Weekend Reading for Financial Planners (March 17-18) 2018


Executive Summary

Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with the big news that the 5th Circuit Court of Appeals has ruled against the Department of Labor and its fiduciary rule, and moved to vacate the DoL fiduciary rule entirely… with the caveat that a separate decision from the 10th Circuit Court of Appeals this week upheld the fiduciary rule, setting the table for a potential final showdown in the Supreme Court, and creating even greater uncertainty about the fiduciary rule in the meantime. Also in the news this week was the revelation that the SEC’s own fiduciary rule proposal may be coming soon – sometime in the second quarter – and its likely to focus more not just on fiduciary disclosures, but also whether advisors and brokers need to be clearer with their titles.

From there, we have several practice articles this week, including: how to conduct effective staff/team meetings (which are especially important as your team grows!); why “compensation” problems with employees are rarely about compensation alone, and effective employee retention is about the more holistic job opportunity and offering; why rearranging your office space (and who sits where) can spur creativity and innovation in the business (albeit at the risk of impairing productivity); and a look at what it will take in the future to be a true “destination” advisory firm (for both future clients, and future employees).

We also have a few articles on retirement planning, from a look at planning strategies to discuss with clients in their 50s when they’re still 5-10 years away from the retirement transition (or in the home stretch to saving enough to achieve it), to recent research that finds a disturbing spike in the mortality rate (especially for men) upon reaching age 62 and becoming eligible for Social Security, and a look at the pros and cons of so-called “bucketing” (or time-segmentation) strategies for retirement portfolios.

We wrap up with three interesting articles, all around the theme of household spending and cash flow: the first looks at the phenomenon of “lifestyle creep”, and why it’s so important to establish systems that aim to save your future raises going forward (so they don’t automatically creep into your lifestyle spending); a fascinating study that finds, due in large part to how judgmental society is of the rich, that most affluent people actually try to hide their wealth and are hypersensitive to being judged about it); and the last looks at how, because money is often a major point of contention between couples in a marriage, that one of the best ways to reduce marital conflict over spending is to give each spouse a guilt-free “allowance” that they can spend on any discretionary expense they want (without fear of being judged!).

Enjoy the “light” reading!


Weekend reading for March 17th – 18th:

Fiduciary Rule Dealt Blow By Circuit Court Ruling (Lisa Beilfuss, Wall Street Journal) – Yesterday, the 5th Circuit Court of Appeals dealt a major blow to the Department of Labor’s fiduciary rule, by not only ruling in favor of the financial product industry that the Department of Labor “overreached” by requiring brokers and insurance agents to be subject to a fiduciary standard, but declaring that the entire DoL fiduciary rule should be vacated, ironically by relying on statements from the industry that brokers and insurance agents should NOT be regulated as advisors by convincing the judge that with “one-time IRA rollover or annuity transactions… it is ordinarily inconceivable that financial salespeople or insurance agents will have an intimate relationship of trust and confidence with prospective purchasers.” In other words, the industry was able to convince the courts that its “advisors” aren’t actually serving as trusted advisors, and therefore shouldn’t be regulated as such! The Appeals ruling overturned a prior Texas court’s ruling in favor of the fiduciary rule, but notably came within just days of a ruling from the 10th Circuit Court of Appeals in favor of the fiduciary rule on Tuesday. Which means the decision from the 5th Circuit to vacate the rule does not mean it will automatically and immediately be voided. Instead, there is a rising likelihood that the DoL fiduciary rule may actually end up going all the way to the Supreme Court to decide which Appeals court ruling should hold. In the meantime, though, all eyes are on the Department of Labor and how it will proceed – especially since President Trump had already directed the DoL to reconsider the rule. The DoL could ask the 5th Circuit decision to be re-reviewed by the entire Appeals court (to defend its rule), or take the matter to the Supreme Court (to resolve the differences between the Appeals Courts), or may ask for a stay of the latest ruling to “hit the pause button” while it resolves all the court differences. Alternatively, the DoL might simply let the 5th Circuit Court decision to stand, and use it as an excuse to start over on a new rule process, ostensibly in coordination with the SEC’s own fiduciary rule that is anticipated to be coming soon (as regardless of the DoL outcome, the fiduciary duty is now in the public and media eye).

Brokers Will Have to Reveal More to Investors Under Coming SEC Rule (Dave Michaels, Wall Street Journal) – With the rise of both the Department of Labor’s fiduciary rule, and an increasing amount of state activism on fiduciary rulemaking, the SEC is widely expected to issue its own version of a fiduciary rule sometime this year. And SEC Commissioner Hester Peirce stated this week that clearer disclosures on the nature of the brokerage relationship will be a centerpiece of the new rule, with the goal of creating a “very candid, short disclosure form” regarding the nature of the advisor-client (or broker-client) relationship and the relevant fees, services, and conflicts of interest. Notably, though, fiduciary advocates are already expressing concern that a more disclosure-based fiduciary rule from the SEC could water down actual consumer protections. On the other hand, with the SEC indicating that it specifically intends to crack down on the ability of brokers to use certain titles like “financial advisor”, it’s still unclear whether ultimately the SEC will weaken the core fiduciary duty itself, or simply provide brokers a non-fiduciary alternative path in exchange for them eschewing financial-advisor-like titles. The SEC is expected to vote on issuing its proposed rule by the end of the second quarter, which will lead to a period of public comment and debate, before the SEC could decide upon and issue a final rule.

How To Conduct Effective Staff And Team Meetings (Teresa Riccobuono, Advisor Perspectives) – As advisory firms grow from solo practitioners to having one or multiple staff members, it becomes necessary to begin conducting regular staff meetings with your team. However, for many advisors, the question quickly arises: what, exactly, should be discussed in those meetings, and how often should they occur? Most advisors will conduct weekly office meetings, and some even do “daily huddles“. The core purpose of these ongoing meetings is to facilitate team communication – where everyone comes together, and talks collectively about what they’re working on and their challenges, which both helps everyone to stay on the same page, and provides the whole team the opportunity to help each other to resolve problems. Accordingly, the agenda should focus on tasks and projects, and specific activities that are open for particular clients and prospects (including whether to reprioritize some of what you’re working on amongst everything on the list). And to ensure that everything is brought to the weekly team meeting in the first place, Riccobuono suggests everyone create a “talk to” folder, where they collect throughout the week all the things that they need to talk to you (or each other) about, so you can cover them collectively in the team meeting. Obviously some items are too urgent and must be discussed right away, but the goal is to shift at least some of the intra-day and intra-week interruptions that happen between team members into the weekly team meeting instead. In addition, Riccobuono also advocates doing broader team meetings periodically – e.g., monthly or quarterly – that are conducted off-site as a team-building exercise. This could be a more socially-oriented event – from cooking or golfing to hearing a motivational speaker or just taking a spa day. And don’t forget the importance of also having regular and periodic one-to-one meetings with your team as well – as even if you’re meeting in a team format, some issues (and feedback) are better suited for one-to-one face-to-face conversations.

The Benefits Of Keeping The Bigger ‘Comp’ Picture In Mind (Angie Herbers, ThinkAdvisor) – Despite the amount of focus in the industry these days on how to build the “right” compensation plan for advisors, Herbers suggests that in the end most comp plans succeed or fail based on other factors in the business. Because in the end, compensation disputes are almost never just about the money itself; not that “what we’re paid” isn’t important, but that there are many other aspects of the job that have even more impact on an employee’s happiness, satisfaction, motivation, and performance. For instance, advisory firms need to clearly articulate their Core Values and live up to them; of course, for advisory firm founders, the firm’s Core Values tends to be their own Core Values, which means it’s easy for the founder to live and espouse those values… but if they’re not articulated clearly, they may not be as clear to all the rest of the employees as the founder themselves, which eventually can leave employees feeling uncertain about what’s really important (or not) in the firm. Having a clear organizational structure is also very important – not for the advisory firm founder at the top, necessarily, but for those who report up the line, and need to be clear on who exactly they’re supposed to report to, and who is responsible for making decisions about their own future career opportunities. Other factors that Herbers emphasizes as important include: articulating a clear Career Track for employees (so they understand what their upside potential would be!); having Training Programs that give employees the opportunity to advance their own skills (important for them both to actually improve at their jobs, and to feel like they have continued upward mobility); effective Tools to perform (i.e., the software technology or whatever else they need to succeed); and both Basic employee benefits (e.g., health insurance and retirement plans) and Lifestyle benefits (e.g., some flexibility to the work day to manage family and life). After all of that is set, there’s still the matter of setting the compensation structure itself as well… but again, you may find that the compensation issues are less problematic when the rest is properly set in place.

Why You Should Rotate Office Seating Assignments (Harvard Business Review) – Reorganizing office workspaces is viewed as a big nuisance for most… something that only happens because the business has grown to the point that it becomes necessary (e.g., due to moving offices, taking on new office space, reorganizing teams themselves and therefore where they sit, etc.). Except design firms have also long made the case that such changes can actually help spark innovation and creativity, as rearranging where people sit causes them to spend more time with, or at least “bump” in to, new and different people, which forms new connections and brings new ideas. And now a Carnegie Mellon University researcher has found some data to actually support the case. In a “natural experiment”, a large South Korean e-commerce company moved into new headquarters, and due to space constraints had to mix together two separate sets of 6 merchandising teams into one group of 9 and one of 3. The end result – the merchandisers relocated into the team of 9 suddenly produced 25% more deals, which were on average 40% higher than their pre-move average, in the first few months after the move. And the outcome appears not to have been the result of team collaboration, per se, but an actual increase in “creativity” and team members in the new environment literally coming up with more new ideas and initiatives (that led to new merchandising deals). Notably, though, the results occurred only in those who already have above-average experience and no prior social ties to the new colleagues; in essence, the benefit only applied to those who had already learned enough in their area to specialize, and now were simply getting exposed to new people that led to more creativity. And notably, the change in office spaces had more impact than a change in compensation (from individual incentives to fixed wages) that also occurred at the same time. Of course, such change and innovation can still lead to disruption; thus, even the researchers themselves acknowledge that if the goal is simply maintaining productivity, there’s a case for keeping workspaces as they are. But if the goal is to compete on knowledge, sharing, and innovation, periodic reconfigurations may be very worthwhile.

The Markings Of A True Destination RIA (Matt Brinker, Wealth Management) – Recent industry benchmarking data shows that organic growth is slowing at the average independent advisory firm, with client acquisition rates falling from 7.1% in 2014 to just 5.8% in 2016, as more and more advisory firms grow to more than $100M of assets under management and reach the growth pains (and reinvestment demands) that come with the transition from a practice into an advisory business. And the challenge isn’t just about scaling the advisory firm on its own, but also the competitive threat… from not just other RIAs, but solutions like Vanguard’s Personal Advisor Services as even Vanguard CEO Tim Buckley has noted that Vanguard sees itself in more direct competition with advisors going forward. In fact, it appears that the bulk of growth is already Cerulli already notes that the 687 firms with more than $1B of AUM account for 59% of all RIA assets shifting to just a small subset of the largest firms, as (while the 3,605 RIAs in the $100M to $500M range are less than 20% of total RIA assets). So how does an independent advisory firm make itself the “destination firm” for clients (and next generation advisors) in the future? Brinker has several suggestions of where to focus: Technology (both because next generation clients will demand it, and because technology allows advisors to spend more of their time actually focused on clients); Differentiation (as more and more advisors differentiate on “independence” and “fiduciary” and “CFP” and “trust” and “experience”… which means those aren’t actually differentiators anymore!); Systematic Growth programs (as relying on referrals only works until you exhaust your personal sphere of influence, and then growth starts to plateau); Training and Coaching (as advisory firms develop a deeper staff, it’s more and more necessary to reinvest into their talents and skills over time); and Equity Value (including formulating a long-term plan of how you will eventually exit your equity stake).

The Fruitful 50s: 7 Planning Opportunities For The Decade Before Retirement (Jon Guyton, Journal of Financial Planning) – Most retirement planning strategies focus on the final years leading into the retirement transition, or in the retirement phase itself… but as Guyton notes, retirement transitions often take 5-10 years to fully play out (as increasingly, retirees don’t just retire cold turkey, but downshift their careers and employment income over time), which means it’s increasingly relevant to plan and prepare for these more gradual retirement transitions earlier (i.e., while clients are still in their 50s). Accordingly, Guyton suggests 7 core areas of focus for those in their 50s: Boosting Nest Egg savings (as while it’s best to save early for the long run, prospective retirees transitioning into the empty nest stage can often make significant dollar savings in the final decade before retirement); planning for Income transitions (whether from shifting to part-time work, becoming a consultant, or monetizing a long-time passion, planning for and setting up the transition to a “post-retirement income stream” has a significant impact but can take time); Revisiting Housing Expenses (both for those who want to downsize or change homes leading up to retirement, or those who want to pay off the mortgage by the time they reach retirement); Reviewing Old Insurance (e.g., life insurance coverage needed earlier that is no longer as relevant in their 50s, with premiums that can be redirected to retirement savings today); Evaluating New Insurance (as long-term care insurance is especially conducive to purchase now in one’s 50s, before the cost ramps up significantly in their 60s); Portfolio Allocations (as approaching retirement often means it’s time to start decreasing risk and equity exposure and building a “bond tent” to protect against an ill-timed bear market in the retirement transition); and Estate Planning (as once children are out of the house, and with new higher estate tax exemptions, many of today’s 50-somethings need a substantially different estate plan than the one they put in place 10-20 years ago at a different stage of life).

Why So Many Men Die At 62 (Demetria Gallegos, Wall Street Journal) – A recent new study in the Journal of Public Economics by Maria Fitzpatrick and Timothy Moore finds that there is a significant increase in the mortality rate, especially for men, that kicks in at age 62… and the researchers believe that the cause may be the availability of Social Security, and the transition to retirement that becomes feasible once it is available (as 1/3rd of all Americans immediately claim Social Security at age 62, and 10% of men retire in the month they turn 62). In fact, the researchers found that the male mortality rate jumps by 2% (i.e., an additional 2-of-every-100 men) within 12 months of turning 62… and the researchers believe the effect is concentrated on those who retire at age 62 (which would make it a 2-in-10, or 20% leap in mortality!). Which means that while some would theorize that retirement could lead to better long-run health – e.g., because you now have more time to take care of yourself and exercise – in practice, the opposite appears to be occurring. Instead, retirees are more sedentary (and thus at greater risk of infection), those who lose their job tend to increase their smoking rate (which all the associated complications), and those who don’t work may have more time to go out and drive (increasing the risk of death from traffic accidents). Of course, the reality is that those who retire at 62 are more likely to have worked as physical laborers, which means those who retire at that age may already be in poor health; nonetheless, that doesn’t explain why, even for those who may have been unhealthy, the mortality rate in the year of retirement at age 62 is so much higher than those who same unhealthy laborers at age 61. Ultimately, expect a lot more research in this area in the coming years to examine the link between health, mortality, and the actual transition into retirement.

The Pros And Cons Of Bucket Strategies (Dirk Cotton, Retirement Cafe) – The basic idea of a “bucket” strategy is to separate retirement assets into various “buckets” to cover certain time periods (e.g., a cash bucket for the first few years of retirement, an intermediate bucket with bonds for the next 5-10 years, and a long-term bucket that allocates the rest to stocks). This kind of “time segmentation” strategy is different than the traditional approach of just mixing all the assets into a single asset-allocated portfolio (although ultimately the final asset allocation may actually be similar anyway), and can be especially appealing to nervous retirees who want to know, exactly, where their retirement cash flows will come from in the next few years. Notably, though, such an approach also shifts the very nature of determining what is “safe” retirement spending in the first place, since it’s no longer about what is a “safe withdrawal rate” from a diversified portfolio to manage sequence of return risk, but instead determining what cash flows can be established more directly from the various buckets. In fact, some advisors go even further to ladder the buckets precisely to when the cash flows are needed (e.g., with a series of laddered fixed annuities, or a laddered bond portfolio). Ultimately, the bucket approach is a form of asset/liability matching that aims to better align the duration and time horizon of the asset with when that particular retirement cash flow will be needed (to avoid mismatches), and can be appealing to retirees who can more directly see that they won’t need to sell from equities in a down market (or won’t be motivated to panic-sell). Ironically, though, it appears that bucket strategies may not actually produce greater retirement income – in part because they often end up holding higher levels of cash and bonds (reducing long-term returns and therefore the ultimately the amount of income that can be sustained), and also because bucket strategies can even lead to unwittingly undesirable liquidation sequences that fail to reinvest more into equities after bear markets (the way traditional rebalancing would). Which means ultimately, bucket strategies may be a superior explanatory and psychological mechanism for clients to manage sequence of return risk, but may not actually be a superior retirement income generation strategy… with the obvious caveat that if we can’t find better ways to explain and report on total return portfolios in the first place, the bucket strategy the client can actually follow may still be superior to the higher-return alternative they can’t stick with anyway.

How To Deal With Lifestyle Creep (Peter Lazaroff) – As human beings, our bodies are wired to adapt to our surroundings… thus why if you place your hand in a bowl of lukewarm water and start heating it, you may not even notice the rising temperature (until it gets really hot), but if you then move your hand to a bowl of ice water it’s immediately noticeable (and quite unpleasant!). Lazaroff suggests that a similar phenomenon occurs in our financial lives as well… where the ongoing raises we get (especially in the early years of our careers when the raises tend to be the biggest) lead to incrementally higher spending decisions (adding premium cable channels, buying more expensive bottles of wine, buying tickets for better seats at an event, etc.) that you can reasonably afford. At least, until they all add up to the point that you’ve had significant “lifestyle creep” and suddenly, it’s “impossible” to go back to the way things were – akin to now moving your warm hand into the bowl of ice water. And since it’s so hard to go backwards, the real key is to better avoid experiencing lifestyle creep in the first place. For instance, Lazaroff suggests a “reverse budgeting” process that treats long-term goals as a “bill” to be paid (a form of “pay yourself first” savings), and otherwise automating finances to remove lifestyle creep temptations. Even more important, though, is specifically having a plan to automatically escalate your savings (not your spending) as those raises come in the future. Unfortunately, most retirement plans today don’t have very good automatic escalation features, but, at a minimum, you can set an annual plan that when your raise comes, you commit to “only” spending part of it, and allocating the rest to ongoing future savings (e.g., commit to spending “just” 50% of each raise). The key, though, is not about just trying to make a decision to save more in real time – which can be challenging and feel like you’re giving something – but instead creating a system for saving more over time as a means of combating the lifestyle creep phenomenon.

Uneasy Street by Rachel ShermanWhy The Rich Are Hiding (John Kadon, Wealth Management) – Working with “affluent” clients with more than $1M of investable goals is highly profitable for virtually every advisory firm… yet the challenge to finding such “rich” clients is that it turns out rich people rarely even want to be found. In fact, as explored by sociologist and author Rachel Sherman in her recent book “Uneasy Street: The Anxieties Of Affluence“, it’s very common for affluent people to try to hide their wealth… primarily from the judgment of others. Which means for advisors to succeed with “rich” clients, it’s important to have empathy for the actual fears and concerns that so many rich people have about their own wealth. Ironically, Sherman discovered the challenge in part because it was difficult to even find, and sit down with, very affluent individuals to interview them for the book in the first place! Because as it turns out, while society tends to obsess about affluent celebrities in the aggregate, at the individual level the wealthy often feel very judged, especially with portrayals from the popular media that the rich spoil their kids, are entitled, are greedy and exploitative, etc. Accordingly, the top 5 takeaways from Sherman’s research include: 1) the top concern of rich people is other people knowing they are rich (especially in being “outed” as a member of the now-infamous 1%), which means it’s crucial for advisors to emphasize their respect for client privacy and confidentiality; 2) the affluent prefer not to think of themselves that way (e.g., some subjects still referred to themselves as “middle class” even as they were earning household income of more than $2M/year with a second home in the Hamptons, because self-perceptions of affluence are still relative and there’s always someone around with even more money); 3) rich people are terrified of being judged (which means advisors should be especially cognizant about conveying any hint of judgment); 4) rich people are very concerned about losing their money (i.e., at some point it’s less about growing than maintaining, and even very affluent people still worry about losing it all); and 5) the rich consistently underreport their own wealth (in an effort to reduce their visibility as targets of fraudsters and simply to minimize their own self-conflict about their level of wealth, which means it’s actually not a good idea to ask about exact numbers for income and wealth until trust is fully established).

How a $500 Monthly Allowance Saved Our Marriage (Catherine Baab-Muguira, Slate) – For many couples, spending decisions can be a point of significant financial stress, as one member of the couple may judge the spending decisions of the other, especially when finances are otherwise tight. In fact, criticisms of how spouses spend money have long lingered in both literature (e.g., “in Madame Bovary, Emma kills herself when her secret debts, not her secret dalliances, are about to be discovered”) and in comedy (e.g., Henry Youngman’s joke “Someone stole all my credit cards, but I won’t be reporting it… the thief spends less than my wife did.”). And the judgmental nature of spending is exacerbated in society by the gender dynamics – where, right or wrong, the stereotype is that the men earn the money, and the women spend it. In addition, the reality is that we all come to the table with our own unique views about money, often shaped by our own “financial/money scripts” and early life money experiences. And so to reduce their own marital conflicts about the decision to spend $300 on an experimental Japanese hair treatment (and more generally why one spouse should have say over how the other spouse spends, especially in a dual-income household where both bring income to the table), Baab-Muguira and her husband adopted an “allowance” system, where they each get $500/month to spend on whatever they want, no questions asked (and no judgment allowed!) from the other spouse. In point of fact, the couple has actually not even ended up spending all the allowance; some of it has accumulated, ostensibly for a larger no-guilt purchase in the future, and the couple actually keeps the money entirely separate in their own respective online brokerage accounts (linked to their checking accounts from which it is automatically funded) Of course, common household-wide spending decisions must still be made jointly… but nonetheless, the couple finds that by segmenting off a guilt-free spending allowance for certain discretionary expenses, it entirely ended their money fights as a couple!


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 as well.





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