to a Roth IRA, recognizing that after-tax contributions can be withdrawn tax- and penalty free if needed; and consider funding an HSA but then pay for medical expenses out of pocket on top (which can presumably be done if you had the extra cash to save in an emergency fund in the first place), and then keep your receipts and in an emergency, use your receipts to validate tax-free withdrawals from your HSA to cover the emergency;

Master Your To-Dos With [Free] Project Management Tools (Katie DeMars, XY Planning Network) – For many people, “to-do” lists are not only an essential aspect of staying organized… they’re also a point of immense personal satisfaction when those “to-dos” get crossed off at the end of the day! In the past, to-do lists were often written down in notebooks or captured on sticky notes, but in the digital world, to-do lists are increasingly digital… which makes them both more accessible (on a wide range of devices!), and easier to use collaboratively with others (e.g., a shared to-do list with an assistant or entire team). In fact, in the current environment, personal “to-do” apps are increasingly intersecting with project management tools for teams, which then integrate with other popular personal and business productivity tools. Highlights include Monday.com, which facilitates not only to-do lists, but other popular self-organizing frameworks (e.g., calendars, timelines, Gantt charts, Kanban, and more), with a wide range of integrations (including to Zapier for anything that’s not already integrated directly). Other options include: Trello, which is particularly focused on managing through Kanban boards (where tasks are organized into columns and moved across the columns as they move through the stages from “planned” to “doing” to “done”) and has an especially “visual” approach to staying organized; Basecamp, which is particularly good for managing to-dos across a team (including the ability to attach conversations to the to-dos and eliminate those long separate email chains!), and can even automate “status check-ins” so everyone gives an update on where they stand on a project (without needing to call a meeting just to say it); SmartSheet, which takes a more spreadsheet-style approach (better for those who historically have preferred to live in Excel or Google Sheets), but goes beyond spreadsheets by attaching workflows, task assignment, file attachments, and dashboards; and ClickUp, which lists itself as a project management tool but in practice is more of an entire productivity platform, covering everything from process management to task management to time management, with a wide range of (albeit not advisor-specific) integrations.

The Perfect Number Of Hours To Work Every Day Is Five (Margaret Taylor, Wired) – In recent months, there has been a growing buzz about the potential for ‘alternative’ work arrangements, not only in terms of whether it’s better to work from home versus the office, but also the four-versus-five-day workweek, and now the 5-6 versus 8-hour workday. One recent business tried adopting a Nordic-style six-hour workday, under the auspices that there is so much ‘wasted’ time through the workday that ultimately the same amount of work could be done in less time, and that a shorter workday would just focus everyone’s attention accordingly. The caveat, though, is that in practice, the compressed workday created more stress for many, who felt anxious about how to squeeze in a ‘full’ day’s work into a sparser number of available hours. Still, though, recent research suggests that about 5 hours is the maximum that most people can really concentrate on something hard (at least on a sustained basis), and that in practice the 8-hour workday is really largely just an artifact of the Ford Motor Company (which employed three 8-hour shifts to keep production running on a steady around-the-clock cycle). And other business experiments have found that when the workday is shortened, while it may initially feel stressful to squeeze everything in, often the more limited time actually encourages the team to find ways to improve efficiency (or decrease distractions!) to ensure all the work gets done in the more limited time window (so that they can subsequently enjoy the rest of the day!). Still, though, the question remains about where the balancing point is between the greater well-being that comes from having more free time (with a shorter workday), and the additional stress of the workday when the pressure is increased to get everything done in far less time. And of course, while 5 hours may be the limit of ‘peak’ creative productivity, not all work requires that level of focused productivity in the first place (which means it may not benefit from the compressed day). Which suggests that in the end, a new 5-hour workday may not become a new staple of the workplace… but that it’s still worth considering for at least some roles, where realistically trying to get more than 5 hours of focused and productive work isn’t likely going to happen anyway?

Effortless: Make It Easier To Do What Matters Most (Greg McKeown, Next Big Idea Club) – In his recent new book “Effortless“, Greg McKeown explores the common challenge that we often know what we ‘should’ be doing, but in practice, we often still struggle to actually follow through and do it. The challenge is often complicated by the fact that the times that we need to implement the biggest changes are often the ones where we’re already under the most time scarcity and pressure, which makes it even harder to find the focus and willpower to make the change. But McKeown notes that in practice, that’s why it’s actually so important to slow down and take a pause, including and especially when facing long-term challenges; or as McKeown puts it, “If your job is to keep the fires burning for an indefinite period, you can’t throw all the fuel on the flames at the beginning”. And the challenge has only been amplified over the past year, where the pandemic has driven a work-from-home environment that blurred the lines between work and home, leading to an even more “ever-on” feeling that has increased the rate of burnout. For which McKeown suggests creating a “done for the day” list, of all the tasks that we realistically can complete for the day… which gives our brains the mental space to “check out” once those tasks are done, making it easier to distance ourselves from work at the end. Other tips include: effortless inversion, where you get clear on the end goal and work backwards to figure out what (and how little) needs to really be done to achieve it (a great way to avoid doing far more than was actually necessary ‘just because that’s the way it was always done in the past’); finding your effortless pace, which is all about not turning our efforts into a sprint (that can lead to faster burnout), and instead figuring out the pace that we really can do comfortably… and consistently, using the sustained effort and compounding to get us there more slowly and comfortably (but in a way that ensures we will get there eventually, precisely because it’s at a pace we can sustain); and investing in the long tail of time management, which means not trying to leverage ‘productivity’ tips to get incrementally faster, but instead taking the occasional pause and step back to figure out what it is that’s causing a material impairment of our productivity, and removing the impediment to allow us to be much more productive going forward.

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 recaps on “When Clients Take the Lead” and “Clients Are Worried About Their Retirement. Why They’re Not Telling Their Advisors”.