Weekend Reading for Financial Planners (July 24-25)

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.

Senate Bill Would Expand Pass-Through Qualified Business Income Deduction To Advisers (Mark Schoeff, Investment News) – This week, Senator Ron Wyden introduced the “Small Business Tax Fairness Act“, which would reform the Qualified Business Income (QBI) deduction for ‘pass-through’ businesses (which provides a 20%-of-income deduction for those businesses that qualify). Specifically, the proposed legislation would introduce a new hard cap on the QBI deduction, which would begin to phase out for all taxpayers at $400,000 of income (and fully phase out at $500,000 of income). In exchange, though, the current “Specified Service Trade or Business” (SSTB) limitations, which phased out the QBI deduction for a wide range of service businesses – including those in the fields of health, law, accounting, consulting, and financial services – would be eliminated. Which means financial advisors would become eligible for the QBI deduction, along with insurance agents (who are already eligible). The caveat, though, is that the current SSTB rules don’t apply until income is above $329,800 (for married couples; $164,900 for individuals), which means advisors with income below those thresholds were already eligible for the QBI deduction… while those above the new $400,000 threshold would still begin to phase out the deduction. As a result, in practice the proposed QBI rules would only provide a benefit for a relatively narrow span of advisors – those who are married filing jointly with income above $329,800 who were phasing out under the ‘old’ SSTB rules, but whose income is still under the new $500,000 threshold that would fully phase out the QBI deduction under the ‘new’ rules. (Though for advisors who file as single individuals, the breadth of opportunity is wider, with potential benefit for anyone whose income was above the existing $164,900 threshold but below the new $500,000 cap where the QBI deduction would be fully phased out.) Of course, the broader caveat is that the legislation is still only proposed, and it remains to be seen whether it will gain traction, given the magnitude of tax increase (a estimated $36.9B/year) it would impose on upper-income households (those above the new $500,000 cap that are not SSTBs and may currently be claiming sizable QBI deductions, including a wide swath of QBI-eligible real estate investors). Nonetheless, with a broad focus in Congress on imposing higher tax rates on higher-income households, and repositioning tax benefits for more ‘middle-income’ households and smaller businesses, Wyden appears focused on repositioning the QBI deduction to be more widely available for ‘small’ businesses (regardless of their profession or industry), given that currently 80% of those claiming the QBI deduction are business owners with incomes <$200,000, but they receive less than half the actual tax benefits (as a disproportionately large amount of the QBI deduction has been accruing to a small number of much-larger non-SSTB pass-through businesses).

Capgemini World Wealth Report 2021 (Capgemini) – Capgemini’s 2021 edition of their World Wealth Report explores evolving opportunities for and demands on advisors as global HNW investor wealth increased 7.6% in 2020, while the pandemic and its life-altering consequences impacted client concerns and values. Key impact points include: a marked increase in HNW interest in ESG (young HNW investors care as much about social justice and a low-carbon economy as they do about a market downturn or higher capital gains rates); the need to leverage data analytics to personalize client engagement and fine-tune investment strategies; and perhaps of most interest, the rise of the HNW and even ultra-HNW client preference for a “hybrid” experience in which investment management is automated via robo tools while they draw on human advice on a more modular, as-they-need-it, pay-as-you-go basis. In fact, the Capgemini data shows that 34% of HNW investors are working directly with robo-advisors… not necessarily as a replacement to human advisors, but simply in recognition that “robo” platforms are providing a better digital experience to address their ‘pure’ investment needs (while the advisory industry and its advisor platforms have unfortunately been slower to embrace ‘robo’ digital automation in the onboarding process). In turn, some robo platforms have been adding human financial planning to their business models, creating a race between human advisors’ ability to deliver the digital experience clients want, and robos with the digital experience now offering a human touch and human advice (emphasizing how the future was never about robos or humans, but a ‘cyborg’ tech-augmented advisor experience that utilizes both). Capgemini also validates that while clients are more and more price sensitive on investment management, they are absolutely willing to pay more for more value-add planning services and hyper-personalized “WOW” client experiences… albeit ones that may require a better use of data and technology. Capgemini highlighted a few other interesting HNW investor behaviors and perceptions as well: 72% of HNW investors are investing in crypto; 47% HNW investors under the age of 40 are not satisfied with their firm’s digital maturity; and just 41% of HNW investors from LGBTQ+ families feel their wealth manager understands their unique needs (and only 50% of HNW investors overall state that they feel truly understood by their wealth managers).

Vanguard Steps Up Push Into Financial Advice (Michael Mackenzie & Chris Flood, Financial Times) – In the 3 years since he took the leadership role of chief executive at Vanguard, Tim Buckley has repeatedly stated that he sees Vanguard as being in the business of financial advice, not ‘just’ investment products, by utilizing the same approach it has brought with great success to the product world: using its massive size and economies of scale to bring down the cost, and then use its lower cost to attract more clients to achieve greater scale and bring the cost down even further. The center of Vanguard’s advice offering is its Vanguard Personal Advisor Services (VPAS), which first launched in 2015, and has quietly grown to more than $200 billion of AUM in the 6 years since, at a price point of just 0.30% and a $50,000 asset minimum. Notably, though, Vanguard reports that 80% of those seeking advisory services already had a pre-existing relationship with Vanguard, suggesting that in practice Vanguard’s growth isn’t necessarily coming from cost-competition with existing advisors, but more “do-it-yourself” consumers who were already using Vanguard’s platform and decided to ‘upgrade’ to working with one of Vanguard’s advisors. Nonetheless, Vanguard sees growth continuing, and recently announcing the opening of a new office in Dallas to expand the 900 advisors it already has, with a particular eye on attracting CFP professionals who live in (or are willing to move to) the Dallas area who may prefer the Vanguard environment where the firm provides the clients for advisors to service (rather than the ‘traditional’ requirement that new advisors have to prospect for their own clients). In addition, Vanguard is also reportedly expanding its financial advice offering beyond the US as well, with the recent launch of a new low-cost retirement advice service in the UK in April, and plans to expand that offering to Germany and other European markets in the future.

SEC Warns On Wrap-Fee Failures In Adviser Regulatory Exams (Melanie Waddell, ThinkAdvisor) – This week, the SEC’s Examinations division issued a new Risk Alert highlighting concerns that have arisen based on recent regulatory exams of advisers’ wrap-fee programs (where firms bundle together a single “wrap” fee that covers both their investment advisory services and the execution of trades in the client’s accounts). Of particular focus were the conflicts of interest that arose with dual-registrants, where the broker-dealer platform may have incentives that run contrary to the purported benefits of the wrap program. For instance, the SEC noted that in some cases, platforms chose to implement mutual funds share classes that included 12b-1 fees in exchange for waived trading fees (when from the client’s perspective, it would have been better to purchase the share class without 12b-1 fees, and have the broker-dealer cover the ticket charge as a part of the wrap fee program they were already paying for). Other concerns from the SEC included: clients that were placed into wrap-fee programs for ‘unlimited’ trading even though they had little or no trading volume, or high balances in cash or fixed income that wouldn’t be traded, such that the client was paying an ongoing wrap fee to include trades that weren’t actually likely to happen; failures to monitor for situations where clients were paying a wrap fee for bundled trades but ended out ‘trading away’ and implementing on other platforms that still incurred a transaction charge anyway; and a lack of sufficient disclosures to clients to describe these conflicts of interest.

Massachusetts Charges Schwab For Allowing Ex-RIA To Collect Fees After Licenses Lapsed (Jake Martin, AdvisorHub) – Massachusetts state securities regulators announced this week that they are seeking a court order that would require Schwab to reimburse nearly $125,000 of investment advisory fees that were collected through its RIA custodial platform by an “advisor” whose licenses had actually lapsed back in 2014 but had continued to collect advisory fees from 7 clients that remained on the Schwab platform. What’s notable, though, is not merely that an unregistered advisor continued to improperly charge fees to clients and may be fined by regulators, but also that Schwab itself was named in the complaint, that Schwab is being asked to refund the fees on behalf of the advisor because it failed to prevent the advisor from collecting those fees, and that the fiasco is being characterized as a “compliance failure” of Schwab for allowing the independent advisor to retain access to (and collect fees via) its RIA custodial platform and not having clear policies and procedures to monitor accounts on the Schwab platform after a third-party advisor has been removed. The significance of the focus on Schwab’s role is that it raises challenging questions for the industry at large about what role third-party RIA custodians should be expected to play in ‘policing’ the behavior of advisors who use their platforms (which has traditionally been the domain of regulators themselves). Especially given that many RIA custodians already impose asset minimums for advisors to access their platforms, often citing the compliance burdens they already face in ‘overseeing’ independent advisors. In other words, the case brings into sharp relief the difficult balance between regulators who often don’t know about improprieties until it’s brought to their attention by consumers (given the limited resources of regulators to investigate every small independent RIA), RIA custodians who are arguably in a good position to monitor independent RIAs on their platform but are not themselves regulators, and the cost to advisory firms themselves (and the consumers they serve) and potential asset minimums that are imposed when the compliance burdens (and associated costs) are increased… balanced against the reality that when consumers don’t trust financial advisors due to insufficient regulation that fails to clean up our own ‘bad apples’, everybody suffers.

What A Former SEC Executive Has Learned About CFP Board’s Enforcement Program (Tom Sporkin, Financial Planning) – Back in 2019, the Wall Street Journal featured an expose on the CFP Board and its enforcement (or lack thereof), highlighting 6,300 CFP certificants who had FINRA compliance disclosures but were reported in “good standing” on the CFP Board’s own website, which in response led to the CFP Board establishing an independent task force to analyze its own enforcement processes and procedures and make recommendations for improvements. As part of its newly increased enforcement efforts in response, the CFP Board, earlier this year, hired Tom Sporkin, who spent nearly 20 years as an SEC regulator in its Enforcement Division, to become its new Managing Director of Enforcement. And now, after recent criticism from advisor Allan Roth regarding the CFP Board’s enforcement efforts – which Roth suggests are still lacking, and that the CFP Board may instead be backing away from its positioning as the ‘gold standard’ designation in its own public awareness campaigns – Sporkin is speaking out about the CFP Board’s current enforcement approach. First and foremost, Sporkin notes that the CFP Board has already addressed the original WSJ criticism by adding links on its consumer-facing websites directly to the advisor’s SEC and FINRA regulatory pages, and has already conducted a background check on all 90,000 CFP professionals against public databases to identify potential misconduct that had not previously been self-reported to the CFP Board. In fact, the end result of its ‘historical review’ has been a whopping 1,266 investigations, supported by a $5M allocation from the Board to enforcement staffing (including a 14-member enforcement staff, and “the addition of more than two dozen lawyers and analysts”) to pursue and complete those investigations by the end of 2021. Other areas that Sporkin highlights include: the CFP Board appointed two individuals with enforcement and compliance expertise to its Board; shifted governance to place enforcement directly under the oversight of its Board of Directors; raised the visibility of the complaint form on its LetsMakeAPlan consumer website; established new systems to gather additional data and track its enforcement work; and expanded its relationships with the SEC, FINRA, and state regulators to further advance its enforcement program. Ultimately, Sporkin maintains that the CFP Board is establishing a better enforcement culture focused on ‘weeding out the bad actors’, and that CFP professionals will be “subject to an enforcement program that is the most respected and toughest in the profession”, while trying to create “procedural safeguards” to provide a fair forum for those CFP professionals who come under investigation.

Almost Famous: Investors Don’t Care About Advisor Media Appearances? (Michael Thrasher, RIA Intel) – The recent Northwestern Mutual “Planning & Progress Study” highlights that in the aftermath of the pandemic, financial advisors are on the rise as the most trusted source of financial guidance, beating out spouses, family members, online sources, and the do-it-yourself approach. At the same time, though, the study also finds that “media financial professionals” ranked last as a most-trusted source (with a response rate of only 3%). Thrasher suggests that this means financial advisors may be wasting their time with efforts to get more active on social media, start podcasts, or line up TV appearances, given the poor ranking for media financial professionals. On the other hand, the irony is that financial advisors themselves have long suggested that “financial media personalities” – e.g., Suze Orman and Dave Ramsey – should be viewed as financial ‘entertainment’ at best, and should not be viewed as good sources of financial advice in the first place. In that context, the Northwestern Mutual study’s results may simply be showing that consumers have gotten that message, and that advisors who appear in the media as a pathway to engage with a client directly are being clearly distinguished from “media financial professionals” who don’t give personalized financial advice and only engage with consumers en masse via the media. At the same time, though, the Northwestern study also highlights that when it comes to consumers’ needs, relatively few are actually looking for ‘financial planning’ itself – with only 22% seeking guidance on creating a long-term financial plan, and just 17% looking to adjust an existing plan – while the top financial planning priorities of consumers in the coming year were simply “paying bills”, “saving for retirement”, and “paying off debt”, along with “taking care of family” as the economy re-emerges from the pandemic shutdown.

Promote Your Improvements (Steve Wershing, Client Driven Practice) – It’s sadly not uncommon for an advisory firm to reach out to clients to ask for feedback on the latest offering – e.g., “What do you think of our new file-sharing system and client vault?” – only to hear clients respond “Oh, you have a new system?” because they didn’t even know that the firm had made the change in the first place. Of course, in some cases, the reality is that certain clients may just be tuned out to what the firm is offering – simply engaging with what they want on their own time and terms – but Wershing suggests that in practice, the ‘fault’ often lies with the advisory firm for not doing enough to highlight its own new offerings and improvements… the business equivalent of “if you didn’t post it on Facebook to your friends, it didn’t happen”. But what’s the best way to make those announcements, in a way that isn’t too awkward or self-promotional? Wershing suggests several steps, including: before fully rolling out a new offering or capability, bring together a small group of clients and demo it for them, showing them exactly how it will work and asking whether/where they perceive value (or what they find to be confusing); add a brief tour to your meeting agenda with the next round of client meetings, taking a few minutes of each in-person (or virtual) live meeting with clients to orient them to the new system; don’t be afraid to send out a client-wide announcement itself to let them know what’s being rolled out (in the end, if it’s really valuable for them, they should want to hear about it!); and be certain to conduct a brief survey after the rollout is complete, to gather feedback to make sure you really hit the mark (and if not, what still needs to be improved).

Which Social Media Platforms Really Drive Leads? (Samantha Russell, Advisor Perspectives) – While financial advisors are increasingly adopting social media platforms, recent Kitces Research shows that the ROI for most advisors has still been relatively limited… which Russell suggests is because most advisors don’t target the right social media platforms based on their firm’s specific marketing goals. Because in the end, different types of consumers engage with different types of social media platforms… which means the ‘best’ social media platform will vary depending on the advisor’s own target clientele. For instance, despite its early growth amongst college students, Facebook is now the most popular platform for those aged 50-64, and tends to attract more higher-income users than other social media platforms, which makes it especially good for targeting retirees and pre-retirees, building communities amongst prospects and clients or trying to reach them with retargeting ads (for prospects who already visited the advisor’s website at least once in the past). By contrast, Twitter’s typical user is also higher-earning, but much younger – more often a 20-something than a 50-something – though Russell notes that even if the typical advisor’s clients aren’t on Twitter, a lot of journalists are, which makes Twitter a strong platform to get quoted and attract media exposure. Other social media platform highlights include: Instagram is a good fit to attract prospects in their 30s and 40s still in the wealth-building stage (particularly for advisors trying to attract women, who more frequently use Instagram); YouTube helps to put a “face” to the brand (given its video capabilities) and building rapport and familiarity with regular content that goes more in depth, and has crossover benefits to boost organic search traffic; and LinkedIn is the best fit for those advisors pursuing higher-income individuals still in their working years (e.g., executives and entrepreneurs), as well as building the firm’s presence to attract talent for its future hires.

The Differences Between Busy And Productive People (Larry Kim, Inc) – In modern society, it’s almost become fashionable to be ‘busy’, an implicit sign of success that one has so many opportunities that their time is constantly filled. But Kim suggests, based on the work of Conor Neill, that there’s a big difference between being busy and actually being productive. At its core, the distinction is that busy people try to maximize their productivity by figuring out how to cram more into their day, while productive people try to cut their to-do list and instead focus on fewer tasks that are the highest impact for themselves and/or their businesses. Which in practice means not only figuring out what to focus on, but also how to pause, delegate, or simply ignore those day-to-day requests that are seemingly urgent but in reality aren’t actually that important and shouldn’t be given any time or focus. In fact, Kim suggests that in the end, one of the key reasons that productive people have much better outcomes than busy people is because busy people are always getting distracted (with all the lost productivity that comes with task-switching), while productive people create systems for themselves that help to retain their focus (e.g., checking emails only at set times of the day, creating time on their calendar for focus work, or creating the space for themselves to take a break and rest and recuperate if that’s what is really needed most).

18 Ways Advisors Can Get Unstuck To Grow (Maria Marsala, Advisorpedia) – In a world of constant busy-ness and client demands, the sad reality is that sometimes we just get ‘stuck’, knowing that we’re not happy with the status quo, but uncertain of what step to take next to actually get unstuck and produce a positive change in our situation. Marsala suggests that in the end, the key is along the lines of the old aphorism “How do you eat an elephant? One bite at a time!”, and that the key to getting unstuck is simply finding something to tackle, taking a bite and addressing it, and then coming back to take the next incremental step. So what can/should advisors tackle first? Marsala provides a helpful list of a number of areas to consider, including: take an inventory of what you own (equipment, software, etc.) and make sure you really still need all of it; take some time to spend with your team to make sure they’re really on the “same page” with you; pick a particular firm process or workflow to better systematize; take a fresh look at your target market and pricing; keep an Activity Audit for 3 months (so you can better reflect on where your time really is being spent); try to change your own mindset from being an advisor with a practice to being a CEO running an advisory business; and be honest with yourself about what your personal and professional vision really is (because when the vision is clear, the decisions get easier!).

Changing Your Mind Can Make You Less Anxious (Arthur Brooks, The Atlantic) – Nearly 50 years ago, psychologist Henry Murray conducted a somewhat infamous study, where he asked college sophomores to write down their “personal philosophy of life” and then debate a young lawyer about the merits of their philosophy… where the young lawyer then proceeded to harshly interrogate them and try to rip that philosophy to shreds. Most participants in the study, not surprisingly, reacted negatively, as most people don’t like being told that they’re wrong, and as human beings, we are adept at resisting change to our own opinions (with a wide range of cognitive biases that try to reinforce our current beliefs and work as hard as we can to disregard any and all evidence to the contrary). Yet in practice, walling ourselves off from anyone who can challenge our beliefs ultimately may become self-destructive, as we become stuck in incorrect beliefs and end out being ‘blindsided’ by the reality we refused to see. However, the little-known side result from the Murray study was that a small subset of the participating college students actually said they liked it, and at least one found it fun, as they enjoyed the challenge of being forced to rethink their beliefs. In fact, a 2016 study from the Journal of Positive Psychology found that those who had more humility – i.e., more willingness to admit they were wrong and change their beliefs based on new facts – were less likely to experience depression and anxiety, and more likely to experience happiness and life satisfaction… echoing the long-standing advice of philosophers, from Saint Augustine’s three pieces of life advice (“The first part is humility; the second, humility; the third, humility: and this I would continue to repeat as often as you might ask direction”) to the teachings of the Buddha (that “attachment to one’s views and opinions is a particular source of human suffering”). Yet, given our human tendencies, how do we overcome the instinct to dig in and defend? Brooks provides four pieces of advice: 1) recognize that if there’s a risk we’ll be proven wrong in the long run anyway, it’s actually better to recognize and admit it sooner to save face, than later when it may be even more embarrassing; 2) recognize that being challenged actually leads to these more positive outcomes, such that it may help to surround yourself with those who will challenge you (akin to Lincoln’s famous ‘team of rivals’ cabinet who he selected because they would challenge him relentlessly); 3) be careful not to document your beliefs (i.e., beware shouting your beliefs from the social media rooftops, as it will make you more reluctant to change them later because the about-face will feel more awkwardly public); and 4) start small, by finding something minor you’d like to learn more about and potentially reconsider (attenuating your mind to the fact that you really can change your mind without adverse consequences). In the end, though, the key point is simply to recognize that while we might fear being seen as a “flip-flopper” or “wishy-washy”, as economist Paul Samuelson once famously quipped, “When events change, I change my mind. What do you do?”

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 “Capgemini World Wealth Report 2021“.