Weekend Reading For Financial Planners (July 30-31) 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.

(Allison Bell | ThinkAdvisor)

Everyone wants to achieve a feeling of success in their professional lives, and there are many factors that can help create a sense of achievement. From the choice of career to working for a company that sets its employees up for success to setting achievable work targets, an individual can influence the conditions that will help them feel successful. And in the case of financial advisors, the choice of revenue model appears to be an important driver of success.

Researchers at the Center for Women in Financial Services, an arm of The American College of Financial Services, surveyed more than 800 advisors in late 2021, asking them whether they felt successful (according to each individual’s definition of success). Overall, about 70% of advisors said they felt successful, although this differed by revenue model and gender. By revenue model, advisors whose revenue came mainly from fees had the highest feelings of success (84%), followed by fee-only advisors (81%), those receiving a salary plus incentives (77%), mainly commissions (66%), and only commissions (58%).

Specifically for women, sense-of-success also differed among different revenue models. Of those female advisors whose revenue comes mainly from fees, 96% feel successful, followed by fee-only advisors (87%), mainly commissions (83%), salary plus incentives (77%), and followed by those only receiving commissions (55%).

Overall, the research shows that while advisors generally believe they are successful, the choice of revenue model can play an important role in this feeling, and that advisors with mixed models (primarily fees but some commissions) appear to be the happiest, as recurring fees provide revenue and business stability while having the ability to do commission-based business allows them to work with a wider range of clientele without needing to say ‘no’ as often. So, for advisors who might feel disappointed in their current performance, data suggest that switching to a fee-only or fee-based revenue model that provides more revenue stability could enhance their feelings of success!

(Allison Bell | ThinkAdvisor)

Consumers have faced significant financial headwinds so far in 2022, from weak stock and bond performance to elevated levels of inflation (that make real investment returns even worse). And a recent survey suggests that consumers are keeping more cash on the sidelines against this economic and market volatility.

According to a survey of 1,004 American adults by Allianz Life, 65% of respondents said they are keeping more money than they should out of the market because of worries of loss, up from 57% in 2021 and 54% in 2020. In addition, 60% of those surveyed said they think it is important to have some retirement savings protected from loss. Similarly, respondents had a pessimistic investing outlook, with only 25% saying it is a good time to invest in the market, down from 37% in the fourth quarter of 2021 (although given the low percentage of those with a favorable outlook both when the market was rising in late 2021 and when it has fallen in mid-2022, investors might just be generally pessimistic about the markets).

Inflation continues to weigh on the minds of consumers as well, with 82% saying they worry about inflation continuing to have a negative impact on their purchasing power in the next six months and 71% responding that their income is not keeping up with rising expenses. At the same time, just over half of Millennials said they have an effective financial plan in place to help address the rising cost of living, suggesting that many younger Americans could benefit from working with an advisor to create a plan to combat inflation.

Overall, the survey suggests that consumers’ broadly pessimistic view of the economy and the markets is affecting their investment behavior. And so, whether it is having conversations with clients and prospects regarding how they can combat inflation, to finding ways to help clients get cash off of the sidelines, advisors can play an important part in ensuring their clients’ long-run financial plans remain on track despite the current downturn!

(Kenneth Corbin | Barron’s)

The decline in mutual fund fees over the past several decades has been a boon to investors, who are able to get the diversification benefits of these investments while keeping more of their money invested. At the same time, many mutual funds continue to offer multiple share classes, which vary both in terms of the fees consumers pay, and the amount of revenue shared with broker-dealer platforms that make the products available to consumers. Yet while this structure works for broker-dealers, those that have affiliated RIAs (which have higher standards for responsibilities to clients) have come into trouble with the Securities and Exchange Commission (SEC) for the interrelationship between the two.

Last week, the SEC announced that RIA Mesirow Financial Investment Management agreed to pay more than $750,000 to settle allegations that it failed to disclose to clients that it was placing them in certain higher-fee share classes of mutual funds that were generating more revenue for Mesirow’s affiliated broker-dealer, resulting in clients paying higher costs without being aware of the conflict of interest that led to those higher costs.

Specifically, the SEC alleged that between early 2015 and May 2019, when Mesirow implemented No-Transaction-Fee (NTF) mutual funds for its clients – which typically have a higher cost in the form of additional 12b-1 fees that go to the clearing firm to cover the mutual fund ticket charges – that Mesirow’s affiliated broker-dealer received a portion of the additional 12b-1 fees as part of its clearing agreement. As a result, Mesirow’s RIA was not simply making an objective decision about whether to put clients into NTF mutual funds or not; instead, the firm’s broker-dealer affiliate financially benefitted from the decision to use NTF funds instead of potentially lower-cost alternatives (for which the clearing broker would have paid no or lower revenue sharing. The SEC argued that these actions violated Mesirow’s fiduciary duty to its clients as an RIA by failing to disclose to its clients the compensation its affiliated broker received from the clearing brokers, and furthermore by not seeking best execution (to enact mutual fund trades for the lowest cost) for its clients. The regulator also cited the firm for failing to maintain written policies and procedures to ensure clients are placed in the most appropriate share class. As part of the settlement, Mesirow did not admit or deny charges, but did accept a censure.

Ultimately, this case highlights the importance for RIAs with affiliated broker-dealers of ensuring that the sources of revenue for the broker-dealer do not interfere with the fiduciary obligations of the RIA – either by eliminating the conflict of interest, or at a minimum, by clearly disclosing the conflict, and having policies and procedures in place to ensure that the recommendations being made to clients are not being tainted by what may generate additional revenue for the RIA’s affiliated broker-dealer. And, at a time when many large RIAs are looking to attract breakaway brokers (and using affiliated broker-dealers to hold assets managed by these brokers that cannot be held at the RIA, or are operating as introducing broker-dealers to participate in custody and clearing revenue), having written policies to prevent fiduciary violations (and a culture of compliance to follow them) will be crucial to avoid violating SEC regulations (and providing the best possible service to their clients!).

(Kathleen Boyd | XY Planning Network Blog)

The shift from a commission-based revenue model to a fee-only model has benefitted many advisors and consumers, in part because by being product-agnostic, advisors can offer their clients investment advice without having the potential conflict of suggesting a commission-paying product. But while discretionary investment management remains a core value proposition for many fee-only advisors, some have turned to an “advice-only” model to profitably serve clients and provide comprehensive financial advice without focusing on ongoing investment management.

Advice-only planning is a business model where advisors provide advice to clients without selling products or directly managing their assets, often with a limited period of engagement. Advisors who take this path have a variety of ways to charge advice-only fees, including on an hourly basis, on a project basis, or as an ongoing retainer. Hourly fees can be good for clients who want a limited-scope engagement (e.g., an employee benefits review), while clients who want a more comprehensive plan (but not ongoing advice) might choose a project-based fee. And clients who do want more handholding can choose a retainer-based approach, where an advisor charges either a flat fee or perhaps a fee based on the client’s income. Notably, an advice-only advisor can offer all of these models within their practice (and might find that some clients who start on a project basis turn into retainer clients). And at a time when revenue at many AUM-based firms has declined along with the markets, having fees that are independent of market performance can help steady firm revenues!

Ultimately, the key point is that an advice-only model allows advisors to focus on providing a wide range of financial planning advice rather than managing investments and gives clients a more tailored experience to fit their specific planning needs. Further, it opens the door to potential clients who might have strong incomes but not the assets to meet the minimums of many AUM advisors (as well as “do-it-yourself” clients who are interested in receiving advice, but want to handle implementation on their own), allowing a firm to reach out to a broader pool of potential clients!

(Bill Winterberg | AdvicePay Financial Advisor Community Blog)

Historically, the business of financial advice has focused on investment management. When this is the case, it is easy for clients (and regulators) to see the work an advisor is doing on behalf of their client, from creating an asset allocation to ongoing trading and rebalancing. But advisors who have shifted to a fee-for-service approach face the challenge of demonstrating their ongoing value to their clients.

One way to demonstrate the work of fee-for-service advisors for clients and regulators is to create a client service calendar, which can be structured around client engagement and planning opportunities throughout the year. The first step to construct this calendar is to identify the potential services the advisor plans to offer their fee-for-service clients. And while there are dozens of potential services that an advisor could offer, focusing on the services clients have requested most often (and the proactive services the advisor offers) can create a more manageable (and meaningful) set of service offerings.

Once the advisor’s services are identified, they can consider how frequently their firm should perform each service. For example, the firm might conduct a monthly internal portfolio review, send out a client newsletter on a quarterly basis, and conduct an insurance analysis for each client annually. The advisor can then consider whether certain services are most appropriate at a particular time of year, and allocate such services appropriately (e.g., holding an end-of-year tax planning meeting in November).

And so, creating a client service calendar not only can help an advisor streamline their workflows, but also allow clients (and prospects) to see the full range of services the advisor provides. Further, a client service calendar can be a useful diagram to provide to regulators who request evidence of the advisor’s work on behalf of their clients (particularly if they are operating on a fee-for-service model). In the end, a client service calendar can help a firm quantify its operational needs in terms of advisor capacity, scale a defined set of services to more clients, and determine when to hire additional advisors as more clients engage with the firm!

(Morgan Ranstrom | The Value Of Advice)

While working as a financial advisor can positively contribute to an individual’s wellbeing, it’s not without its challenges. And these challenges are particularly acute for firm owners, who often have to run the operational side of their business while also seeking new clients and serving current ones. And after an early period of growth, firm owners can find themselves struggling to keep up with the pace of business while not pulling in profits commensurate with their efforts.

Ranstrom refers to this situation as a “Triple Whammy” where a firm owner has 1) too much work, 2) for too many clients, 3) for too little money. He suggests that this can be the result of the advisor not making difficult choices, such as raising fees, defining a niche, ‘graduating’ clients who are a poor fit, and overserving their clientele. And the consequences of the Triple Whammy can seep into both the advisor’s professional and personal lives, leading to everything from low profit margins to frustration and burnout. Ranstrom’s preferred solution to the Triple Whammy is to limit the number of clients an advisor serves, which can be a forcing mechanism to focus on client quality, firm efficiency, delivering quality service, as well as the firm’s profit margin and the advisor’s lifestyle.

The key point is that while running an advisory firm is a challenging (but often rewarding) proposition, advisors can sometimes make it more difficult than it has to be by avoiding hard choices that could alienate clients. But by confronting the challenges of the Triple Whammy, a firm owner can create a more efficient business that provides outstanding client service and leads to better long-term health for the business and for the advisor themselves!

(James Dahle | The White Coat Investor)

A mortgage is often a consumer household’s largest debt, and many individuals grapple with the decision of whether to make the regular monthly payments for the life of the loan (often 30 years) or to make additional payments and pay off the loan early. Which in practice can be a tangled web of trade-offs, from the implicit low-cost source of capital for making portfolio investments, to the peace of mind (and potential additional financial flexibility) that comes from not having any obligation for ongoing mortgage payments.

A simple way to look at the mortgage from an investment perspective is to consider the interest rate of the mortgage compared to an expected investment return in a portfolio. For example, for a client who locked in a low 3% mortgage rate in the past and has a 6% expected portfolio return, investing available capital to fund the portfolio rather than pay down the mortgage could be attractive as the portfolio out-earns its borrowing rate. However, while the 6% return might be expected in the long run, market volatility can play havoc with portfolio performance in the short run (where the portfolio may substantially underperform the borrowing cost); more generally, this means that maintaining a mortgage while also investing is the equivalent of investing with debt leverage, simply in the form of investing “on mortgage” instead of “on margin”. Conversely, prepaying the 3% mortgage provides a ‘guaranteed’ return of 3% by eliminating the interest cost (and while some individuals can deduct their mortgage interest on their taxes, they would also have to consider taxes due on their investments as well). Which may be especially appealing if the fixed income portion of the portfolio isn’t netting much (or anything) higher than the borrowing cost anyway.

Further, in today’s high-inflation environment, some might view their mortgage as an inflation hedge, because for those with fixed mortgages, their payments will remain the same for the life of their loan, even in the presence of inflation. Thanks to these fixed payments, homeowners can avoid rent increases that are otherwise commonly caused by inflation. Yet the reality is that the hedge against rent inflation is not the mortgage itself, but rather is a function of owning the home, as a homeowner would get the benefit of avoiding higher rents whether or not they still have a mortgage simply by owning the house itself. In addition, some view a mortgage as an inflation hedge because it can be paid off with future “cheaper” dollars resulting from inflation over time. But it is important again to recognize that it is not the mortgage itself that is the inflation hedge, but rather the source of the cash used to make future mortgage payments, whether it comes from higher wages in the future (as a result of inflation) or investment returns from the cash freed up by the mortgage (both of which exist as inflation hedges even without the mortgage).

Ultimately, the key point is that the decision of whether to hold on to a mortgage – especially while continuing to save and invest – involves a risk tradeoff for clients. For which it may still be appealing to take on the risks and potential rewards of buying investments “on mortgage”, but it’s important to recognize why a mortgage itself is not necessarily an inflation hedge, and in the end, if clients want to have a ‘more aggressive’ portfolio often the most straightforward path is not to maintain a portfolio and a mortgage at the same time but simply to liquidate low-yield bonds from the portfolio to pay off the similar-or-higher-interest-rate mortgage and keep the rest invested (which results in a higher equity allocation… but if clients aren’t comfortable with the additional risk of a greater equity allocation, perhaps buying stocks with leverage isn’t a good idea, either?). Especially simply given the potential psychological benefits for clients of just owning their home outright!

(Michael Batnick | The Irrelevant Investor)

The decline in mortgage rates from late 2018 to early 2021 gave many homeowners the opportunity to refinance their loans at a lower interest rate. And while many of these mortgage holders simply refinanced their current balance (thereby reducing their monthly payments thanks to the lower interest rate), some took advantage of rising home values by electing to engage in a “cash-out” refinance, not only refinancing their outstanding mortgage balance but also generating additional cash by taking out a larger loan.

In Batnick’s case, he originally had a 30-year mortgage at a 4.625% interest rate, but as interest rates declined during 2020, he refinanced into a 15-year loan at a 2.875% rate. And as the housing market heated up in 2021, the value of his home also appreciated, giving him the option of tapping the equity in his home through a cash-out refinance. Doing so would require tradeoffs, however, including moving to a higher interest rate (3.375%) and extending his loan over a longer period (30 years), so he consulted with his advisor to determine what investment return would be needed to come out ahead (this turned out to be between 4.5% and 5% in his case). He decided the liquidity and flexibility gained from the cash-out was worth the risk and went through with the refinance.

In the end, some will view such a cash-out refi as a smart risk (particularly when mortgage rates are low), providing the opportunity for significant upside if the invested funds do well, while others might prefer to have a smaller mortgage and the lower monthly payments that come with it. For advisors with clients with significant home equity, being able to determine the breakeven return the client will have to achieve from a cash-out refinance can be useful from a financial perspective (along with guidance on the tax treatment of the refinanced loan!), but at the end of the day, the client’s tolerance for volatility (as investment returns are likely to be uneven over time) and the psychological impact of holding a larger mortgage will also be important factors in their decision!

(Kris Frieswick | The Wall Street Journal)

There are many reasons to renovate a home, from making needed repairs to adding an addition to accommodate the work-from-home environment. But sometimes, home renovations are not undertaken for practical purposes, but rather for emotional ones. For example, Frieswick’s father engaged contractors to turn their house’s back porch into a screened-in porch with a cathedral ceiling. This seemed excessive and unnecessary to Frieswick, particularly as construction delays dragged the project on for longer than expected. But then she realized that her father was convinced that as long as the porch was under construction, her mother, who had late-stage cancer, wouldn’t die.

Some people have the belief that as long as they are busy, nothing big and scary can happen. A famous example of this effect was Sarah Winchester, the widow of the man who manufactured the Winchester rifle, whose home remained under construction for 40 years until her death because she thought that if the home remained unfinished, the ghosts of those killed by Winchester rifles could not haunt her. In the present day, such examples could include someone whose company is struggling but engages in a home renovation anyway (“I can’t be fired if I have to pay for this expensive project!”), a couple in a struggling marriage who attempt a renovation as a way to come together on a project, or someone who copies the project of a seemingly wealthier neighbor in a form of “keeping up with the Joneses”.

These decisions might seem irrational, but it is important for advisors to recognize the underlying feelings that might be going into similar decisions made by clients. Because what seems to be a frivolous renovation project could in reality represent a deeper emotional reaction (and while the advisor does not have to condone the project, it can help to know of any grief a client is feeling to be an understanding advisor and to help them make sound financial decisions during a period of stress).

(Fred Wilson | AVC)

The onset of the Covid-19 pandemic led to a dramatic shift in how many companies work, going from a primarily in-person environment to an almost totally virtual workplace. And as some employees return to the office (at least on a part-time basis), the desire for the flexibility of at-home remote work remains. This has led many companies to embrace a hybrid work structure to get the collaboration and camaraderie benefits of in-person work with the focus and time-savings (no commute!) that working from home can provide.

Companies that do decide to take on a hybrid format have many options to do so. Some might choose to have employees come into the office on certain days of the week. These days can entail meetings and brainstorming sessions that benefit from being in the same room, and companies can soften the blow of having to commute to the office by offering employees lunch or an after-work happy hour. Another option is to come into the offices for focused bursts, for example, for a week at the beginning and the end of a project. Occasional in-person retreats can also be a way to bring an executive team or the whole company together to consider the big-picture path for the firm and to socialize.

And given that remote work has become increasingly popular with financial advisors, firms can consider how to accommodate a remote or hybrid environment. This could include bunching in-person prospect or client meetings into certain days or weeks (allowing staff to work on financial plan preparation and other computer-based tasks from home) or planning occasional in-person social events to bring the team together. In the end, because both in-person and remote work offer benefits for companies and their employees, taking the best aspects of each can lead to a happier and more productive workplace!

(Gregory Schmidt | The New York Times)

When looking for a new condo or apartment, individuals often consider a building’s amenities, which could include a pool, gym, or outdoor area for socializing. But in the new remote-work environment, a new amenity is gaining steam: co-working space.

Many workers who live in smaller apartments or condos might have limited space to set up a desk for work (or might have to resort to working from the kitchen table or a couch). In addition to not having enough space for a computer and other office equipment, working near the same space where you eat and sleep can feel confining. With this in mind, apartment and condo buildings are starting to add co-working spaces as an amenity for their tenants. These can take on a variety of forms, from shared tables and desk areas to private rooms that can be used for meetings or focused work. And in addition to separating the workspace from the rest of one’s home, working in these spaces can also provide a social outlet for those who might not see another person face-to-face during the day as some of the locations host happy hours and collaboration events.

So for advisors working remotely and seeking a new place to live, finding a building with a dedicated workspace could help them strike a better balance between home and work life. Because while working from home can provide a comfortable and convenient environment, sometimes getting out into the ‘real world’ can be a refreshing change, even if it’s only an elevator ride away!

(Alina Dizik | The Wall Street Journal)

Conferences provide many benefits for attendees, from educational speakers to the opportunity to network and to check out the latest industry technology in the exhibit hall. But for parents, after the pandemic created long stretches of balancing work while having children at home, traveling to conferences is now also serving as an outlet for relaxation.

While the pandemic first brought conferences to a halt, many of them transitioned into the virtual environment. While this can still provide an outlet for speakers and some limited networking, such virtual events could not provide attendees with one feature they were looking for: the opportunity to get away from both the office and responsibilities at home. And now, in-person conferences are roaring back, and many have added new amenities to draw in attendees, from a scheduled time at the pool to free massages and concerts. And while conferences in the past were often held in locations with nice weather and plenty of sites to see, conference locations are becoming even more important now after many have limited their travel during the past two years.

And advisors looking to attend a conference (for the education, networking, and the opportunity to get away for a few days) have many options to choose from for the remainder of 2022 and into 2023. Whether it is a major association conference like NAPFA’s Fall National Conference in Denver or the FPA Annual Conference in Seattle, a more intimate conference such the Insider’s Forum in Salt Lake City, or the opportunity to attend a conference held entirely outdoors like Future Proof, there are a wide range of options to choose from (and, wherever you go, don’t forget to bring home souvenirs)!

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.