Weekend Reading For Financial Planners (Sept 10-11) 2022

Author: Adam Van Deusen

Team Kitces

Adam is an Associate Financial Planning Nerd at Kitces.com. He previously worked at a financial planning firm in Bethesda, Maryland, and as a journalist covering the banking and insurance industries. Outside of work, he serves as a volunteer financial planner and class instructor for non-profits in the Northern Virginia area. He has an MA from Johns Hopkins University and a BA from the University of Virginia. He can be reached at [email protected]

Read more of Adam’s articles here.

(Eric Rasmussen | Financial Advisor)

Financial advisors have significant experience working with members of the Silent Generation (those born between 1928 and 1945), Baby Boomers (born between 1946 and 1964), and, increasingly, Generation X (born between 1965 and 1980). Individuals in these generations have built up their retirement assets over time and frequently have sought out advisors to help with their increasingly challenging planning needs. But the Millennial generation (born between 1981 and 1996) is starting to gain wealth and could increasingly be seeking financial advice in the years ahead.

According to a study by consulting firm Cerulli Associates, 25% of Millennials as of 2021 had more than $100,000 in total financial assets, up from only 10% in 2016. And as Millennials’ income and wealth rises, so too does the complexity of their financial situations, as they balance paying off student loans with saving for retirement, buying a house, and saving for their own children’s educations. Cerulli found that while Millennials are more likely to use platform providers directly (e.g., robo-advisors or large asset managers) than previous generations (who might have started investing before internet-based self-directed investing was available!), they are increasingly demanding more personalized advice, including comprehensive financial planning.

The increase in Millennials’ wealth could create competition among advice providers to serve them. Initially, some might be attracted to the advice arms of the financial services providers they already use, such as their bank’s wealth management arm or the human advice service of their existing broker-dealer firm (e.g., Vanguard Personal Advisor Services). Nonetheless, Cerulli sees an opportunity for independent advisors to be competitive by focusing on building a strong personal relationship with members of this generation (compared to financial services firms, which can be seen as more transactional). Advisors can also potentially attract Millennial clients by being conversant in the areas of investing of interest to them, including cryptocurrencies (as one-quarter of the affluent Millennials studied by Cerulli reported owning cryptocurrency in 2021).

Ultimately, the key point is that the Millennial generation represents a significant opportunity for advisors to build client relationships that could last for several decades into the future. And while this generation is starting to build assets (to meet an AUM-based advisor’s minimums), advisors might want to also consider alternative fee structures, such as monthly retainers or income-based fees, that could attract a broader range of Millennial clients. No longer the new kids on the block, Millennials are likely to be a key demographic for advisors in the years ahead!

(Alex Padalka | Financial Advisor IQ)

Historically, financial advisors were focused on adding value to a client’s portfolio. And while advisors continue to add value in this area (from asset allocation to tax management), the growth of comprehensive financial planning has led to advisors offering a wider range of services. But while this approach has largely been the purview of RIAs, the wider range of services offered by broker-dealers (and their increasing adoption of fee-based models) has led some RIAs to offer more services to their clients to differentiate themselves.

According to consulting firm Cerulli Associates, 19% of RIAs are expecting to expand their trust services during the next two years, while 17% plan to build out digital platforms, and 16% want to add concierge or lifestyle offerings. Of course, adding these services can come with a cost, particularly with staffing becoming a major concern for firms in the current tight labor market. Combined with weak market returns so far in 2022 (and their corresponding negative affect on firm revenue for firms charging on an AUM basis), firms might seek alternative fee approaches to reflect their increased service offerings and steady their revenue.

Further, with 93% of advisors, regardless of channel, expecting to bring in at least 50% of their revenue from advisory fees by 2023, charging on a fee basis (rather than through commissions or other sales-based approaches), might be less of a differentiator for RIAs going forward. While asset-based fees are still the most popular option among advisors (with 95.5% of advisors using this structure, according to the Investment Advisor Association), alternative models are becoming more popular. In fact, between 2012 and 2021, fixed and hourly fees saw the most growth of any fee structure (with 44.8% of advisors now using fixed fees and 29.7% using hourly fees, sometimes in combination with asset-based fees), with performance- and commission-based fees shrinking during that time period.

In the end, while offering comprehensive services on a fee basis is becoming less of a differentiator for RIAs (and as differentiation on fiduciary lines continues to be blurred), RIAs appear to be adapting to meet this challenge. From enhanced service offerings to alternative fee models to serving a specific client niche (which, by focusing on specific client needs, can reduce the cost of offering tailored solutions for unique client needs), RIAs have a range of options to thrive among this increasing competition!

(Thomas Giachetti | ThinkAdvisor)

In late 2020, after several years of background research and seeking public comment from investment advisers, the North American Securities Administrators Association (NASAA), an association of state investment regulators, put forth a Model Rule that would, for the first time, add an annual CE obligation to the investment adviser representatives (IARs) of state-registered RIAs – specifically, 12 hours of continuing education each year, including 6 hours of “Products & Practice” and 6 hours of “Ethics & Professional Responsibility”. Technically, though, because NASAA is an association of state regulators and not a regulatory body itself, it doesn’t actually control the regulations of the states – which typically requires each state’s legislature to draft its own laws or the state’s regulator to go through its own formal process for implementing new rules (ideally using NASAA’s Model Rule as a template). As a result, while NASAA implemented its Model Rule in the fall of 2020, individual states are still rolling out their IAR CE requirements, one state at a time.

So far, three states (Maryland, Mississippi, and Vermont) have adopted CE rules based on the NASAA model rule that must be followed by the end of 2022. In addition, CE rules in Arkansas, Kentucky, Michigan, Oklahoma, South Carolina, Washington D.C., and Wisconsin become effective on January 1, 2023. Nevada and Rhode Island are also finishing up rules that could, if established this year, become effective on January 1 as well.

Notably, IARs who are required to register in more than one state will (for states that follow NASAA’s Model Rule) be in compliance with another state’s CE requirements as long as the IAR’s home state’s CE requirements are as stringent as those of the other state. This means that IARs will want to be aware of the number of CE credits required, as well as the content breakdown of the credits, for each state in which they are registered, in case they need to fulfill additional requirements for states that are more stringent than their home state’s.

The key point is that advisors acting as IARs will want to be aware of this new CE requirement and whether it applies to them (as IARs who fail to complete the required training by the annual deadline will first have their IAR status set to CE inactive, and, if the requirement is not completed by the end of the following year, will be unable to renew their registration). But with a variety of ways to fulfill the requirement, advisors can not only avoid running afoul of regulators, but also ensure they are maintaining the knowledge needed to properly serve their clients!

(Caleb Brown | ThinkAdvisor)

Hiring a new associate planner or paraplanner can be a risky endeavor for financial planning firms, particularly small ones. From the costs of finding qualified candidates, to time spent training the new hire, to actually paying for the new employee’s salary and benefits, making a poor hire could prove costly. Because of this, firms sometimes prefer hiring advisors with experience (rather than recent graduates of financial planning education programs, who are likely to require more training in the non-technical aspects of financial planning).

But this paradigm can be costly for both firms and recent graduates. As experienced planners are likely to have greater salary requirements, hiring these professionals is likely to be more costly than bringing on a recent graduate. At the same time, aspiring planners who are unable to land a job with an independent firm often end up at large broker-dealers or insurance companies, where their role can be more sales-oriented (rather than planning-oriented) than they might have imagined.

Amid this environment, a new company, Planning Zoo, seeks to support both firms looking for assistance and aspiring planners. The company is hiring financial planning students on a contract basis, who will learn how to understand client information, enter the data points into financial planning software programs, identify any information gaps, and provide a list of basic red flags or opportunities for the advisor to consider as they create the plan for their client. All material prepared by the students will be reviewed by experienced planners.

This approach allows firms to outsource data entry and preliminary planning tasks to free up the time of internal team members for higher-value tasks, while also giving back to the profession by allowing new planners to experience what the planning role entails. And for aspiring planners, not only will they gain valuable experience to make them more attractive candidates to advisory firms (that also can be applied to the CFP Experience requirement), but also be paid for their efforts.

In the end, Planning Zoo has the potential to increase the skill level of financial planning students, which could ultimately give advisory firms more confidence that their new hires will be successful. This could not only allow firms to grow more efficiently, but also increase the chances that new planners will have a more meaningful start to their (hopefully long) financial planning careers!

(Eliza De Pardo | Financial Advisor)

The “Great Resignation” and the related current tight labor market is making headlines daily. And while the financial services industry has seen a lower quit rate than other industries (leisure and hospitality has been particularly hard hit), it is not immune from talent shortages. Amid the continued growth of the financial advice industry and an anticipated wave of advisor retirements, hiring will need to be on the forefront of many firm’s minds if they want to continue to be successful in the years ahead.

One way for firms to attract and retain their employees is to put career path planning first and build the infrastructure to continuously develop its talent. This would allow team members to become more capable and better equipped to progress in their careers and would also let the firm focus its recruitment on backfilling with entry-level positions (after the previous employees in this role move up in the organization), which can be a larger (and less expensive) pool than trying to hire seasoned advisors.

Such a career planning path could start with a period of structured training, including internal and external coaching, as well as time spent shadowing experienced team members to both better understand how the firm operates and to build personal connections within the team. Along the way, the new hire’s milestones can be tracked to ensure they are on pace to be a productive member of the firm.

Another consideration for firms looking to attract talent today and looking forward is considering opening up positions on a fully remote basis. While this could require the firm to create formal programs to bring new employees on remotely (to build strong remote leadership and company culture), it would likely broaden the pool of candidates available to the firm.

So whether a firm is currently looking to make a hire or might need to in the future, it is crucial to lay the groundwork for success in what could be a continued competitive market for advisor talent. Whether it is through creating an internal training program (or even a financial planning residency program) or creating the capability for team members to work fully remotely, proactive firms are likely to build the strongest teams in the years ahead!

(Steve Garmhausen | Barron’s)

As the current market downturn has hit many AUM-based firms’ revenue, adding new clients has become increasingly important for advisory firms. This can lead to a need for new employees to serve these clients, but amid the continued tight labor market for advisor talent, some firms are instead looking for efficiencies to serve a growing client base with the same staff headcount.

Many firms are looking to technological solutions to improve their efficiency (especially in back-office operations). This can include advisor technology solutions to support everything from the onboarding process and document management to project management and more efficient advisor workflows. In addition, some advisors are leveraging technology to preemptively answer client questions (avoiding a 30-minute phone call each time!) by using webinars, podcast, and other forms of media to address common issues in the current environment.

Some firms are also looking to increase efficiency by analyzing their client base to determine whether both sides are getting sufficient value from the relationship. This could lead to the firm “graduating” clients who they can no longer serve profitably (or who have planning needs that the firm can no longer address effectively), freeing up more time to focus on its other clients.

The key point is that firms have many ways to handle a growing client base, from bringing on new talent to creating more efficient processes. In the end, taking the time to consider the type of clients the firm wants to serve and how they want to serve them can pay significant dividends, particularly during a challenging time for hiring new employees!

(Dinah Wisenberg Brin | ThinkAdvisor)

The concept of longevity risk is one of the most talked-about topics in financial planning today. With more and more retirees living into their 90s and beyond, creating a retirement income plan that can last the duration of their lifetimes can be challenging. However, there are many ways to mitigate this risk, from delaying Social Security (and receiving larger monthly benefit payments for life) to purchasing a Single Premium Immediate Annuity (SPIA), which, in its most basic form, offers a ‘guaranteed’ monthly payment for the remainder of the annuitant’s life in return for an upfront premium payment.

Another option to mitigate longevity risk, similar to an annuity, is a tontine, which provides payments that include both a return on capital and mortality credits stacked on top. The difference, however, is that with a tontine the mortality credits are not paid until some of the tontine participants actually pass away – which eliminates the guarantee of exactly when mortality credits will be paid, but also drastically reduces the reserve requirements for companies that offer a tontine (improving pricing for consumers).

And while tontines have faded in popularity during the past century, a new option has emerged, as Canadian asset manager Guardian Capital this week introduced two tontine products. The firm’s GuardPath Modern Tontine is open to individuals born between 1957 and 1961 and will provide investors with a significant lump-sum payment in 20 years (when they will be between the ages of 81 and 85) in return for an upfront investment. The product’s returns will come from a combination of compounded growth during the period and the pooling of survivorship credits from those participants who redeem early or pass away (with these individuals or their survivors receiving a reduced payout). And for retirees looking to get a stream of income as well as a lump sum to help cover costs in their later years, Guardian’s Hybrid Tontine Series provides income payments as well as a lump-sum payout to surviving unitholders at the end of 20 years.

And while these ‘modern’ tontine products currently only available to Canadian investors, interest in them could portend its introduction in the United States. Because for clients with long life expectancies who are willing to make an up-front, lump-sum investment, a tontine could be an attractive option to meet their retirement income needs!

(Mary Beth Franklin | InvestmentNews)

The pandemic created major changes in the work environment, from a spike in the unemployment rate to the shift to remote or hybrid work for many individuals. Given these disruptions, many workers decided to retire (perhaps earlier than they might have thought before the pandemic) and began claiming Social Security. But amid the reopening of the economy, improving wages, and increased inflation, some recently retired individuals might be considering reentering the workforce. And so, current retirees who plan to return to work (and therefore might not need the additional income from Social Security) might wonder whether they can reverse their decision to claim Social Security in order to get the increased payments that result from delaying their benefits.

One option available for individuals who claimed Social Security within the past 12 months is to cancel their application through a process called a withdrawal, which can be used once in the individual’s lifetime. This allows the individual’s benefit to continue to grow (until they eventually decide to claim) but requires them to repay all the Social Security benefits received, as well as those who received benefits on their record, such as a spouse or child. This repayment also includes any money withheld from the benefits to pay for Medicare premiums or voluntary income tax withholding. Notably, individuals who already have Medicare and take advantage of a withdrawal must state on form SSA-521 whether they want to keep their Medicare benefits (and, if so, they will pay their premiums directly to the Centers for Medicare and Medicaid Services).

Another option, available to those who have reached their full retirement age but are not yet age 70, is to suspend their benefits. This allows individuals to earn delayed retirement credits for each month their benefits are suspended (thereby increasing their monthly benefit once payments are resumed), or until age 70, when payments automatically start again. For those who suspend their benefits and are enrolled in Medicare, they will be billed directly for their future Part B premiums.

Ultimately, the key point is that given the significant potential value of delaying Social Security benefits, individuals currently receiving benefits (and have other sources of cash flow to support their expenses) might want to consider a withdrawal or suspension. And given the requirements and paperwork involved in doing so, as well as the need to ensure that Medicare benefits continue and are paid for, advisors can play an important role in ensuring that their clients complete the process successfully!

(John Rekenthaler | Morningstar)

When advisors think about sequence of return risk, they usually think about individuals who are nearing retirement. For these individuals, poor returns in the first years of portfolio withdrawals can severely impair their ability to meet their income needs throughout retirement (or, alternatively, experience significant upside if investment returns early in retirement or strong).

But retirees are not the only ones who face sequence of returns risk, as it can also play an important role in portfolio growth (or lack thereof) for individuals who save during their working years. Because individuals tend to save regularly throughout their working years (e.g., through regular 401(k) plan or IRA contributions) as opposed to saving a single lump sum, the sequence of returns they face during their accumulation years plays a major role in the size of their portfolio at retirement. For example, while retirees benefit when strong returns occur early in retirement (before their portfolio has been depleted by withdrawals needed for living expenses), savers benefit more when stronger returns occur later in their accumulation period. This is because workers tend to have little saving accumulated early in their careers (when a major market boom or decline would not have much effect on the size of their portfolio in dollar terms), and much more as they near the end of their careers (when their portfolio has grown as the result of years of contributions and compounded returns).

In the end, advisors and their working clients cannot control the whims of the market, but they can control their asset allocation to balance the need for portfolio growth with sequence of return risk, particularly in the later work years and in the first several years of retirement. And while the current market downturn might be discouraging for many investors, those who have many years of saving ahead could benefit if stronger returns are on the horizon!

(Khe Hy | RadReads)

For busy professionals, it can often seem like there are not enough hours in the day to get everything done. From work responsibilities to time spent with family to exercise to (at least some) relaxation, there’s a lot to fit in each day. And according to startup executive and investor Shreyas Doshi, there are only three ways to win back time: stretch it, save it, and scale it.

Stretching time means using more hours to get everything you need to do accomplished. Whether it means eating lunch at their desk or just sleeping less, those who pursue this tactic try to fit in as much activity as possible in a given day. But doing so can lead to burnout and exhaustion, whether it is from constantly thinking about work or not having enough energy as a result of poor sleeping and eating habits.

Another option is to save time by becoming more efficient, leveraging the myriad tips, hacks, and tools available to help cut down on email clutter and get certain tasks done more quickly. But while these techniques can free up some time for other tasks, the more important question is whether an individual is focusing on the most valuable tasks in the first place.

This is where scaling time comes in. By focusing on activities that are force multipliers, an individual’s work can result in much greater impact and time saved for other responsibilities or interests. For example, a financial advisory firm owner whose strength is in serving clients could hire a chief operating officer to take on the responsibilities of running the business, freeing up significant time for the firm owner to focus on growing the business and serving their clients. While there is a monetary cost of bringing on a new employee, doing so could create significantly more free time than trying to squeeze in an extra hour of work each day or reducing time spent processing email.

The key point is that while everyone only has 24 hours in a day to use, there are countless ways to divide up to that time to fit in all of the work and personal responsibilities that an advisor wants to get done. But by focusing on the tasks that they perform the best and hiring others or outsourcing the rest, advisors can not only create more time for themselves, but also build a more scalable firm!

(Nick Maggiulli | Of Dollars And Data)

Each person has a limited lifespan, which helps explain why researchers have found that using money to buy time is often the best ways to improve an individual’s happiness. By using money (e.g., hiring landscapers) to create more free time to pursue the activities we want to do (reading Weekend Reading?) rather than those we don’t (mowing the grass), individuals can get more enjoyment out of the time they have. But what if there were also a way to extend your lifespan, as well as the quality of those years?

Maggiulli suggests that being physically fit is one of the most effective ways to create more high-quality time for yourself. Because not only can being fit lead to you living longer, it can make the years that you do live even better. For example, an individual might live until age 90, but if they are largely confined to their home for their last 20 years because of a physical ailment, their life might not be as enjoyable as someone who lives to 90 but can travel and participate in their community throughout their later years. In fact, some research suggests that every hour you spend exercising is likely to give you six to eight hours of additional healthy life. For example, spending four hours a week exercising over the course of 50 years could give you an extra six to eight additional years of disability free health!

So whether you decide to engage in aerobic activity, strength training, or, optimally, both, exercise can not only add years to your lifespan, but also make it more likely that you will be able to do the activities you enjoy throughout your life. This is especially important for advisors, whose jobs are largely sedentary; so the next time you have a conference call, consider making it a walk-and-talk!

(Mark Schrader | Scribe)

Financial advisors are familiar with the concept of the time value of money, by which a dollar today is worth more than the same dollar in the future because of its potential earning capacity. This is a key concept in investing, where a dollar today could be worth several dollars in the future if invested properly. But flipping this concept backward to “the money value of time” can also be an instructive concept.

The phrase “time is money” is a common refrain for busy workers. Whether you’re getting paid an hourly wage (where the value of an hour of your time is explicit) or a salary (which can be divided into the hours worked each week), an individual can choose to exchange an hour of their time for money by working. But Schrader suggests that not all periods of time are created equal. For example, the value to you of an hour of time in the middle of the day when your kids are at school might be worth significantly less than an hour in the evening where your whole family is together. In fact, that hour with your family might not just be worth multiples of the midday hour, but could even be considered priceless, as the time you have to spend with your kids when they are a given age is limited.

Financial advisors recognize that tradeoffs are an inevitable part of life and business. For instance, every hour spent on business development is an hour that could have been used to service current clients. But given that an hour lost is gone forever, thinking carefully about how to spend our time (which can sometimes be hard to value), as well as charging appropriately for time spent working, are important parts of making the most of the limited hours we have!

We hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think we should highlight in a future column!

In the meantime, if you’re interested in more news and information regarding advisor technology, we’d highly recommend checking out Craig Iskowitz’s “Wealth Management Today” blog, as well as Gavin Spitzner’s “Wealth Management Weekly” blog.