Weekend Reading for Financial Planners (October 14-15) 2017 (2024)

Weekend reading for October 14th/15th:

Social Security Benefits To Increase By 2% In 2018 (Mary Beth Franklin, Investment News) - The inflation numbers are in, and the official Social Security Cost-Of-Living Adjustment (COLA) for 2018 will be 2%, increasing the average retirement benefit by $27/month to $1,404/month. Notably, the modest increase is actually thelargestto occur since 2012, especially given the 0.3% increase this year (in 2017) and the 0% increase in 2016. And ironically that means the 2018 Social Security increase for existing recipients will end up being almost fully offset by the unwind of the Medicare Part B "Hold Harmless" provisions that have been in place since 2016(as pre-2016 enrollees will see their Part B premiums jump from $109/month to $134/month in 2018, almost completely offsetting the dollar amount of the Social Security benefits increase). Other factors impacted by the Social Security inflation adjustments include the Earnings Test thresholds, with early retirees now facing a reduction once earned income exceeds $17,040/year in 2018 (compared to $16,920 in 2017), and the upper-tier threshold in the year of full retirement age will be $45,360/year in 2018 (compared to $44,880 in 2017). In addition, the Social Security wage base - i.e., the amount of employment income on which Social Security FICA taxes are paid - will also increase modestly for inflation in 2018, up from $127,200 to $128,700 next year.

5 Bold Predictions For Asset Managers Product Shelf In 2027 (Craig Iskowitz, WM Today) - The trend of robo-advisors and technology in financial services isn't just proving disruptive to parts of the financial advisory community; it's actually disrupting trends in asset management as well, especially when paired with ongoing regulatory changes. In fact, while financial advisor fees have remained remarkably stable and resisted any technology-driven fee compression so far, it's been the asset management industry that has borne the burnt of the fee compression, as advisors themselves use technology to select lower-cost investmentsand try to add value in other ways. And the situation is made even more complicated by the fact that advisors are increasingly trying to get paid for the value of their advice, even as broker-dealers often still treat them as being paid primarily to sell products... such that Cetera President Adam Antoniades has stated he's banning the word "broker-dealer" within his own company, in an effort to transition the firm from being product-centric to advice- and advisory-centric. Other notable trends in the coming decade include: the shift to "passive management" with ETFs doesn't appear to be passive at all, given ETF turnover is 880%/year (compared to "just" 120% for individual stocks), and instead implies that advisors are simply using ETFs as trading instruments for active asset allocation; the processing and trading value-proposition for custodians is quickly grinding towards zero (just witness the recent round of cuts in ticket charges from major RIA custodians), as the firms shift their own models to focus more on asset management and lending instead (and more generally, custodians split their offerings into low-cost commoditized processing, and higher-margin servicing); the debate still rages about whether asset managers can and will embrace goals-based reporting, or whether it's still just a smokescreen for those who aren't actually beating their benchmarks and will persist (because consumers still have a right to verify that their managers areadding value at the manager level, or not); and the shift of advisors and reps serving as investment managers is creating its own due diligence problem, as when the advisor is the manager and the fiduciary for the client... does that mean the advisor may have to fire themselves for bad performance someday?

An Investing Scorecard With A Blank Space (Nir Kaissar, Bloomberg Gadfly) - According to the latest S&P Indicates Versus Active (SPIVA) scorecard, the odds of picking an actively managed fund that beats the index continues to be low, with just 15% of U.S. Equity funds and 9% of international funds beating their benchmarks over the past 15 years (and it isn't much better over the past 5 years, at 15.6% and 28.1%, respectively). Yet American Funds, in its own "Select Investment Scorecard" analysis, finds that an equal-weighted portfolio of "Select" funds that have low expenses and high manager ownership actually beat the S&P 500 Index a whopping 86% of the time over rolling 10-year periods from 1997 to 2016 (and the International group beat the MSCI ACWI Index 87% of the time). In an effort to replicate the study, Kaissar did his own analysis, screening large-cap mutual funds with expense ratios less than 0.75% that had at least one fund manager with a minimum of $1M in their fund (which results in a list of 93 equity funds), and found that 58% of the funds did beat their benchmarks over 15 years (although it was just 50% over 10 years, and 35% over 5 years), and the results were even better internationally (with 64% beating over 5 years, 56% over 10 years, and 100%! over 15 years). Notably, a further dissection of the results revealed thatmostof the outcome was actually dictated by the lower fees, and not the manager ownership (though both factors were better than either alone). The fundamental point, though, is that large swaths of managers really are beating their benchmarks, at least gross of fees, and if the active manager fees are low enough, there may actually still be room for those active managers to consistently outperform in the long runnetof fees, too.

The Single Stock Mishegas (Josh Brown, Reformed Broker) - The latest 2017 edition of the FPA's Trends In Investing study found that a whopping 88% of financial advisors now use ETFs, up from just 40% a decade ago. Brown suggests that the shift is part of a broader trend of financial advisors realizing that it's "crazy" (mishegas) to still try to manage individual stocks in a modern wealth management firm. The issue is not simply a question of whether at least some advisors may be able to pick individual stocks, but the sheer extent to which it then ends up distracting the financial advisor from being able to do anything else. For instance, what happens if youdopick a stock that's a winner... and it was 1% of the portfolio, but then becomes 2%, and continues to rise... and you want to sell and take profits off the table, but it's not clear how much should be sold, and there are tax ramifications, and you're trying to figure out whether to sell before or after the next earnings report... and suddenly, all your time is consumed by tracking individual stocks. The problem gets even worse when the firm itself is growing, andnewclients arrive... as just because you don't want tosella particular stock now (given the tax ramifications for existing clients), you may not feel its good enough to merit buying fresh fornewclients... except if you don't, then all your new clients end up with different investments and different performance. And then the client questions start rolling in... "should I sell JP Morgan after the London Whale event?" or "What do you think of the latest iPhone, should we add to Apple now?" So what's the path forward? Brown suggests thatthisis a major reason why advisors have been shifting to ETFs... because it eliminates the madness of tracking, reporting on, and obsessing over single stock positions, as "ETFs Become The New Stocks" instead (but without the frustrating co*cktail party chatter).Of course, some clientswantto own individual stocks... which advisors can handle by opening up a "side" account for the client, except if all the clients want to do the same, suddenly the advisor's firm looks more like a scattered collection of managed accounts and E-Trade-style self-directed brokerage accounts!

The Morningstar Rating For Funds: A Good Starting Point For Investors? (Jeffrey Ptak, Morningstar) - The Morningstar Star Rating for mutual funds, which scores their relative performance to competitors based on trailing risk-adjusted returns, is nearly ubiquitous in the investing world, yet the debate still rages about whether assessing funds' prior (risk-adjusted) performance, and the Star Rating itself, has any real value in picking a fundgoing forward. Notably, even Morningstar itself encourages investors to consider the star ratingalong withother data when selecting a fund, but the question arises as to whether Star Ratings are at least a usefulstartingpoint. And Morningstar's analysis (admittedly with a self-interest in analyzing their own ratingsystem, though the company has a history of candid self-skepticism about its own methodology) does find that Star Ratings have some predictive value. In particular, higher-rated funds have tended to be substantially cheaper over the past 15 years (with an average cost difference of nearly 0.60%/year between 1-star and 5-star funds), and also have a stronger tendency to be no-load funds (though if the advisor still charges separately for his/her own services, instead of via the mutual fund load, the shift away from 12b-1 fees may improve mutual fund performance but not the investor's net returns!). In addition, higher-star-rated funds have also tended to be "easier to own" and keep by exhibiting less volatility (especially when avoiding 1-star funds), and being substantially less likely to close (though given the impact of Morningstar star ratings on fund flows, low Morningstar ratings may not just be correlated with the likelihood that a fund closes, but actually causallyincreasingthat likelihood!). And the cumulative effect of these factors– that higher-rated funds tend to have lower costs and lower volatility– means that when tested, star ratings do appear to have at least some predictive ability to forecast future excess returns over the next 3-5 years (though more so for allocation funds than individual stock or bond funds). Which means that while Morningstar star ratings certainly aren't perfect, they reallydoappear to be a productive starting point (and screening criterion) when evaluating potential fund investments!

Eight Rules For Developing The Next Generation Of Leaders (Bob Veres, Advisor Perspectives) - Over the past decade there has been a growing focus on identifying the "best practices" of leading advisory firms and what they're doing to succeed, but industry consultant Philip Palaveev suggests that, in the end, what defines the most successful firms is that they have the most talentedpeople, and that the ones at the top are succeeding because they've figured out how to most effectively develop the skills of their younger advisors and other staff members. Or as Palaveev puts it, "An extraordinary firm is nothing more than a collection of extraordinary energies, and talents, all contributing to a shared vision." Accordingly, in his recent "G2: Building The Next Generation" book, Palaveev lays out his 8 key lessons that advisory firms need to take heed of in order to have the top "G2" (2nd generation) talent: 1) Be willing to hire inexperienced talent and provide them the training and experience in-house (especially given the shortage of industry talent... if you wait for experienced people, you'll be waiting a very long time, or have to pay a whole lot to get them!); 2) Cultivating talent is a 2-way joint responsibility, where firms need to improve at offering opportunities, but the G2 talent itself needs to step up and walk through the doors of opportunity and take responsibility; 3) the best way to create in-house opportunities is to define what a "career track" really means, so G2 advisors know what they're working towards, and what new skills they need to gain in order to succeed(and can understand what skills they don'thave yet, to explain why they aren't being promoted to partner yet!); 4) the foundation of a G2 career track is to start with the technical expertise (i.e., CFP certification first to establish competency and credibility, andthenbuild the relationship management and business development skills!); 5) when allowing G2 advisors to step up to the lead advisor role, you have to let them make (potentially costly) mistakes, as ultimately that's the only way for them toreallylearn; 6) don't make the mistake of trying to treat all of your employees equally (as while it may be tempting to support your below-average employees, it destroys the motivation of your top talent and makes them want to leave and go to a more advanced league!); 7) recognize (as a firm, and as the G2 advisor) that achieving success means there will be times where work/life balance is poor (i.e., be ready to make some sacrifices when it's necessary); and 8) the key skill that every successful advisor has to learn is how to manage himself/herself (from managing your time, to your emotions, and your behavior around both your clients and your colleagues).

3 Essential Components Of (Young) Financial Planner Satisfaction (Rianka Dorsainvil, Investment Advisor) - Dorsainvil suggests that ultimately, there are three core components that (young) financial planners need in the workplace to be successful: culture, community, and compensation. Culture is crucial because it's almost impossible for young advisors to succeed in a culture that isn't able to support their growth; for instance, is the firm supportive of roundtable discussions where newer advisors can learn from those with more experience, able to facilitate mentoring opportunities, and does it reinvest into its employees to go to conferences, all of which create a cultural environment of positive growth. And community is important, because financial planning is a relationship-based business with relationship-based people... which means they need to be able to have productive relationships with their colleagues as a community, and externally representing the firm to the broader community as well, but that means the firm needs to support such opportunities (e.g., by giving young planners time to attend events and networking meetings). And of course, the third C is compensation, as while Millennials do often report the greatest interest in finding a job with work/life balance, they are also carrying the largest student loan debt of any generation in history, which makes them risk-averse in their careers (not interested in working on commission), and potentially evenmoreinterested in upwardincome mobility. Though notably, Dorsainvil points out that many "compensation issues" aren't actually compensation issues at all, but what a young planner may ask for if they don't feel respected and valued, especially if the firm is already failing on the other two C's of culture and community!

UBS To Hire Fewer Trains And Spend More On Them To Satisfy Clients (Elizabeth Dilts, Reuters) - Major wirehouse UBS has announced that in 2018, it is aiming to hire 30%fewertrainees, but will invest 2-3X more into training them to actuallybefinancial advisors, rather than just operating as brokers, including the ability to receive a base salary for the first 2 years (up from just 7 months in their prior program). The shift in focus appears to be both a recognition that the nature of wealth management itself is changing– from brokerage to advice– and that the sales-centric wirehouse culture is not appealing to young advisors (exacerbating the industry's challenging age demographics, where nearly half of all brokers are over the age of 55). Notably, though, UBS is not aiming to hire students directly out of school, and instead of looking to attract career changers with work experience, who are younger than existing advisors, but experienced enough that when paired with a senior advisor can get up to speed more quickly (and eventually take over those high-net-worth clients in the future). The shift at UBS is not unique, either, as last April, Merrill Lynch also said it would redouble its efforts to recruit and train younger advisors, though UBS appears to be going even deeper than other wirehouses into training its trainees, in part because the firm is already the smallest of the four wirehouses (with the least scale to just throw a lot of trainees like spaghetti at the wall to see what sticks) and thus is aiming to succeed with a more targeted approach to improving productivity and reducing the industry's traditionally-high attrition rates amongst newer advisors.

Choosing A Career Path: It's Not Always Client-Facing (Lisa Kirchenbauer, Journal of Financial Planning) - Almost by definition, the expectation of most young people when they come into the financial planning profession is that their career path is to be a client-facing financial planner... after all, how can you be in the financial planning business if you don't serve clients? Yet Kirchenbauer notes that as the broader industry grows and evolves, and advisory firms themselves get larger and more complex, there are more and more roles in financial planning businesses that don't involveactuallydoingfinancial planning for clients. Which arguably is a good thing, because the reality is that ever-larger advisory firms need a wider range of talentsbeyondjust what it takes to actually sit across from clients, deliver advice, and manage relationships. For instance, in the past, the only "operations" staff of a broker was a registered sales assistant, but now advisory firms have client service staff and operations managers and as they grow even more ancillary roles that are necessary to support the infrastructure of a sizable business (and especially since most client-facing advisors themselves donothave a strength in operations). In fact, operations roles are becoming so deep in many firms, they are actually becoming full-length career tracks unto themselves, from client services to operations managers to Chief Operating Officers. So how do prospective new advisors know which track they should be pursuing? Kirchenbauer suggests using an assessment tool like Kolbe or StrengthsFinder; for instance, someone whose Kolbe score is high on "Quick Start" (likes to initiate new things quickly) may be a great client-facing advisor entrepreneur, but someone whose score is high on "Fact Finding" and "Follow-Thru" may be better in an Operations role. In other words, use assessment tools to understand where your strengths are, and don't be afraid to pick a career path that fits your best talents (and advisory firms should be cognizant that as they grow, theyneedto develop team members with these skillsets!).

Let's Face It: End-Of-Year Pay Talks Are Painful (Kelli Cruz, Financial Planning) - As the end of the year approaches, so too do end-of-year employee reviews and compensation discussions. Accordingly, Cruz provides a series of tips and best practices on how to handle employee pay and review meetings in advisory firms, including: 1) Review what your employee is doing relative to their actual job description, and if it doesn't match figure out if the employee needs to adjust their time and focus, or if the job description needs to be updated to more accurately reflect reality (and if you don'thavea job description, discuss with your employees where they're spending their time and use that as the necessary guidance to write one!); 2) Look at the firm's results overall, and figure out which employee(s) had the greatest impact on the firm (e.g., key initiatives that were implemented, or people who brought in new clients and revenue, or those who had a major impact on productivity and profitability), and then given them bonuses that are commensurate with their impact; 3) if you really want to incentivize employees to grow and improve, stop giving out annual COLAs, and instead only change compensation based on an actual change in role and responsibilities (or if the market rateofthe position truly changes); 4) Continuing the prior point,checkthe existing compensation data to be certain you know what the going market rates reallyarefor your core positions, so you can ensure you're paying properly, and so you can justify why employees are being paid what they are if they ask; 5) Remember to consider the cost of turnover in employee positions, especially hard-to-fill roles, which means you may need to pay a little more for those most-challenging positions (which in advisory firms, tend to be experienced advisor positions, but can also be core operations positions as well); and 6) if you're going to use discretionary bonuses, be certain you can explain and rationalize them so employees don't question why they're being paid as they are, and ideally set bonuses to clearer performance-based discretion that can be objectively measured (so employees understand what it really takes to succeed and earn more!).

Advisor Holiday Gifts (John Anderson, SEI Practically Speaking) - Every year, it seems there are a few stories about something that an advisory firm did as a holiday gift to thank its clients, that sounds like a good idea to try next year... except no one remembers until the holiday season the following year, when it's too late to do anything about it! Accordingly, Anderson provides some holiday gift ideas to consider for clients... now, in October, when there's still time to actually implement the idea! The popular approach is something relatively simple, like sending holiday cards, though Anderson cautions that they can come across as too generic, and including a note like "we are donating to XYZ charity in your name" may just stir up problematic questions, from "did youreallymake the gift" to "how much did you give, and was this a prudent use of my advisory fees!?" So what are better alternatives? Anderson gives a few suggestions: host a charitable event (rather than just making a donation in clients' names), and take pictures that reallyshowwhat you did (e.g., last year Anderson volunteered at his kid's school cafeteria, and shared pictures of the experience, hair net and all); if you just want to make a charitable donation, at least Take A Poll and get feedback from clients about where to give (so they can feel more connected to the firm and the charitable outcome); or even consider a Charitable Gift Card, where some community foundations allow a debit-like card to be issued with the gift amount, and the client/recipient can "use" the card to donate to their charity/passion cause of choice!

Why Getting Started Is More Important Than Succeeding (James Clear) - The first part of a business' year-end process is the end-of-year review with employees, and expressing gratitude to clients, but the next step is looking forward to strategically plan the year ahead. Yet the challenge is that for a lot of advisory firms, "strategic planning"– to the extent it's done at all– tends to just be a document of ideas the founder/owner was thinking about, that often never actually get implemented, often due to a fear of failure (what if the idea hasn't been researched and vetted enough?). Yet the reality is that sometimes it's necessary to just take a leap if necessary, and get started withsomething, and then figure out along the way how to refine it. In fact, Clear notes that celebrated tennis professional Lindsay Davenport once pointed out that she when she became a professional athlete, she had to "grow up fast" to adjust to the reality of living in front of the media and a crowd, but that she learned her craft itself by simply playing tennis and constantly trying to improve and persevere. In other words, she learned tennis by playing tennis, and she learned to live as a professional athlete by becoming a professional athlete, because you can only do so much planning in advance before it's time to justdoit and adapt as necessary. Which is difficult, because the learning stage often involves making mistakes and screwing up, in a world where it feels very embarrassing to be caught making mistakes. Yet ultimately, the success comes a willingness to get started, try something new (even if you may look stupid), and let yourself be vulnerable, because the only people who ever succeed and finish are the ones who (consistently) can keep getting started. So what new thing will be part of your strategic plan for your business or career in 2018, and are you really ready to take the risk involved in doing something you've never done before? And if not, what will it take to build up your courage to take the risk or doing something new and different to improve yourself?

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.