Weekend Reading for Financial Planners (July 31-Aug 1)

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.

CFP Board Proposes Tougher Penalties For Hiding Misconduct (Mark Schoeff, Investment News) – This week, the CFP Board released proposed updates to its Sanction Guidelines and disciplinary Procedural Rules, based on recommendations from the Commission on Sanctions and Fitness it created earlier this year to review the current guidelines and rules for potential improvements. The primary focus of the current proposal would be to increase the sanction penalty for a CFP certificant’s failure to self-report their own misconduct (or in the event they otherwise fail to file a complete and accurate Ethics declaration); in the past, the failure-to-report penalty was a private censure, but under the proposal, it would be changed to a public censure. The proposal comes in the aftermath of the July 2019 Wall Street Journal investigation that found widespread incidents where the CFP Board’s website failed to show regulatory infractions of listed CFP certificants, which led to the CFP Board doing a substantive review of all CFP certificants for infractions that had not been reported, resulting in the opening of more than 1,000 investigations this year under new CFP Board Managing Director of Enforcement Tom Sporkin. Under the new guidelines, the CFP Board ostensibly hopes that a heightened penalty for failing to report will lead more CFP certificants to proactively notify the CFP Board in the first place. Perhaps more even significant, though, is that the CFP Board has indicated that it was also considering the imposition of monetary sanctions as well – i.e., “fines” that the CFP Board might levy against those who engage in misconduct – and/or to implement an ‘administrative fee’ on CFP certificants who are found to have failed to report (to cover the CFP Board’s enforcement costs for pursuing the matter), which would then be waived if the CFP certificant agrees to a finding of guilt and waives their right to a (costly and time-consuming) disciplinary hearing. At this point, the CFP Board’s current proposal is ‘only’ to make the change from private-to-public censure for failure to report, and not to apply a monetary sanction, but it has specifically requested feedback from the CFP community about the possibility of doing so in the future. For those who are interested and wish to contribute to the discussion, comments can be submitted directly via the CFP Board’s website by September 21st.

SEC Fines 27 Firms In First-Ever Form CRS Enforcement Actions (Mark Schoeff, Investment News) – On Monday, the SEC announced a series of 27 advisory firms – both RIAs and broker-dealers – that had been fined a cumulative total of $910,092 in penalties (ranging from $10,000 to $97,523 per firm) for violations of the obligation to prepare and deliver Form CRS to prospects under Regulation Best Interest. Specifically, the firms were disciplined for failing to deliver Form CRS to existing clients, and/or for failing to post it on their websites, as was required by July 30th of 2020, and had to be “reminded twice” by their regulators (i.e., they were sanctioned after failing to respond to an initial warning from regulators). The sanctions come alongside a growing focus of the SEC on how advisory firms actually are implementing Form CRS, as the SEC identifies where gaps may be emerging, from firms not filing Form CRS at all (in this case), to other recent SEC warnings for firms not to omit their disciplinary history, and a range of other ‘form and content problems’. And with Reg BI having taken effect more than a year ago now, the SEC is beginning to transition from merely expecting a “good faith” compliance effort, into expecting advisory firms to actually have their Form CRS up to snuff (or risk being sanctioned for failing to do so).

Financial Planning Boosts Client Satisfaction (Michael Fischer, ThinkAdvisor) – A new research study from Aon and the Money Management Institute finds that 52% of investors are reporting the value of financial advice is even greater now in the aftermath of the pandemic, and that despite the ‘conventional’ view that financial planning is primarily for older clients who are more likely to have substantive portfolios to be managed, that in practice it’s actually younger clients (defined in this case as those under age 55) who are seeking out financial planning conversations more often than older clients, including 23% of investors under the age of 45 who were putting a financial plan in place for the very first time. However, the study shows that, broadly, advisory firms are still more focused on investment management than financial planning, with nearly 3/4ths of clients over age 55 reporting they had an annual portfolio review in the past year, but only 43% of investors stating that they have discussed financial planning. Nonetheless, the research also indicated that amongst clients who did receive a financial plan, they expressed higher levels of financial confidence, a better overall experience with their advisor, and were even more upbeat and bullish about markets themselves. On the other hand, priorities in a financial plan varied significantly by client age, with older clients more focused on projecting retirement income relative to living expenses, while younger clients were more focused on future health care needs and dependent care responsibilities. Though ultimately, the consumers that reported the greatest satisfaction with their advisors weren’t just those who engaged in a goals-based planning process with their advisor, but those who felt that their values were heard, understood, and reflected in the planning process.

Digital Client Acquisition Fueling Growth At Top RIAs (Nicole Casperson, Investment News) – The latest annual benchmarking survey from Charles Schwab is out, and according to its 2021 results it was the advisory firms that were fastest to pivot to “digital-focused client acquisition strategies” that experienced the strongest growth last year. As a result, amongst the top-performing firms, 81% were still able to meet or exceed their new client goals in 2020 (despite the unexpected breakout of the pandemic), and the top three channels of top-performing RIAs in attracting new clients were their website (82%), email campaigns (71%), and social media (61%). Other key digital-marketing-related strategies implemented by top-growth firms included Search Engine Optimization (51%), content created specifically for their ideal client persona (51%), and implementing website metrics and tracking tools (51%). Of course, the reality is that the internet itself certainly is not new, and some advisory firms have been engaging in digital marketing strategies for years; however, the Schwab study finds that the pandemic and its disruption of ‘traditional’ marketing channels has greatly accelerated this shift. And the growing confidence in digital marketing strategies is, in turn, leading firms to further refine their marketing – as firms with written marketing plans, value propositions, and established client personas attracted 50% more new clients, 62% more new client assets, and in turn felt the confidence to spend more on marketing (at 2.1% of revenue, versus just 1.6% of revenue spent in marketing for advisory firms without a clear marketing plan). However, the study also finds that most advisory firms are reverting back to more in-person activity, with 90% of advisors stating they engaged with prospects virtually in Q1, but only 30% engaging virtually as pandemic-related restrictions began to lift.

YOUR Need Will Kill The Sale (Tony Vidler) – As consumers are bombarded with more and more marketing messages every day, we have become increasingly sensitive to ‘pushy salespeople’. In fact, the reality is that amongst more affluent consumers, “price” is usually not even the biggest determinant of the purchase, as those who can are quite willing to pay a “fair price for fair value”, and many will pay even more for greater value and/or greater convenience. As a result, Vidler suggests that for many advisors who are struggling with growth, the problem is not necessarily one of price and value, but simply the manner in which we sell it, and whether we do so in a manner that is ‘too pushy’. Or stated more simply: if we as advisors “need” the sale too much, our need (and the conscious or subconscious aggressive sales activity that comes with it) is what will actually kill the sale (whether selling an idea, a product, or a service). Notably, this doesn’t mean that advisors shouldn’t have and engage in a sales process; instead, the point is that while the professional may control the process, it’s the prospect who sets the pace. In other words, advisors can guide prospects to the next step, but trying to get them to take action any faster than the pace they’re prepared to move results in a feeling of ‘pushiness’ that kills the opportunity. As a result, one of the biggest keys for sales success is putting oneself in a position of enough financial stability to be able to move at (only) the pace the prospect is ready to go, so we don’t have a ‘need for speed’ in the first place.

These Beliefs Hold Advisors Back From Getting Referrals (Jane Wollman Rusoff, ThinkAdvisor) – The conventional view of growing with referrals is that if clients are satisfied with their advisor, they will refer, but research from Julie Littlechild finds that is not true; in practice, it takes more than mere ‘satisfaction’ for clients to actually be willing and ready to refer. Not that satisfaction isn’t important – those who are not satisfied with their advisor clearly will not refer – but the real blocking point for most clients to refer is that they don’t know who amongst their friends and family to refer (e.g., they don’t know who will actually meet the advisor’s minimums), and because clients primarily refer to do a favor to that person (not the advisor), they’re reluctant to refer when the person they send along might get rejected (not exactly a favor to them!). Other notable highlights from Littlechild’s research on referrals include: creating meaningful engagement with clients means going beyond just satisfaction, and instead increasingly personalizing the firm’s communications to them (e.g., instead of sending a standard newsletter to all clients, include a section with articles on health and wellness that may be of greater interest to retired clients focused on that topic); the percentage of investors thinking about changing advisors shifted from 21% in 2019 to 31% in 2020 as a growing number of consumers are deciding their current ‘financial advisor’ may not be up to snuff; while in the past clients often preferred in-person meetings, now that they’ve been successful meeting online, a growing number (but not all) want to stick with virtual meetings; and even though advisors have historically focused on and grown through referrals from their retired clients, it’s actually younger clients who are the most likely to give referrals.

Right Way Retirement (Robert Laura, Financial Advisor) – The Baby Boomer pig-in-a-python population bulge (with 10,000 turning 65 every single day) has both clients and advisors staring into the chasm that is the uncertainty and stress of retirement planning. And for those fortunate enough to have ‘enough’ and the financial peace of mind to not be worried about outliving their assets, they still must contend with emotional, social, and health-related issues as they age and transition. In the aftermath of the pandemic, with so many people rethinking retirement, considering early retirement, and finding their values and priorities have changed, “advisors will have a tremendous opportunity to rebrand themselves and make the discussion of [retirement] wellness part of their events and client meetings”. However, in the sea of sameness that is financial advisor marketing, while there are certainly some practices that have emerged in which retirement planning is their core value proposition, in general, our messaging and identity as advisors remains very investment-oriented. Laura says, “Getting retirement right means helping people plan beyond the dollars and cents…more than 80% of what it takes to successfully retire has nothing to do with money, yet most firms focus almost 100% on the financial side of things”. Retirees who do transition well accomplished these six things according to Laura: 1) Replaced their work identity; 2) Filled their time with meaningful tasks; 3) Stayed relevant and connected; 4) Kept mentally and physically active; 5) Expressed their spiritual beliefs; and 6) Felt financially secure. When we and our clients focus only on the financial aspects, clients often come back to meetings in the first few years unhappy with their retirement transition… or worse, becoming increasingly fear-focused about everything (retirement, investments, and otherwise) because they haven’t found anything else to occupy their focus. And as Laura says, while financial security is great, most find “they would likely give all the money they’ve saved in exchange for the knowledge they had family, friends, good health, and more time”. Which is why the significance of retirement planning goes beyond just investing the retirement portfolio and determining a sustainable spending strategy (though that matters, too), and instead is about helping prospective retirees really visualize what life might look like, and how to use what they’ve saved to power it (especially given that most of us have little ability to actually imagine how different retired life will be). Which arguably helps to explain why so few advisors ourselves often retire from the business, even when we can; the challenge of visualizing life after retirement isn’t unique to just our clients!

Are You In Retirement Hell? (Mike Drak, Marketwatch) – The initial transition into retirement is a thrill for most; no more long commutes, demanding work schedules, or setting an alarm, replaced instead by the total freedom to do whatever you want, whether it’s sleeping in or traveling the world or playing golf or playing with grandchildren. For those who are “comfort-oriented” retirees, that freedom and the ability to comfortably enjoy it may be enough. But for others, who ultimately need a challenge – some challenge – to feel engaged with life, the big retirement transition can lead quickly to the big retirement dip… or what Drak calls “retirement hell” in his recent book, “Retirement Heaven Or Hell”. Specifically, “retirement hell” is the point where the initial surge of retirement freedom passes… and is replaced by a feeling of being lost and vulnerable, when the life of leisure starts to feel empty and meaningless, as the ‘old’ hobbies get boring and no longer bring joy. For Drak, retirement hell began almost as soon as retirement itself – the first Monday after he retired, when his wife went to work (she hadn’t retired yet), all his friends were still at work, there was nothing to do, and he started to “get a little antsy”, which then devolved into trouble sleeping, a growing level of stress in retirement, and a rising depression that in turn led to a growing fear about whether they had enough to retire (even though, ironic, Drak’s wife is an investment adviser who could definitively affirm they did have “enough”). Ultimately, Drak realized that the fears about whether they had ‘enough’ weren’t actually about a fear of running out of money, but a recognition that because he wasn’t clear on what retirement life would include that would make him happy, he had no idea what it would cost (and thus he couldn’t feel fine). In fact, Drak ultimately found that his fears of running out of money subsided once he became clear on what he would be doing in retirement… which in turn made it easier to figure out that, yes, he really did have enough to enjoy it.

Confessions Of An Overnight Millionaire (Anonymous, NY Intelligencer) – Over the past year, nearly 750 companies have gone through an Initial Public Offering (IPO), raising $200B of new capital, and minting thousands of new employee millionaires. This article highlights the journey of one such worker, who joined a fast-growing company knowing that in theory the end game was either an acquisition or an IPO (or an implosion like WeWork, but hopefully not!), for which there might be some ‘reasonable’ upside like a $200,000 payday (which certainly jump-starts the retirement journey, but isn’t “life-changing” money). But then a few years later, the IPO happened… and she learned that she would be making north of $6 million, for which a ‘small screw-up’ could cost her hundreds of thousands of dollars! Which led her to reach out to wealth managers to interview, only to find that many couldn’t use basic video-chat tools (unappealing for someone who just made millions in the tech industry), or didn’t know how to evaluate the risk and opportunities of her company stock after the IPO (hint: you have to really understand the details of the company, not just ‘the market’ in the aggregate)… even though by industry standards, she should have been an ‘ideal’ client that any advisor would want (someone with $6M+ of investable assets who could be a client for 50+ years). And the uncertainty about hiring an advisor has spread to other parts of her life as well; for instance, she has the money to buy a Tesla or a new house, but doesn’t really want to, and because she’s historically be a very frugal person she’s still trying to get comfortable with $10 shipping on a gift (despite objectively being able to ‘easily’ pay it). In fact, the author suggests that her dog’s lifestyle has changed more than her own, with a significant diet upgrade (special prescription dogfood that costs $70/bag, plus pet supplements for fish oil, a probiotic, and one for joint health!). On the other hand, because she grew up in a world where one spouse became financially dependent on the other – and then destitute when a subsequent divorce occurred – the financial windfall has provided a certain feeling of liberation for finding a spouse and starting a family. Though at the same time, the questions of self-doubt also creep in – “I don’t build anything. I don’t do any math equations. I’m corralling a bunch of pieces together, so in reality I’m doing everything and I’m doing nothing… do I deserve this money… I just happened to be in the right place at the right time…” And because she’s now suddenly so much more wealthy than her friends, the financial ‘freedom’ is proving to be isolating, as her existing network can’t relate to the emotional distress she’s feeling. All of which provides a powerful reminder that wealth and money are far, far more complex than simply having it or not.

The Highest Forms Of Wealth (Morgan Housel) – The Biltmore is the largest home in America, a 250-room mansion clocking in at 178,000 square feet, built by George Vanderbilt during the height of the Gilded Age. Yet the irony is that despite their extraordinary wealth, books about the ‘House of Vanderbilt’ show that the Vanderbilt family not only struggled to find happiness, but ultimately found resentment, insecurity, and social anxiety. Or as Housel puts it, “money buys happiness in the same way drugs bring pleasure: incredible if done right, dangerous if used to mask weakness, and disastrous when no amount is enough.” So what are the highest forms of wealth that do bring value? Housel suggests a few: 1) controlling your time and the ability to wake up and say “I can do whatever I want today” (which might still involve working, and even working hard, but only because you wish to do so, not because you have to); when money becomes like oxygen, so abundant relative to your needs that you don’t have to think about it despite needing it; and 3) a career that allows for intellectual honesty (where money makes it possible to say whatever needs to be said, because you know that you have enough to be fine even if the truth you wish to speak is unpopular).

Americans With Higher Net Worth At Midlife Tend To Live Longer (Science Daily) – Utilizing data on 5,400 siblings and twins who followed different paths in life, researchers from Northwestern University analyzed the midlife net worth of adults (when they were in their mid-40s) and compared it to their mortality rates 24 years later (as they turned 70), and discovered those who had greater wealth at midlife tended to live longer, Notably, since the data was on pairs of people who were siblings or outright twins, the presumption is that any differences in genetic predisposition were controlled for by their shared DNA, such that positive wealth differences are more likely to have been a causal factor in their subsequent improvement in longevity. Recognizing that the differences might have also been due to earlier health conditions – e.g., early age heart disease or cancer that limited one’s ability to accumulate wealth by midlife – the researchers also re-analyze the data using only those who did not have heart disease or cancer, and found that the within-family association between greater wealth and greater longevity remained. Which ultimately can highlight not only the value of financial planning in general, but specifically how good wealth habits and getting an ‘early start’ on saving and/or generating higher income to save in our early years can have not only a magnified effect on our wealth accumulation for retirement, but the health we have when we reach the retirement stage.

Go Big, Then Stop (Nick Maggiulli) – The traditional advice for retirement savings is to start early in saving 10% to 20% of your income, and then simply stick with it and let it compound for the long run. But Maggiulli notes that if he could go back in time to give financial advice to his 22-year-old self, it would not be the traditional savings approach, but instead a philosophy of “Go big… then stop”. At its core, the point is simply a recognition that saving money is hard, but compounding growth on your savings is easy… which means if you manage to save enough, early enough, you won’t even have to keep saving thereafter, as the compounding alone will more-than-carry your retirement savings the rest of the way. After all, the mathematical reality is that saving $10,000/year for 10 years and then letting it grow for 30 years actually results in more long-term wealth than waiting 10 years and then saving $10,000 per year for the subsequent 30 years (where the growth on each compounds at 7%/year growth rates). Because, again, the largest the cumulative balance is, the more its subsequent growth is driven by the growth – and not the contributions. In fact, if you decide to take a $5,000/year vacation every year in your 20s, you’d actually have to save 100% more ($10,000/year) in your 30s just to make up for it (or more than $15,000/year if you wait until 35, and nearly $25,000/year if you delay 20+ years until age 40). Of course, that doesn’t necessarily mean being so frugal in your 20s to the point of being miserable, as there is clearly such thing as having ‘too much’ of a fixation on money and frugality, and the strategy is obviously easier for those who manage to have solid income growth and ‘big raises’ in their early working years. Nonetheless, the point remains the same: when you save enough early on, not only does it mean you don’t need to save as much later, but “going big” on savings early on can quickly give you the freedom to stop saving altogether (and just let compounding do its work for the decades that follow!).

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 “Right Way Retirement“.