Weekend Reading for Financial Planners (May 15-16)

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.

FSI Sues Department Of Labor For Nixing Independent Contractor Rule (Melanie Waddell, ThinkAdvisor) – One of the hot-button issues of the new “gig economy” is when someone should be classified as an employee versus an independent contractor, which is crucial in determining everything from whether the business must pay payroll taxes or the individual pays their own self-employment taxes, whether the individual is eligible for employee benefits (e.g., health insurance or an employer retirement plan) if it is offered to offer employees, and whether the individual is eligible as an employee for other protections under the Fair Labor Standards Act. To address the issue in the ‘modern’ era, the Trump administration had issued an update to the determination of Independent Contractor Status shortly before leaving office (with the Final Rule published in the Federal Register on January 7th of this year) that would have simplified the test from a prior “economic realities” test into a narrower and more concrete evaluation based on two “core factors” (the worker’s control and the opportunity for profit and loss) and three other “guidepost” factors, which in practice was expected to make it easier for companies to classify (gig) workers as contractors and not employees. However, because the rule had been published but was not yet effective when President Biden took office, its effective date was initially delayed, and this week – the day before it would have taken effect – the Department of Labor announced that it was withdrawing the rule entirely (and reverting back to the prior/existing status quo). In response, this week the Financial Services Institute announced that it was joining a lawsuit suing the Department of Labor over the withdrawal of the rule, claiming that doing so was a violation of the Administrative Procedures Act (by “arbitrarily and capriciously” overturning the DoL’s previous guidance). The issue is important in the financial services industry, as the independent broker-dealer model (and also a growing number of independent RIAs) rely on an independent contractor structure between the firm/platform and the advisor, and the FSI has expressed concern that a rollback to the prior rules creates more ambiguity about the future treatment of independent financial advisors as independent contractors (relative to the new rule that would have more clearly ensured that independent advisors are eligible for independent contractor status).

Riskalyze Campaign Attacks Orion’s HiddenLevers & RiXtrema (Samuel Steinberger, Wealth Management) – The big industry buzz this week was a 6-weeks-in-the-planning announcement from Riskalyze CEO Aaron Klein of a new marketing campaign, tied to a Riskalyze-controlled website UnhiddenLevers.com, that criticizes portfolio stress testing tools like Hidden Levers and RiXtrema as employing “predictive guesswork” that Riskalyze claims is “wildly inaccurate” in predicting how markets would react in various economic environments. The broadside appears to be in response to an announcement from HiddenLevers, when it was acquired by Orion back in March, that criticized a “single-number risk analysis” approach (that appeared to be singling out Riskalyze, albeit not by name). The negative marketing campaign was a surprise to many, both because Riskalyze is already a leader in market share that – according to the T3 Technology Survey – was not losing any substantive market share to HiddenLevers or RiXtrema anyway, and because Riskalyze itself is integrated with Orion (which now owns Hidden Levers). In response, RiXtrema highlighted how its stress testing methodology has been published in peer-reviewed journals, and Hidden Levers noted that ultimately its tool is designed to highlight to clients the potential risks they may be exposed to but not to specifically design portfolios for those scenarios (as most advisors hold broadly diversified portfolios anyway). In response, Riskalyze ‘updated’ their critique later in the week, continuing to highlight the differences between the various risk tools but stepping back from calling out individual competitors by name on a new “Guesswork” page on Riskalyze’s own website.

Social Security Rolls Out New, Shorter Statements (Jeff Berman, ThinkAdvisor) – This month, the Social Security Administration began a “soft launch” of a newly redesigned Social Security statement for those who haven’t yet started and want to see what their projected benefits will be. The new version of the statement will be consolidated from four pages down to just two, and will provide more details about what starting benefits would be beginning at any age between 62 and 70 (rather than the current structure that only shows estimated benefits at 62, 67, and 70). The more incremental approach of the new statement – highlighting the additional benefits received for each incremental year of delay – is expected to encourage more people to work a little longer (or draw down their early retirement portfolios a little longer) before starting benefits. In addition, the Social Security Administration announced a series of 9 new supplemental fact sheets to further amplify key Social Security rules and decisions. Notably, though, the statement still uses the somewhat ‘controversial’ approach of projecting what benefits will be if the worker continues to work – which can sometimes result in surprises for those who retire earlier and don’t actually continue to generate additional years of (potentially higher) earnings used to set their benefits. However, the Social Security Administration also indicated that it is still gathering feedback from those using the MySocialSecurity online portal to view the new statements (which as of now have only been rolled out to a “small percentage” of workers), and further revisions may still occur before the final updated version of the new statements is released in the future.

Was The Secure Act Good Or Bad For Trusteed IRAs? (Natalie Choate, Morningstar) – Most individual retirement accounts are structured as what is technically a custodial account, where a retirement custodian (i.e., the bank or brokerage firm) holds the account on behalf of an individual (the beneficial owner of the retirement account) and follows their directions about what to do with the account (e.g., how to invest it, when to distribute it, etc.). However, there is an alternative structure for IRAs – the trusteed IRA – where legally the financial institution is not the custodian of the account but its trustee instead. The appeal of this structure is that while a custodial account grants ownership and control to beneficiaries immediately upon the death of the original owner, a trusteed IRA limits beneficiaries to only have whatever control is written into the trust document itself… which makes it possible to limit beneficiaries’ access to the account (e.g., for irresponsible beneficiaries or those who need asset protection) to no more than whatever annual required minimum distributions must be made to that beneficiary (and without the need for a separate trust as beneficiary, because the retirement account itself is a trust). The caveat, though, is that because trusteed IRAs must follow the RMD rules for beneficiaries (and can only limit access to the account above and beyond that annually required distribution amount), when the SECURE Act changed the rules to require most beneficiaries to liquidate the account by the end of the 10th year after death, the trusteed IRA suddenly becomes a much-more-rapidly-self-liquidating account (the opposite of what is most often its original purpose). Which means advisors have to more carefully consider now the three options for how retirement accounts will be made available to beneficiaries after death: the ‘traditional’ custodial IRA (where the beneficiary has unlimited access); the trusteed IRA (where the beneficiary’s access can be restricted but it all must become available in the 10th year); or using a trust as beneficiary of the IRA (where the IRA may be required to liquidate into the trust after 10 years, but the trust can still hold the assets for a longer/indefinite period of time… albeit with the IRA distribution likely subject to less favorable compressed trust tax brackets).

Boomers Want to Stay Home: Senior Housing Now Faces Budding Glut (Peter Grant, Wall Street Journal) – With the ongoing aging of Baby Boomers, one of the biggest bets in commercial real estate has been the rise of “senior housing”, from apartments, suburban townhomes, or entire “villages” of over-age-55 housing, to continuing care retirement communities for those who are “inevitably” anticipated to need an escalating level of care and support in their later years. In fact, in 2018 alone, senior-housing developers added 21,332 new units, which meant senior housing was a faster-growing segment of commercial real estate than office, retail, hotels, or apartments, in anticipation of the front wave of Baby Boomers reaching their mid-80s (the typical move-in age for senior housing). Except with a rising boom in various “aging-in-place” technologies, from houses with malleable fixtures (e.g., height-adjustable bathroom sinks and living rooms that easily convert into bedrooms) to doorbells with facial recognition to identify visitors, to voice-recognition services that can initiate conversations with seniors about their health or send caregivers alerts, more and more Baby Boomers are deciding to remain in their homes after all. And the trend appears to be accelerating as venture capital firms are expected to invest nearly $1B just this year alone in new aging-in-place technology firms (more than double the amount of just 3 years ago). As a result, the average age that people do enter senior housing is starting to rise (to 85 today, up from 82 a decade ago), and occupancy rates for senior housing are starting to decline even as the building continues. Notably, this doesn’t mean that senior housing will become irrelevant – it is still anticipated to be very popular for a wide range of seniors – but the potential for an overbuilding “glut” could, in turn, make such housing options even more affordable and appealing?

401(k) or ATM? Automated Retirement Savings Prove Easy to Pluck Prematurely (Anne Tergesen, Wall Street Journal) – One of the biggest trends in employer retirement plans over the past decade has been the rise of automatic enrollment plans (coupled with the emergence of automatic escalation of those automation savings contributions over time); in fact, since 2005, the number of employer retirement plans with automatic enrollment has risen from under 20% to nearly 70%, and 401(k) plans with automatic enrollment have an average participation rate of 85% (compared to only 63% for plans without that feature). However, according to a recent study from TIAA, it turns out that those who are automatically enrolled into saving are also substantially more likely to subsequently withdraw the money early, with almost half of the additional savings that occurred via automatic enrollment taken out within 8 years of joining the plan. In addition, auto-enrolled plan participants were also more likely to borrow from their 401(k) accounts. Which is concerning not only because the initial increase in savings may ‘overstate’ the actual long-term benefits of automatic enrollment once this subsequent ‘leakage’ is taken into account, but also that when early withdrawals (or 401(k) loans that are defaulted on) are subject to taxes and often an additional 10% early withdrawal penalty, there’s a concern that some workers may actually be worse off for having been automatically enrolled. Furthermore, the studies found that those who were only able to save a ‘nominal’ amount are more likely to just liquidate (rather than roll over) their retirement accounts when leaving their job (a further signal that the lack of initial commitment to saving means it’s hard to follow through and keep the savings later). Which on the one hand raises questions of whether automatic enrollment needs to be rolled out a little more cautiously for those who simply may not be able to afford the additional savings. But on the other hand, also suggests that perhaps more financial wellness education programs, or outright financial planning advice in the employer channel, could help employees adjust their spending habits to be able to sustain the automatically enrolled savings rate?

Credit-Card Debt Keeps Falling, And Banks Are On Edge (AnnaMaria Andriotis, Wall Street Journal) – In the aftermath of the pandemic and its mass layoffs and economic disruption, credit card debt is plummeting – down from nearly $900B to under $750B in less than 18 months, after having risen steadily for the past decade, with Discover and Capital One reporting that the number of people with fully paid zero-balance credit cards at record highs – which is arguably ‘good’ news for consumers and fiscal responsibility. However, because of the simple fact that it’s been harder to spend on restaurants and travel (not to mention a testament to the impact of government stimulus in 2020, that delinquencies didn’t surge), the decline in credit card use is threatening to wreak havoc for the business of credit card issuers themselves. Accordingly, credit card issuers are now trying to get more aggressive in attracting new borrowers (particularly those who have good credit scores but tend to carry balances that generate interest)… which means the number of credit card solicitations, from mailers to online ads, is up significantly, along with more “deals” (e.g., teaser rates and other incentives), and underwriting standards to qualify for cards (e.g., required credit scores/credit history) is loosening as well. Thus far, though, even as the economy and jobs begin to rebound, credit card use and balances aren’t showing a significant uptick (yet?), raising the question of whether the pandemic just temporarily slowed the use of credit cards during the recession, or if – similar to the Great Depression – the pandemic may have substantively and permanently changed peoples’ attitudes towards using credit card debt? (Time will tell!?)

How To Divorce Your First Credit Card (Amber Burton, Wall Street Journal) – According to Experian, the average age of an open credit card account is almost 9 years, a function of both the hassle in switching to a new credit card (in a world where a particular credit card may be tied to a wide range of recurring subscriptions that are a nuisance to update) and the habit (or sentiment?) of wanting to keep the first credit card we ever had. Of course, in some cases, people hold on to their first credit card simply to maintain a longer continuous credit history, which is a factor in how credit scores are calculated. Still, though, the credit card industry – including and especially the perks and rewards it offers – has changed so much over the past decade that a 9-year-old credit card (or even older) may no longer be competitive with what is currently available. Accordingly, one option is to actually switch to a more current credit card (with better features and benefits) with the current issuer, by not just signing up for a new card but calling the company and asking for a “product change” – which means getting a new card with the same provider and the same account number and the same credit, but paired to a new type of card with newer perks and benefits, which both maintains credit history and avoids a potentially credit-score-dinging hard credit check for the new card (but usually means not getting any new signing bonuses). Another option obviously is just to “let go” (and recognize that a closed credit card that was in good standing can still remain on your credit report for up to 10 years to help support your credit score), and find a new card (but avoid doing so if you’re about to apply for a big loan or mortgage, so there aren’t too many credit checks occurring in quick succession, a sudden drop in available credit, or rise in utilization for your remaining credit cards that could ding the credit score). Alternatively, those who have strong credit and can get more credit may simply want to put the longtime card on ‘hold’ by just not using it and getting a new/better card to use instead… but be cognizant that if the card is entirely unused for an extended period of time, the issuer may deem it dormant and close the card out anyway (which means running at least some purchase once every 3 months to ensure it remains “active”).

Sleeping With Cash (Andrew Forsythe, Humble Dollar) – One of the biggest practical challenges that financial advisors face is that the “optimal” portfolio from a purely quantitative perspective isn’t always the portfolio that the client can tolerate holding when market volatility comes, and/or simply isn’t the portfolio that will let them sleep well at night. Which most commonly leads to holding a more diversified portfolio with lower-volatility assets (e.g., bonds) in addition to stocks… and in some cases, leads to potentially sizable holdings of cash. As while from an investment perspective, “cash is trash” (particularly in a near-zero-yield environment), research has shown that those with more cash-on-hand really do feel happier and more financially satisfied. And arguably, for those who have already accumulated a significant portfolio, the reality is that they may be able to afford to take a lot of risk – because they have significant wealth and a healthy buffer – but they also don’t need to take as much risk at all, such that holding significant cash and incurring a sizable “cash drag” on returns still won’t actually threaten their ability to achieve the goals they’ve already met! Of course, being in the habit of keeping sizable cash reserves for those who don’t yet have a lot of wealth can also be beneficial – in its commonly known form of “emergency savings”. Still, though, the point remains that if a sizable cash holding is what lets a client keep the rest of their assets invested for growth, arguably a barbell strategy of high-growth-plus-high-cash can still end out with a better result than a “fully invested” portfolio that doesn’t let the client sleep well at night and causes them to not remain fully invested for the long run anyway?

In-Person Vs On-Screen (Fred Wilson, AVC) – Over the past year, virtually all businesses have been forced to operate in a virtual environment, where meetings with everyone from vendors to clients to teammates all occur via video chat. Now, as offices and meeting spaces begin to reopen, it’s possible to return to the way things were, but the fact that most businesses have survived and even thrived in the virtual world raises the question of what, exactly, should return to the ‘normal’ office and what may be better to simply remain virtual instead? For Wilson, who is a venture capital investor where his “clients” are the founders of companies he is considering whether to invest (or has already), he finds that meeting with clients has held up just fine in a virtual world. However, when it comes to meeting with teammates, the ideas and creativity that come from an in-person conversation have been much harder to replicate in the online world. Or viewed another way, on-screen interactions may be efficient (and work in situations where efficiency is rewarded), but in-person is still “better” for the richness of the interpersonal connection and communication (and thus more conducive to situations where the relationship and the conversation itself is paramount). In practice, this is leading Wilson’s firm to adopt a hybrid approach, where the team is expected to be in-office two days a week (on Mondays and Thursdays) when in-person meetings are set, but has the option to work virtually the rest of the time (for the ‘efficient’ busy-work that has to get done in the rest of the week).

15 Remote Employee Recognition Ideas To Build A Culture Of Appreciation (Lori Li, Advisorpedia) – One of the ancillary benefits of the in-person office environment is that when something good happens, everyone is around to see it and celebrate… which means in the shift to a virtual environment, there’s an increased risk that employees who do good work may not feel seen, recognized, and appreciated. In fact, a recent study from McKinsey found that being rewarded and recognized for one’s good work is one of employees’ top concerns in the pandemic era. So what can firms do to recognize and celebrate employee success in a virtual work environment? Potential options include: create a peer-to-peer employee recognition system where team members can nominate and recognize each other (either via a simple email or Slack channel, or a dedicated tool like TINYpulse or Bonus.ly); have a place to share positive feedback received from clients (e.g., a standing slide in a regular All-Hands meeting or a team chat channel); create an employee-of-the-week/month program (as long as the system is fair, yes employees do appreciate the recognition!); acknowledge ‘quirky’ milestones of remote work (e.g., “first Zoom meeting where no one forgot they’re on mute!”) to celebrate the small wins; give team members local treats (that can be delivered to them) for their accomplishments; and don’t forget the simple option of just taking a moment to open up a chat message, email, or an impromptu video call just to say “thank you” or “good job”!

What Will Become Permanent Pandemic Changes In Advisory Firms? (Bob Veres) – As vaccination rates rise, new COVID-19 case counts fall, mask mandates begin to lift, and offices start to reopen, the big question is what will become the “new normal” for advisory firms in a world where the preference has “always” been for in-person offices and in-person teams… yet so many advisory firms have survived and even thrived in a virtual environment. Veres highlights a number of key trends that appear to be emerging, including: a significant number of clients that “had to” switch to virtual meetings are finding that they like the time-efficiency and convenience of the format and don’t want to go back to in-person (which means at best the virtual-vs-in-person meeting decision may become another client preference, similar to whether the client prefers emails or phone calls); while virtual meetings may be slightly less personal than in-person meetings, they’re making it possible to meet with clients more frequently (in smaller bites) which is actually deepening the relationship compared to the in-person approach; the availability of meeting virtually is allowing advisory firms to expand their footprint, from better retaining clients who relocate (if it’s a Zoom meeting, does it matter whether they’re 10 miles or 1,000 miles away?), and even being able to attract clients outside their local geography (especially for firms that have a niche or specialization to attract non-local clients); the virtual model is having an ancillary impact of killing the traditional wholesaler model as advisors are also demanding more on-demand or virtual meetings and are showing less willingness to “meet with that wholesaler who will happen to be in the area next Tuesday”); firms that have had success operating virtually are not just looking at hiring virtual staff, but are also becoming more flexible to a wide range of virtual outsourced solutions now that the in-office barrier has been broken; and a growing number of advisors are using the flexibility of virtual operations to run their own businesses in a “location-independent” manner, which could mean adopting a more travel-centric lifestyle or simply relocating to a more desired area while keeping no-longer-“local” clients!

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.