Weekend Reading for Financial Planners (June 27-28)

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 Tightens Enforcement With 87,000 Background Checks Ahead Of New Code Of Ethics Implementation Date (Diana Britton, Wealth Management) – After a Wall Street Journal article last July highlighted thousands of CFP certificants who had failed to self-disclose client, criminal, or regulatory infractions to the CFP Board, the CFP Board announced that it would no longer rely on self-disclosure alone, and formed an Independent Task Force to propose updates to its Enforcement processes. And so now, with the CFP Board’s new Standards of Conduct and Code of Ethics due to start being enforced effective June 30th, the CFP Board has announced new enforcement processes and procedures, starting with a “decisive” move away from the CFP Board’s historical reliance on self-disclosure. In fact, as a starting point, the CFP Board’s Board of Directors has approved a one-time expenditure of $5M over the next two years to improve enforcement, starting with running background checks on all 87,000 CFP certificants, and is now beginning investigations into the 1,240 CFP professionals (about 1.4% of the total) where misconduct was detected (though notably, nearly 40% of the matters are not client-related, instead involving civil matters, tax liens, etc.), hiring 20 temporary attorneys and administrative support staff to work through the cases. In addition, the CFP Board is also updating its LetsMakeAPlan website to directly link consumers to FINRA’s BrokerCheck and the SEC’s IAPD by December 31st, will proactively review those regulatory databases (along with national legal databases for new criminal records, tax liens, bankruptcy filings, etc.) on a regular basis to identify new disclosure information (in addition to still expecting CFP professionals to self-report such matters within 30 days, down from the prior within-2-years requirement), and is creating a database of state regulatory actions related to securities and insurance licensing for use when evaluating candidates for CFP certification. Furthermore, the Board of Directors is implementing written policies about specific enforcement outcomes that staff are expected to achieve, and CEO Kevin Keller’s performance will be monitored against those expectations, as part of the enforcement ramp-up. Notably, though, the CFP Board has not yet indicated whether it will be able to sustain ongoing enforcement of the new standards with its current resources, or whether an increase in the CFP certification fee may be coming in the future to help cover the cost of a more proactive enforcement approach from the CFP Board.

IRS Issues New Rollover Relief For Unwanted RMDs To Roll Back By August 31st (Jeff Levine, Nerd’s Eye View) – Earlier this year, Congress passed the CARES Act in response to the coronavirus pandemic, which included, amongst other provisions, relief from taking any Required Minimum Distributions from IRAs and other defined contribution plans in 2020. The caveat, though, was that the CARES Act was passed on March 27th, and many people had already taken their 2020 RMDs (either in full or at least partially through ongoing monthly distributions)… which is problematic, because the standard rule for Required Minimum Distributions is that, once taken, they cannot be rolled over and put back into a retirement account again (at least, not once they’ve passed the normal 60-day rollover period). To provide some partial relief in April, the IRS issued Notice 2020-23, which extended the 60-day rollover period for unwanted RMDs through July 15th (and did so retroactively for those who had taken RMDs as early as February 1st). Still, though, anyone who had already taken RMDs partially or fully in January still couldn’t receive relief, along with those who had already taken another recent rollover (or were taking ongoing monthly RMDs) and were barred from rolling back some or all of their RMDs under the once-per-year rollover rule, and non-spouse beneficiaries of inherited retirement accounts who also aren’t permitted to do any kind of rollover of their RMDs. And so this week, the IRS issued Notice 2020-51, which grants broad relief to anyone and everyone who had taken RMDs this year – retroactive all the way to January, waiving the once-per-year rollover rule in the process, and even allowing an RMD rollback for beneficiaries of inherited retirement accounts – as long as the roll-back occurs by August 31st. In fact, the irony is that the IRS relief is actually so broad – and appears to be outright contrary to provisions of the Internal Revenue Code itself – that while the RMD relief is welcome by many, it may actually set a troubling precedent for the IRS in the future (if such rules can be ‘ignored’ here, will the IRS have to grant similar relief in Private Letter Rulings in the future?). For the time being, though, the key point is simply that for anyone who took an RMD in 2020 already and changed their mind, you can put it back by August 31st to reverse the RMD… no further questions asked!

Study Finds 3 In 4 Mass Affluent Investors Would Recommend Their Advisor (Ginger Szala, ThinkAdvisor) – In a new study from Cerulli Associates, a whopping 78% of households with $100,000 to $1M in investable assets (the so-called “Mass Affluent”, representing approximately 33 million U.S. households) use a professional advisor in some way. And of those households working with an advisor, 74% stated that they would recommend their advisor, 77% said their advisor was worth the cost and only a mere 1% stated that they were dissatisfied. In addition, the results found continued growing interest in more advice from advisors, with 38% stating they were looking for more personalized financial planning advice and that the lack of human interaction was a primary obstacle to digital (i.e., “robo”) relationships (though automation of basic services and back-office tasks was welcomed). Notably, though, the Cerulli study was very wide-reaching in who it sampled and found that in practice amongst the mass affluent, direct platforms like Schwab and Fidelity held the largest share of assets ($2.2T), followed by independent broker-dealers ($953B), wirehouses ($754B), independent RIAs ($568B), and hybrid RIAs ($567B). Other notable data points from the study included: a full range of investment choices was most appealing (49%), but other important factors were having a dedicated advisor (48%), face-to-face meetings (45%), and comprehensive wealth planning services (32%); two of the most important goals of the group were to have an assured comfortable standard of living in retirement, and protection of their current level of wealth; 31% of their anticipated retirement income would come from Social Security, 23% from employer retirement plans, 14% from IRAs, and 8% from annuities; and the average household had 1.5 relationships with brokerage firms (i.e., just under half had 1, and the other half had 2+), indicating that even amongst a group where 78% are using an advisor, the majority still split assets across multiple firms?

How The Pandemic Is Reshaping The Industry’s Focus On Delivering Financial Planning (Michael Thrasher, RIAIntel) – According to a recent study from Aite, more than 75% of financial advisors increased the number of financial plans they provided to clients over the past year, as the industry continues to shift from an investment-management-centric focus to a more holistic financial planning focus. However, the research still found that across the industry at large, only 18% of advisors provide formal written financial plans for most or all of their clients, while 34% still provide comprehensive financial plans to fewer than 1/4th of their clients. The primary reported blocking point continues to be the time-consuming nature of financial planning itself, as well as the perceived complexity of financial planning software. In fact, the time to deliver financial plans is so time-consuming that Aite projects that the number of financial plans being delivered may end out dropping during the coronavirus pandemic, as many advisory firms were overwhelmed by client phone calls and requests for meetings and ended out having even less capacity to provide financial plans for clients. Though with the more financial-planning-centric RIA channel leading industry growth, the focus on financial planning is expected to quickly rebound. Still, though, even amongst those doing financial planning, there is still widespread dissatisfaction with industry financial planning software, as only 51% of advisors said they were satisfied with their planning software, and a mere 12% indicated that it “exceeded” their needs – implying that in reality, the primary blocking point of financial planning software amongst advisors who do financial planning may not be that it’s too complex, but actually that it’s too simple and doesn’t accurately capture their real-world client advice issues.

Wells Fargo Increase In Revenue-Sharing Fees Provides A Glimpse Of Modern Shelf Space Agreements (Vicky Ge Huang, AdvisorHub) – According to a recent regulatory filing, Wells Fargo Advisors is raising the fees that it charges third-party asset managers to get access to the brokers who sell mutual funds and ETFs on its advisory platform, with a new maximum fee of $650,000/year (up from $550,000/year) for each asset manager and their family of funds. Notably, this ‘access fee’ is in addition to a “platform support fee” for recordkeeping and administrative costs of 30 basis points (reduced from 35bps). Similarly, Morgan Stanley’s revenue-sharing disclosure document also shows charging as much as $600,000/year for fund salespeople to market to its financial advisors, plus up to another $600,000/year for “data analytics”, and a platform fee of 1 to 10bps to be listed on Morgan Stanley’s product shelf. The rise of revenue-sharing and increasing shelf-space and access fees do not coincidentally come at a time that other broker-dealer revenue levers – e.g., trading commissions – are falling, and is leading to more conflicts between platforms and asset managers (e.g., headlines two years ago when Morgan Stanley suspended Vanguard’s funds from its platform after Vanguard refused to make such shelf-space payments). In fact, one of the primary reasons that certain funds have lower expense ratios is because their fees are not increased for such shelf-space payments, as what broker-dealers charge asset managers still ultimately flows through to the end consumer somehow. Yet while brokerage platforms – including RIA custodians that also often participate in such fees – are entitled to generate revenue for the services they provide, regulators are increasingly focusing on the conflicts of interest that arise when platforms choose some asset managers (willing to pay more shelf space fees or other revenue-sharing arrangements?) over others, and whether smaller asset managers and fund families may increasingly be edged out from platforms due to their lack of sufficient size and capital to pay the shelf space entry fee.

What’s Next For Chaos In The RIA Custodial Space? (Tim Welsh, ThinkAdvisor) – For most of the past nearly 30 years of the emergence and growth of the independent RIA channel, the supporting business of RIA custody was a relatively quiet and stable business, with a few big players (e.g., Schwab, Fidelity, TD Ameritrade, and Pershing), a handful of smaller players (e.g., SSG, TradePMR, Trust Company of America, etc.), and not much changing along the way as they all accomplished the core business functions – opening brokerage accounts, keeping client assets safe, processing trades and money movements, delivering statements, and providing ‘the platform’ for RIAs to operate. And because RIA custodians operated on the chassis of ‘traditional’ brokerage firms, they generally made money that way as well – through revenue-sharing with mutual funds, payments for order flow from institutional traders, harvesting net interest margin from client cash, earning interest from lending (e.g., margin loans and securities-based lending), and (until recently) profiting from trading commissions. But now, the RIA custodial model is suddenly being disrupted – which Welsh suggests is actually coming primarily from the competition in the retail brokerage channel (that most major RIA custodians also compete in), and is rippling and ricocheting through the RIA custody world along the way. For instance, Schwab’s decision last fall to cut its trading commissions to $0 appears to have been driven primarily by its competitive standing with consumers directly (not its RIAs), but the cut so destabilized competitors that within months both TD Ameritrade and E*Trade (which compete in the RIA custody space as well) announced they were being sold. And Schwab itself accomplished this because of the reconfiguration of its own business, which despite being a “brokerage” firm is actually predominantly a cash management platform (generating 60% of its entire revenues from the tiny slice of cash held across millions of clients and trillions of investment dollars)… only to be whammied by the coronavirus pandemic that cut interest rates near 0% again and has constricted the ability of custodial platforms to generate profits from cash holdings. So what comes next? Welsh suggests that the first and primary pressure on RIA custodians is the search for ever-more scale, which will likely lead to even more RIA custodian consolidation. But consolidation itself also brings a hunger for new competitors, as witnessed by Goldman Sachs’ acquisition of Folio’s RIA custodial platform. Ultimately, Welsh predicts that these disruptions will lead to “three migratory waves” of advisors in the coming year: first is the movement of small firms that aren’t happy with the consolidation and are moving from their acquired firms to greener pastures (e.g., TD Ameritrade, E*Trade, and Folio-based RIAs); the second will come once M&A deals are finalized and advisors know for certain what deals will be happening and when; but the last, and potentially largest, will come after the initial waves of consolidation occur, and advisors see which firms are really, truly focused on their end advisors, and what service levels they receive (or whether they become ‘just a number’) in the new era of mega-custodians.

A Five-Step Plan To Leverage Content Across Multiple Channels (Samantha Russell, Advisor Perspectives) – One of the biggest challenges for financial advisors who want to engage in content marketing is that content creation is very time-consuming in the first place… and even more challenging (and time-consuming) to do so on an ongoing basis to feed the content-marketing machine. But Russell notes that, in practice, advisors can actually leverage the content they do create far more than they do in practice. For instance, the starting point might be to create a blog (ideal length about 1,800 words, because Google prioritizes long-form and more thorough content). But from there, be certain to leverage the time invested into the blog post by also putting some effort into Search Engine Optimization (SEO), adding an image or two, double-checking available keywords you may want to use, and try to rank for, and adding them into the header tags, etc., to make the blog post more findable (i.e., get more readers for the content you already produced!). From there, you can then distribute the article via social media channels, which might start with a teaser of the article before it releases, some additional social media tweets/posts when it releases, and a few more after it’s out (e.g., one blog post could be shared out on social media 8-10 times over the span of several weeks), leveraging tools like Canva to have easily customizable graphics and other templates to share (and then scheduled out to share using tools like CoSchedule, or Russell’s own LeadPilot). From there, turn the blog post into a video of you talking through the topic (you can record it on your smartphone, which is actually very capable video equipment!), and then upload that video to the blog post, to social media, and perhaps out to YouTube as well; you can also consider turning it into an audio-only format as a podcast, too. And don’t forget to distribute the new blog post (and video) via email as well, which is actually still the dominant channel for distributing content (more so even than social media). The key point, though, is simply that one piece of created content can be leveraged multiple ways over time, across multiple channels, and using multiple mediums (e.g., written, video, podcast/audio), to get the maximum mileage from the content effort expended!

What Makes A Website Compelling? (Dan Solin, Advisor Perspectives) – The most basic function of a website is to be the display window of your virtual ‘store’, providing information to visitors about your services so they can decide whether to pursue a relationship. And notably, just like a physical storefront, the website matters not only to “street traffic” (those who might just be walking by on the street, or digitally from an internet search) but also those who were referred to you (who like any business, still ‘look’ at the storefront they were referred to when they’re walking up!), as first impressions (whether in-person or digital) still absolutely do matter. Yet even with a checklist of the key elements of a financial advisor website, it’s not just about covering all the requisite information, but also how it’s implemented in practice. For instance, Solin suggests that it’s not only important to have photos on the website, but that they should be taken by a professional photographer who has an eye for lighting, background, spacing, etc. Similarly, video should be shot with a cinematographer who again has an eye for the visual appeal (camera placement, camera movement, shot composition, focus, lighting, etc.), beyond just “taking the video” itself. And when crafting the website, be certain it’s professionally done, by hiring either a custom developer to build a WordPress site or an industry provider (Solin suggests Twenty Over Ten) that has a strong approach to visually-appealing designs. But the bottom line is that, just as it’s important to have professional-looking office space when meeting with clients to convey your desired credibility, it’s equally important for financial advisors to have a credible and visually-professional-looking digital storefront as well.

Five Awesome Undiscovered Apps To Support Advisor Marketing (Taylor Schulte, Advisor Perspectives) – Technology tools are wonderful to create new efficiencies, but with a constant stream of new tools coming out, it’s often difficult to keep track of and try them all out. Schulte, as a self-acknowledged “tech nerd” who likes to try out new tools, shares some of his recent new favorites for advisor marketing, including: Loom, which captures your voice and video via your webcam and your screen all at once, creating an easy voice-over video that is equally-easy to share out via email, effectively allowing you to voice an email response or other communication (whether to team members, clients, or prospects) to help convey a point (in practice, Schulte suggests using it for everything from birthday messages to loyal clients, follow-up messages to new clients welcoming them and suggesting next steps, screenshares to delegate tasks or show clients how to do something, or talking through a performance review digitally); Zapier, which can be used to connect disparate pieces of technology in the advisor tech stack (e.g., Schulte uses it to “zap” new contacts in his email marketing automation tool ConvertKit to also become records in his Redtail CRM system, or zap a prospect who schedules an appointment using his website scheduling app into both ConvertKit and Redtail); email “sniper links” that you can put on your confirmation page to take users directly to their Gmail or Yahoo inboxes to be shown only confirmation emails from you (so they don’t miss their opt-in confirmation in their spam box!); Linkfire or Chartable which create smartlinks you can share widely to help people easily sign up for your podcast in one central place; and Pocket (or Instapaper) which are handy not only to capture articles to read, but can also be used to capture and tag articles for future sharing with clients and prospects!

The Perks Of Being A Weirdo (Olga Khazan, The Atlantic) – Human beings are social animals, with our brains hard-wired to feel safer with the herd, such that from a relatively young age we feel a natural desire to want and try to be “normal” and “fit in” with everyone else. But as it turns out, recent research is finding that being an ‘oddball’ or ‘weirdo’ can actually spark creativity. As in practice, it has long been observed that many creative people credit their success to being ‘loners’ or ‘rebels’… and when a Johns Hopkins researcher decided to test this by inviting people to do some simple exercises (e.g., basic art drawings), but randomly telling some of them they were ‘rejected’ and not permitted to be part of the originally invited group. And as it turned out, even being a ‘reject’ for such a simple exercise led those who had been rejected to be more creative if their subsequent actions, effectively using their rejection as a moment of freedom to deliberately not even try to be like the others. The caveat, though, is that the rejection = creativity link wasn’t present for all, but only those who had an “independent self-concept” (i.e., those who already felt that they didn’t necessarily belong). In turn, the independent self-concept appears to begin even as children, as Arnold Ludwig cites in “The Price Of Greatness“, where many of the most eminent creatives were known even as children to be “odd or peculiar”, where the skills they learned to manage their own social isolation turned into independent thinking in their adult years! Similarly, research has also shown that being “weird” in your culture can also enhance creativity (as they have strong “integrative complexity” that lets them see problems from multiple perspectives), and in being outsiders tend not to filter their creativity as much (since they’re already less concerned with what the in-crowd thinks of them). Or stated more generally, it appears that once we have experiences that violate the standard norms and rules – from being a weirdo to traveling abroad or having other ‘unique’ experiences – we become more open to thinking about the world differently and more creativity emerges.

The Creativity Of ADHD (Holly White, Scientific American) – Attention-Deficit/Hyperactivity Disorder (ADHD) is generally known as a neurological disorder for the distractibility, impulsivity, and hyperactivity of those who suffer from it, often presenting in children and remaining into adulthood, and often being associated with a wide range of negative consequences along the way from struggles with academic achievement and later employment performance. Yet recent research finds that ADHD may also bring with it a unique advantage of greater creativity, including more divergent thinking (the ability to think many ideas from a single starting point), as well as better conceptual expansion (loosening the boundaries of an existing concept to be able to stretch it into something new), and an ability to overcome existing knowledge constraints (as prior knowledge often unwittingly limits us into defaulting back towards ‘what we know’ rather than thinking of new ideas or viewing a problem differently). Thus for instance, if we’re asked to invent a new animal that might exist on another planet we start by thinking of a normal animal on our planet and then just trying to make a slightly different ‘alien’ version… while those with ADHD are more likely to eschew the constraining effects of existing knowledge. And in fact, it often takes remarkably little nonconformity and conceptual expansion to fuel creative breakthroughs – for instance, the innovation of the sewing machine stemmed from the ‘simple’ adaptation of putting the eye of a sewing needle on the pointed end, instead of the blunt end (where it had been for tens of thousands of sewing years!). In the context of ADHD in particular, though, the key point is simply that people who are more distractable and have trouble focusing attention or sitting still in the context of formally structured environments (e.g., school or the traditional workplace) may be especially gifted at leveraging the same tendencies towards more open-ended and unstructured environments (i.e., creative original thinking).

You May Be More Original Than You Think (Ella Miron-Spektor, INSEAD Knowledge) – The traditional view of creativity is that an individual sits down, “thinks about” an idea, iterates on it for a while, and then presents/delivers/builds the fruit of their thinking labor… often coming up with a solution that, in the end, may not feel all that original or different. Yet recent research finds that in reality, we tend to systematically underestimate our own originality through the ideation process, assuming that most others have probably already had similar ideas when in reality the wonderful variability of human beings means often our ideas really are more original than we realize. For instance, one exercise asked people to come up with ‘original’ uses for a series of 10 common household items, and then estimate how many of their peers also came up with the same ideas… and found that while most people didn’t come up with very original initial ideas, if they persisted they did tend to come up with more original ideas (known as the Serial Order Effect), but underestimated how unique their later and more innovative ideas actually were. In fact, because of this, the researchers found that simply by telling people that others had come up with 6+ ideas to each, the average person tried harder to also come up with more ideas, and in the process came up with more original ideas. Which means, on the one hand, most of us may actually be far more original and creative than we realize, if we just give the ideation process a few iterations to delve deeper into our naturally-more-original thoughts (which may also help to explain why those with more experience end out creating new businesses… because they’ve seen and been able to ideate longer)… though, on the other hand, we should be cautious not to throw out even our early ideas, which the research also shows tend to be far more original than we ever give ourselves credit to be!

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 Bill Winterberg’s “FPPad” blog on technology for advisors, and Craig Iskowitz’s “Wealth Management Today” blog as well.