Weekend Reading For Financial Planners (June 4-5) 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.

Read more of Adam’s articles here.

(Emile Hallez | InvestmentNews)

While at least a small subset of investors have long sought to invest in a ‘socially responsible’ manner, Environmental, Social, and Governance (ESG) investing has increased in popularity during the past several years, buoyed by an increasing number of convenient ETF and mutual fund options, alongside a number of more specialized ESG separate account managers and platforms. Their popularity jumped again in the wake of the pandemic, perhaps thanks in part to the strong performance of clean energy and certain technology stocks, which often make up a significant portion of ESG funds. But the staying power of ESG investing remains to be seen, and a recent survey suggests that some advisors and clients might be cooling on the trend.

According to the Journal of Financial Planning and Financial Planning Association’s 2022 Trends In Investing Survey, which surveyed 413 financial planners, while 28% of respondents said they expect to increase their use of these funds (up from 24% last year), 15% of those surveyed said they expect to decrease their use of ESG funds in the coming year (up from 4% in 2021). In addition, the percentage of planners who said they currently use ESG funds with clients has fallen slightly to 34% from a high of 38% in 2020. Further, these figures appear to be at least partly driven by waning client interest; 31% of respondents said their clients had asked about ESG or Socially Responsible Investing (SRI) in the past six months, down from a survey high of 39% in 2021.

And while each advisor’s reasoning almost certainly is different, there are a variety of potential reasons for the potential cooling of opinion toward ESG funds, from questions about their actual impact (given that the definition of ESG/SRI varies across funds), to their fees, as well as regulatory questions surrounding ESG disclosures and the poor relative performance of some ESG funds compared to the broader market so far this year (especially compared to 2020 and 2021).

A similar trend can be seen in terms of the use of cryptocurrencies (many of which have declined in value significantly during the past six months) in client portfolios. According to the survey, 13% of advisors planned to increase their use of cryptocurrencies in the next year, down from 26% in 2021, while 11% of advisors planned to decrease their use (up from 4% last year). Nevertheless, only 15% of respondents consider cryptocurrencies to be a fad to be avoided or not a viable investment option, down significantly from the roughly half of respondents who said so between 2018 and 2020.

Notwithstanding a potential plateau in interest, though, a significant number of advisors are still adopting an ESG approach and increasing their use of ESG solutions (and a significant portion of clients appear to still be interested in ESG investing as well). Which suggests that ESG is increasingly becoming something advisors are either ‘all-in’ on – making ESG investing central to their investment process and value proposition for all advisors, and focusing the advisor’s attention on choosing the most appropriate tool to make the investments (whether it is through an ETF, direct indexing, or another method) – or are not, and instead are backing away altogether (as it doesn’t really make sense to have just a partial ‘ESG allocation’ in a broader non-ESG-centric portfolio)!

(Mary Beth Franklin | InvestmentNews)

When the Centers for Medicare and Medicare Services (CMS) in November of last year increased the monthly Medicare Part B premium to $170.10 from $148.50 (the largest increase in dollar terms, and the fourth-largest hike in percentage terms in the program’s history), it came as a jolt to the budgets of many seniors. The cost increase was largely associated with the potential costs to the program of the Alzheimer’s drug Aduhelm, whose initial price of $56,000 per patient.

However, the subsequent reduction in the price of Aduhelm to $28,200 led to a CMS review of the Part B premium hike in light of the potentially reduced costs to the Medicare program. But after completing the review, CMS has decided against a mid-year Part B premium reduction, citing the administrative challenges associated with a mid-year premium change, instead announcing that any savings due to changes in the cost of Aduhelm will be reflected in the 2023 Medicare Part B premium, which is set to be announced this fall.

So while clients will not see a reduction in their Part B premiums in 2022, CMS did say that given the information available today, it expects the 2023 Part B premium to be will be lower than the 2022 premium. And while that might provide a small bit of relief for clients, this could serve as an opportunity for advisors to review their clients’ Medicare coverage and recommend any potential changes to be made during the end-of-year open season, which could have an even greater impact on their clients’ financial plans!

(Mary Beth Franklin | InvestmentNews)

Social Security benefits make up a significant portion of income for many retirees, so the continued ability of the program to make full benefit payments is analyzed regularly. And while the bulk of the funds needed to pay Social Security benefits come from payroll taxes from current workers, in recent years the program has had to dip into the “trust fund” in order to cover the full benefits owed.

And so, this week the Social Security and Medicare Trustees released an annual report indicating that the Social Security Old-Age, Survivors, and Disability Trust Fund (the most common measure for gauging trust fund insolvency) will be exhausted in 2035, one year later than projected in last year’s report. Notably, Social Security would still be able to pay out 80% of benefits at that time, declining to 74% of benefits by 2096. Further, the report indicates that the trust fund would remain solvent through 2096 if the payroll tax were immediately raised by 3.24 percentage points (from its current 12.4% to 15.64%).

So while advisors regularly field questions from clients about Social Security’s future, the latest Trustees’ report provides additional context into when and by how much benefits could potentially be reduced (despite what some clients believe, benefits would not go to $0!). That said, there are many potential actions (including a payroll tax increase) that could take to shore up the system, which ultimately means there isn’t really a question of “what to do” about Social Security’s shortfall, but simply a matter of what Congress will implement between now and 2035?

(Timothy Welsh | ThinkAdvisor)

Building a tech stack that suits the needs of a firm and its clients is a key driver of advisor success. But with a wide range of AdvisorTech categories and a growing number of offerings within each category, finding the ‘right’ tool can often be a challenge. And so, each year, the T3/Inside Information Advisor Technology survey is published to help guide advisors through the tools and trends that make up the AdvisorTech landscape.

The 2022 survey included 4,500 responses covering more than 800 applications, services, platforms, and software tools. One takeaway from this year’s survey is that despite new entrants into the AdvisorTech space, a few large players continue to dominate key categories. For example, the survey found that eMoney and MoneyGuidePro each have roughly 33% market share in the financial planning category, with RightCapital following with 12%. That leaves roughly 22% of the market divided among 17 other products, most of which have less than 1% market share.

Another trend identified in this year’s survey is the rise of ‘All-In-One’ solutions, which include some combination of CRM, performance reporting, trading and rebalancing, and other functions. According to the study, 20% of respondents use one of these solutions, although some also use additional tools to provide supplementary functionality. This trend is also reflected in the brisk pace of mergers and acquisitions in the AdvisorTech space, particularly by the largest players who seek to provide a more comprehensive offering. So while some firms try to find the best tool for their needs in each category, the All-In-One solutions appear to be attracting advisors who want a simpler and better-integrated solution.

Ultimately, the key point is that while innovation is booming with more growth than ever of new AdvisorTech companies, advisors are still relatively slow to change and adopt new technology, as it’s hard to change tools and takes a lot to persuade an advisor to leave an established provider. Fortunately for those who do want to explore new options, there is an ever-widening range of AdvisorTech options available to advisors, and studies like the T3/Inside Information survey, as well as the Kitces Report On The Technology That Independent Financial Advisors Actually Use (And Like), can help them scope the various offerings and how they are rated by other advisors. Because while building an appropriate tech stack is not an inexpensive endeavor, having the right tools can help firms better serve their clients and grow into the future!

(Bob Veres | Technology Tools For Today)

Bringing AdvisorTech tools into a firm’s tech stack has often been thought of as a way to improve back-office operations. From organizing client data to performance reporting, technology solutions can support a wide range of advisory functions. At the same time, many functions have largely remained “low tech”, including prospect engagement and new client onboarding. But as industry veteran Bob Veres observes, this year’s T3 Advisor Technology Conference showed that many new AdvisorTech tools are specifically aimed at enhancing the client engagement experience through technological solutions.

Advisors use a variety of methods to market to prospective clients. And while some are rather low-tech (from in-person seminars to blogging), there is a growing set of tools allowing advisors to give prospects a taste of the value of financial planning before engaging with the advisor themselves. Examples include MoneyGuidePro’s “Blocks”, which are professional-grade planning calculators that allow prospects to get a glimpse of their own situation (and perhaps generate questions they might want to have addressed by an advisor) while allowing advisors to get a sense of who is using the tools and what their needs might be. Another tool in this category is FP Alpha’s “Prospect Accelerator”, which offers prospects the opportunity to upload documents or financial information into the system and receive an overall financial wellness score (which could perhaps be improved by working with an advisor).

And once a prospect decides to become a client, technology solutions can deliver a smoother onboarding process. And while some advisors have upgraded from paper forms and wet signatures to electronic documents and signature options, this process can be further enhanced by technology. For example, Nest Wealth offers a tool that allows different parties to work on client paperwork simultaneously, allowing advisors (and back-office staff) to work together with the client to speed completion, reduce drop-offs, and provide the client with a better first impression of the firm.

In addition, once onboarding is completed, AdvisorTech tools can lead to better engagement with the client. These include ‘All-In-One’ solutions that allow advisors to bring up all of a client’s information in one place (particularly valuable during virtual client meetings). And whether it is included in a broader suite of tools or on a standalone basis, a client portal can allow clients to view the status of their portfolio as well as their progress toward meeting their goals outside of their regular meeting schedule.

The key point is that, as many firms adapt to operating in a virtual environment, AdvisorTech tools can not only support back-office operations but also enhance engagement with prospects and clients as well – not necessarily to make the process ‘faster’, but to improve client satisfaction by making the client experience better (i.e., more engaging and meaningful).

(Josh Belfiore | Financial Advisor)

“Big Data” and “AI” are two of the major buzzwords heard when thinking about the way work will be done in the future. And given that financial planning is a data-heavy profession, AI tools have the potential to both enhance advisor productivity and the client experience in all 7 steps of the financial planning process.

For the first three steps of the planning process (understanding the client’s personal and financial circumstances, identifying and selecting goals, and analyzing the client’s current course of action and potential alternatives), improved account aggregation tools could enhance these areas by going beyond pulling together financial information to also bring in the context of each account’s activity and the ability to automate the execution of account actions within predetermined parameters developed by the advisor. These tools could provide planners with automated alerts based on spending, saving, or unusual transactions that could prompt action by the advisor or client, as well as guide client conversations by determining the planning areas that might be most important to them.

In steps four and five (developing and presenting the financial planning recommendations), AI-enabled planning platforms could assess plan inputs and create a series of comprehensive planning recommendations based on that individual’s unique personal and financial circumstances, allowing advisors to then review the recommendations and the reasoning behind them to determine what course of action might be most appropriate for their client.

And for the final two steps (implementing the recommendations and monitoring progress), planning technology will benefit from deeper integrations across the technology ecosystem, allowing for more tailored and efficient planning and portfolio management processes, giving advisors more time to work directly with clients (and perhaps enabling them to profitably serve a more diverse client base).

In the end, clients do not expect advisors to personally handle every aspect of the financial planning process, and in fact, prefer that some areas (particularly within portfolio management) be handled by technological tools. Therefore, rather than serving as a potential replacement for human advisors, the AI-enabled technology of the future could instead serve as a force multiplier that allows advisors to focus on what they do best!

(Mary Beth Franklin | InvestmentNews)

Rising healthcare-related costs over the past several years have many clients worrying about how their income in retirement will be affected. From the cost of health insurance (typically through Medicare) to how much they will have to pay for medical services themselves as well as potential long-term care needs, there are a range of potential health-related expenses (although they can be predicted to some extent).

And for advisors, modeling health care expenses is not as simple as including a single line for these costs in a cash flow analysis. For example, because a client’s Medicare premiums can vary based on their income (through the IRMAA surcharge), managing client income in a given year can be an important way to add value to retired clients. In addition, choosing an appropriate Medicare plan given a client’s circumstances can also ensure they not only save money but also are able to access the care they need.

Amid this backdrop, software tools are available that can help advisors evaluate the various moving parts that make up a retired client’s health care spending. For example, IncomeConductor’s Health+ offering allows advisors to incorporate personalized actuarial longevity projections, Social Security claiming options, Medicare premiums, and out-of-pocket costs in their clients’ plans. In addition, Medicare consulting firm 65 Inc.’s i65 software combines personal information with actuarial data to estimate longevity and health care costs and offers personalized guidance on the optimal time for a given client to enroll in Medicare and the best type of coverage given their needs.

The key point is that health care costs are often top of mind for clients near or in retirement, so advisors can add significant value (and boost client loyalty) by providing a detailed analysis of their options and a recommended course of action. And thanks to a range of available software tools, advisors can more efficiently offer personalized health care spending plans for their clients!

(Steve Garmhausen | Barron’s)

The past decade has seen interest rates remain at historically low levels, which negatively impacted the returns individuals received on their cash savings. From sub-1% returns on savings accounts to long-term Treasuries offering yields below 3%, it has been difficult to generate much income with client cash. But the recent rise in interest rates might present new opportunities for clients to generate a return from their cash (which is particularly important as inflation remains high!).

The simplest (and typically most liquid) solution could be to keep client cash in a savings or money market account. While the returns on these accounts have been depressed in recent years, rising interest rates could lead to these rates ticking up. And, given the wide range of offerings in this space, advisors can seek out banks with the best rates (or use a software tool to do the work for them).

For those looking for additional income, one way to generate yield while keeping some cash available for near- to intermediate-term purchases is to create a bond ladder. For example, a ladder of Treasuries with maturities ranging from 30 days to one year could generate a 1.5% return. Alternatively, for those who can access them (and are willing to bear the associated risks), alternative investments such as private credit or private real estate could generate additional income thanks to rising interest rates. An option with easier implementation could be short-term bond ETFs that could be used to generate income with easier implementation. And for those who won’t need their cash for at least 12 months, I Bonds, whose interest rate is based in part on inflation, currently offer a rate of return well above many other bond and savings options.

The key point, though, is that advisors can use the current rising interest rate environment to start a conversation with clients about their cash flow needs. By exploring their goals for their cash (which could range from an upcoming major purchase to a desire to “buy” happiness) as well as discussing the effects of inflation on their purchasing power, advisors can help clients both better calibrate their cash position for their specific needs and find ways to generate additional income!

(David Blanchett | Advisor Perspectives)

From the introduction of the index mutual fund several decades ago (which greatly reduced the cost of buying a diversified portfolio) to the more recent dramatic reduction in the costs of trading (now free on most platforms), investors have benefited from the trend of lower investment fees. Nevertheless, simply because one product has a lower fee than another does not necessarily mean it is the better choice, because in some cases higher costs bring with them certain benefits that can outweigh paying a higher fee.

One area where fees and benefits can vary significantly is in the annuity space. For example, annuities with a Guaranteed Lifetime Withdrawal Benefit (GLWB) feature – which allows access to the annuity contract value (i.e., are revocable) and guarantees a minimum level of lifetime income (which in some cases could even increase) even if the underlying account value goes to zero – can come with a range of features that add additional costs. And while GLWBs have traditionally offered an annual ‘step-up’ provision (that can increase the income/benefit base used to determine the income level), more recent products only offer a step-up only once, at retirement. These ‘GLWB-Lite’ products with fewer step-ups come with reduced fees compared to ‘regular’ GLWBs, but advisors might wonder whether the reduced costs are outweighed by the more limited benefits.

According to an analysis conducted by Blanchett, while the expected aggregate value of the products (lifetime payments plus any residual balance available for heirs) is similar, the ‘regular’ GLWB dominates based on lifetime income (while there is a larger residual balance leftover with the ‘GLWB-Lite’). And so, because individuals typically buy annuities for the income benefits as a form of longevity insurance (rather than as a tool to maximize the size of legacy gifts), it likely makes more sense for these individuals to purchase the ‘regular’ higher-cost GLWB if they’re going to pursue such income guarantees at all (and perhaps earmark some of the non-annuitized portions of their portfolio for a legacy benefit).

Ultimately, the key point is that it is important for advisors to look beyond fees and understand client goals when analyzing potential investment products. And this is especially true in the case of annuities with GLWB features, where ironically seeking the lowest-cost option could negate much of the benefit of buying an annuity in the first place!

(Ryan Holiday)

Learning how to read is a core part of education. But the skill of reading goes beyond recognizing sounds and words to comprehension of the larger meaning of the work and how it might apply to your own life. And given the limited amount of time many busy professionals have available for reading (particularly for reading longer books), several strategies are available that can lead to a more fulfilling reading experience.

One way to become a better reader is to be more selective about what you read. For example, you might start a book but become disinterested after reading several chapters. Holiday suggests that this is a sign that you should stop reading the book and offers a rule of thumb to read at least the number of pages equal to 100 minus your age (so a 40-year-old could abandon a book after reading 60 pages). In addition, you can ask people you admire for book recommendations; if a certain book changed their life, there is a chance it will change yours too. And while some might seek to read as many books as possible, it is often more valuable to read a limited number of books attentively than to speed through a larger number of books.

Another way to become a better reader is to pursue a wider range of books. For example, while a given advisor might typically reach for books related to their business, expanding into other areas, such as history or philosophy, as well as reading fiction, can not only be rewarding but spur creativity as well. And to better recall what you have read, you can consider creating a “commonplace book” – a collection of quotes, ideas, stories, and facts – that can be useful for remembering key portions of a book later on.

In the end, each person has different preferences for how to get the most out of reading. But by being more selective with what you read and expanding your horizons beyond one genre, your reading practice can not only be more enjoyable, but more productive as well!

(Peter Lazaroff)

A common New Year’s resolution for many individuals is to read more in the coming year. And as 2022 is almost halfway through(!), now might be a good time to renew that resolution (or start a new reading habit!). But while short-form content (whether it is a news article or an even shorter tweet) can be consumed easily and conveniently, reading more books on a consistent basis can be challenging.

While some people might set a goal of reading a certain number of books per month or per year, Lazaroff suggests instead of aiming to read for a certain amount of time each day. Because while reading two books each month might seem daunting, reading for at least 20 minutes each day can both seem more manageable and help make the reading habit more consistent. Another way to read more is to make it easier to (literally) find books to read. This can be accomplished by spreading books around the house (as you might prefer reading on the couch one day and in bed the next), and by having books available in a variety of mediums (e.g., having books loaded into an e-reader in addition to physical books). In addition, reading multiple books at once in a variety of genres can allow you to jump right back into a book of interest, no matter your mood, for a given day.

Just like other habits, getting started can often be the toughest part of reading on a regular basis. But by creating an environment conducive to reading, you can achieve, and hopefully surpass, your initial goals!

(Ryan Holiday | Forge)

Sometimes, when a leader encounters a problem with their business, it can seem like a unique challenge. But it’s very likely that someone has had the same problem before and quite possibly wrote about it. By reading books avidly, leaders can learn lessons from others to not only avoid making the same mistakes in the future but also gain wisdom to solve problems that arise.

As an extreme example, President Truman credited his extensive reading (including all of the books in his local library growing up!) for providing him with the wisdom needed when he suddenly became president in the middle of World War II after President Roosevelt’s death. And while most advisory firm owners don’t have aspirations for the presidency, reading can not only provide wisdom to apply to the workplace, but also make you a better person. For example, one study found that the mental process of imagining scenes while reading can help you develop greater empathy. In addition, it is important to not just read a book, but also do what it takes to retain key points, whether by using highlights, taking notes, or another method.

The key point is that for busy leaders, it is important to not necessarily treat reading as a distraction from work, but rather as a necessary facilitator of a leader’s most important and meaningful work. By devoting time to reading more often, whether it is digging into a physical book on philosophy before going to bed or listening to a suspenseful work of fiction as an audiobook on the commute to work, a leader can not only become more effective at work but also develop as a person!

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.