Weekend Reading For Financial Planners (Aug 20-21) 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.

(Evan Simonoff and Eric Rasmussen | Financial Advisor)

The financial advice industry includes organizations with a wide range of interests, from companies in the business of selling financial products, to firms that are in the business of selling advice, and membership associations that support various segments of those varying interests. And given the particular financial power (and regulatory influence) of the product sales industry, three associations that frequently seek higher standards for financial advice – the Financial Planning Association (FPA), the CFP Board of Standards, and the National Association of Personal Financial Advisors (NAPFA) banded together nearly 12 years ago to form the Financial Planning Coalition, in an effort to use their collective strength to influence regulatory decision making in favor of financial planning advice over product sales and distribution.

But this unity appears to be fraying, as the FPA plans to ‘quietly’ leave the Coalition at the end of 2022, to the apparent disappointment of the other Coalition members. Part of the reason for the FPA’s planned departure appears to be related to its July announcement that it is launching a new advocacy initiative with the goal of achieving title protection of the term “financial planner” to ensure that “anyone proclaiming to be a financial planner meets minimum standards that protect consumers and advances the financial planning profession”.

One potential reason for the rift is that the FPA did not indicate that the “financial planner” title it wants to protect would be tied to the CFP marks (possibly frustrating NAPFA, whose registered advisors must hold the CFP certification, as well as the CFP Board itself), and leaving many scratching their heads given that the FPA’s own Bylaws states as part of the organization’s Purpose that “The thrust of FPA’s message to the public will be that… when seeking the advice of a financial planner, the planner should be a CFP professional”. In addition, the FPA has indicated a potential interest in pursuing title reform at the state level, having thus far declined to support last year’s XY Planning Network petition to the SEC to enact Federal title protection for the “Financial Planner” title, and splitting from the CFP Board that similarly has adamantly maintained that it opposes state regulation of financial planning and believes it’s better to pursue a nationally uniform approach to regulation and enforcement to avoid the risk of having a patchwork of 50 state rules.

Ultimately, the key point is that while there is a growing movement amongst key financial planning organizations to stand up for financial planning and require that those who hold out as “financial planners” actually meet the appropriate standards to market themselves as such, there is little agreement about the best path to pursue in order to achieve that goal, and those increasingly divergent views appear to be fraying existing Coalitions apart. Which may simply be a reality if the different organizations have differing views. Though in the long run, the real concern is that when lobbying against the well-funded financial product sales industry, which might propose its own watered-down version of title reform (e.g., only requiring that an advisor pass the Series 6 exam to call themselves a “financial planner”, regardless of any other education, designations, or experience), the FPA risks opening a Pandora’s box of 50 individual state lobbying efforts without the resources to see their higher standards through. In other words, advocates of higher standards for those who hold themselves out as “financial planners” may eventually need to work together on a solution they compromise amongst themselves… though for the time being, the FPA appears content to walk its own path alone!

(Karen DeMasters | Financial Advisor)

Whether it was the sale of mutual funds or other investment products or offering investment advice for a fee, investment management has for decades been at the center of the financial advisory industry. But as technology solutions have offered an alternative to labor-intensive investment management (and as more advisors and consumers have recognized the benefits of comprehensive financial advice), many advisors have become more interested in moving away from investment-centric planning to a more holistic approach.

According to data from Broadridge, 62% of advisors want to spend more time with client-facing activities, 43% want to spend more time focusing on holistic financial planning, and 42% want to spend more time on client acquisition. At the same time, advisors – particularly younger advisors — surveyed indicated that they want to spend less time managing money. Many advisors appear to be taking advantage of Turnkey Asset Management Platforms (TAMPs) as well as model marketplaces to reduce the time spent managing investments, allowing them to work on other areas of planning and business development. These approaches might become more popular as well amid this year’s volatile market, as their systematic rebalancing approaches can help reduce investment risk.

In the end, the shift from investment-centric advice to a more comprehensive approach gives advisors a greater value proposition, particularly amid competition from relatively lower-cost retail-oriented “robo-advisor” solutions. And outsourcing investment management can not only allow advisors to spend more time working directly with clients and growing their business, but can also provide expanded options for how they charge clients (beyond an Assets Under Management basis), whether it is a retainer or similar fee-for-service model, or even taking an advice-only planning approach without providing ongoing investment management services at all, both of which can further expand the pool of clients who the advisor can profitably serve!

(Financial Advisor)

The introduction of so-called “robo-advisors” – which offer automated investment management, often at a lower price than working with a human advisor – more than a decade ago led to some predictions that they could eventually replace human advisors. But those worries did not pan out, and some robo-providers have shifted to an advisor-facing model amid growth challenges on the retail side and competition from larger asset managers. At the same time, a recent survey suggests that consumers are not necessarily choosing between human and robo-advisors, but rather want the benefits of both.

According to a survey of more than 2,000 working-age investors by advisor technology provider Envestnet, 76% of respondents working with a financial advisor said that FinTech was key to their financial success, compared to 58% of those not working with an advisor. In addition, 58% of those surveyed said they trust human advice over digital options, with this advantage being seen in all generations studied.

This research follows a 2022 Vanguard study, which found that consumers have different preferences for the planning services they want to be completed by a human and those to be done by a digital solution. For example, consumers preferred human advisors for many relationship-building and communications tasks, such as understanding their goals and being empathetic to their personal situation, but preferred digital tools for diversifying investments and simplifying their finances for organized, cohesive management.

Altogether, recent research suggests that instead of seeing robo-advisors as a threat, advisors who embrace automated investment tools and the broader FinTech landscape can not only save time (that they would otherwise have to spend on investment management and other non-client-facing functions), but also provide clients with the standard of service they desire. At the end of the day, this kind of ‘cyborg’ advisor could be more successful than either human advisors or robo-advisors on their own!

(Kristen Luke | Advisor Perspectives)

One of the major struggles for a new advisory firm owner is attracting prospective clients. While they might create an attractive website and leverage Search Engine Optimization (SEO), the number of prospects scheduling introductory meetings is likely to be a trickle at first. But over time, this flow is likely to grow and can reach the point where the advisor feels like they are spending too much time meeting with prospects who are not well-suited for their firm.

When this happens, advisors can use their calendaring software to ask basic qualifying questions to identify the people who clearly are not a fit (even before an introductory call) and refer them to an advisor who would be a better match. When setting up qualifying questions, it can help to first introduce why you are asking them (e.g., “Tell us a little bit about your situation so we can be prepared for the call.”). The message can then move into basic demographic questions (e.g., age, occupation, marital status) as well as their financial priorities (the advisor can offer a list of options, such as planning for retirement or dealing with a life transition, as well as including a free-response option), and questions to understand their experience with investments and financial advice.

The next set of questions can more directly reveal whether they meet the firm’s financial minimums. These can include estimates of their household income, total investable assets, and total net worth, including real estate and businesses. Notably, offering the prospects a range of options (e.g., $0-$250,000, $250,000-$500,000, etc.) can make it easier for them to answer than having to come up with an exact number. Importantly, the advisor will want to tailor the range of options to be able to immediately be able to identify whether the prospect is qualified. For example, an advisor with a $500,000 investable asset minimum might set the options at $0-$500,000 (to identify unqualified prospects), $500,000-$3 million (to identify prospects in the advisor’s “sweet spot”), and above $3 million (to identify prospects who might be lucrative but could have issues more complex than the advisor’s normal clients). These ranges can also be adjusted if the advisor takes into account income or total net worth in determining whether a client is qualified.

The key point is that as an advisory firm grows, the owner is likely to have less time for introductory calls with prospects, many of whom might not meet their firm’s niche or minimum financial qualifications. But by asking prospects background questions before even meeting with them, the advisor can not only save their time (by filtering out those who do not meet the firm’s qualifications) but also the prospect as well (as they can save their own time and receive a referral to a more appropriate advisor)!

(Julie Littlechild | Absolute Engagement)

Given the challenges of attracting clients, it can be tempting to take on any prospect who can afford to pay the advisor’s fee. But taking on clients with a wide range of backgrounds and needs can be draining for an advisor, whether by requiring research into specific areas of planning they have not worked on in the past or by dealing with a client that is not a personality match for the advisor. Because of this, identifying an ideal client can not only help build a more efficient advisory firm, but also enhance the advisor’s overall wellbeing.

The first step for an advisor to define their ideal client is to identify the work they love to do by describing the scope, depth, or type of work that energizes them. This could mean the type of work they enjoy doing (e.g., investment planning or retirement planning), different client situations (e.g., clients undergoing a life transition), or the specific needs of the client (e.g., considering how to manage equity compensation). Once the advisor has identified the areas of planning that energize them, they can then define the characteristics of their ideal client, who should: value the work the advisor wants to deliver, be a good fit for what the advisor offers, and energize and inspire the advisor. Individual factors could include whether the client fits the advisor’s values and personality, as well as are in sync with the advisor’s investment approach and planning philosophy.

Once the advisor has identified their ideal client, they can then assess whether their ideal client definition fits within their goals, identify potential knowledge gaps, and ensure those clients represent a significant opportunity. For example, an advisor who wants to work with clients going through a divorce might want to pursue supplementary training (e.g., the CDFA certification) to gain expertise in this area and then consider how to profitably price this service. In addition, the advisor can consider whether they have any ‘deal breakers’ that would make them not want to serve a given client and how to identify them when meeting with prospects. Finally, the advisor can consider whether they need to make any changes to their business to attract and retain their ideal clients. This could include updating their website to make their ideal client clear or upgrading their credentials.

In the end, taking a methodical process to identifying an advisor’s ‘ideal client’ can help them build a client base that they can not only serve more efficiently (and profitably), but also one with whom they enjoy working. Because while taking on any paying prospect who walks through the door might be tempting in the short run, defining and serving ideal clients can be beneficial for the long-run health of the firm (and the wellbeing of the advisor!).

(Bill Cates)

Asking questions is an important part of the relationship-building process for an advisor and a prospective client. By learning about their challenges and goals, the advisor can not only build trust with the prospect, but also learn whether they would be a good client for the firm. But with limited time to meet, it is important to focus on questions that bring significant value to the advisor or the prospect.

One option is to ask clients for the top three items on their ‘bucket list’, things they would regret not doing, being, or having. This can not only be useful for the prospect in helping them identify goals, but also for the advisor in considering how they might help the prospect achieve them. A second question is to ask for the three things the prospect’s current advisor does not know about their goals, dreams, and legacy. Notably, the prospect will have to be currently working with an advisor, and this is likely to be more appropriate if the prospect initiated contact with the potential new advisor, but it can be useful in helping the prospect decide whether they are currently working with the wrong advisor and allow the interviewing advisor to understand whether they will be able to meet these needs. Finally, the advisor can ask the prospect for the three things that tend to come up when they worry or grow concerned about their finances. This question can help the prospect identify the gap between where they are today and where they want to be (whether financially or emotionally) and gives the advisor the opportunity to show how they might be able to fill these gaps.

Ultimately, the key point is that asking questions that get to the heart of the prospect’s life goals and financial pain points (and effective follow-up questions!) can not only confirm for them their interest in working with an advisor but help the interviewing advisor show how they can help the prospect achieve their goals and resolve their financial concerns. This can lead to not only more meaningful discussions, but also increase the chances the prospect will become a client!

(Dan Solin| Advisor Perspectives)

Humans face a constant tradeoff between current pleasure and future wellbeing. In a personal finance context, this could mean spending today versus saving for retirement, but tradeoffs can occur when deciding whether to spend time completing a mundane or challenging task. For example, many individuals put off creating an estate plan because of the emotional difficulty of considering their own death, or delay engaging with a financial planner because they do not want to face their financial challenges head-on.

This phenomenon is known as “temporal discounting”, or the tendency to perceive a desired result in the future as less valuable than one in the present. And while some temporal discounting is inevitable, those who do so chronically can find themselves in a difficult financial situation. But advisors have several tools to work with prospects or clients who engage in temporal discounting. The first step is to acknowledge the potential for temporal discounting when meeting with clients. For instance, an advisor could ask a younger client whether they can envision what their retirement will look like (even a rough framework). This could help the client realize that they have goals for their future that they want to save for now. In addition, automation can mitigate temporal discounting by eliminating a choice between a present and future reward. For example, this could mean automating retirement plan contributions or automatically depositing part of the client’s paychecks into a savings account.

Another option is to create short-term incentives to work toward long-term goals. For example, an advisor could suggest that a client follows through with a trip they’ve wanted to take once their 401(k) reaches a certain dollar amount. A final method is to present alternatives as a series of outcomes rather than a one-time choice. For instance, instead of saying “Would you prefer $10 today or $15 in five years”, the advisor could say “Would you prefer $10 today and $0 in five years or $0 today and $15 in five years”. This framing can help clients better realize the consequences of their spending and savings decisions today on their finances in the future.

The key point is that while advisors are typically well-versed in being empathetic to their clients’ situations, it is helpful to identify the underlying basis of seemingly irrational choices. And by considering temporal discounting and using strategies to help clients overcome it, advisors can better support clients in making decisions that will benefit their future selves!

(Sarah Newcomb | InvestmentNews)

When you think about money, how far into the future are you considering? For some people, they tend to think and plan about money only days or weeks in advance, while others look ahead decades or even generations. And it turns out that this tendency, one’s “mental time horizon”, can play an important role in one’s wealth and financial wellbeing, no matter their income level.

According to a study by Newcomb of 900 U.S. households, the most common response to the mental time horizon question was thinking months in advance, followed by years, and then weeks. This suggests that many individuals might have a hard time considering their future selves decades into the future (i.e., when they might retire). And in fact, the study found that across all income levels, those who tended to think and plan about their money at least 10 years into the future had significantly higher savings than those who focused on the shorter term. Further, this longer-term view not only benefited their net worth statement, but their overall financial health as well, with the answer to the mental time horizon question explaining 27% of the variation in financial health scores (while income only explained 8% of the variance!). And again, in every income group, respondents who said they think at least 10 years ahead also had significantly higher financial health scores than those with shorter mental time horizons.

Given the benefits of having a longer mental time horizon, advisors can add significant value to their clients by helping them look out further into the future than they might today. First, it is important to recognize that making a major shift in the mental time horizon in a short period is unlikely, so working step-by-step can be helpful. For example, an advisor could help a client who currently looks out weeks ahead of time first consider their financial situation a month into the future, and then a year out before leading them to longer periods. In addition, an advisor can help clients extend their mental time horizon by setting a specific, achievable goal that they can picture with clarity. For instance, while it might be hard to imagine what a client’s life might be like 30 years into the future, setting a five-year retirement savings goal can be more motivating as they track their progress on a monthly or annual basis. And once the client’s mental time horizon has been pushed out into years, the advisor can more easily help them extend it further, so that they consider multi-decade, or even legacy goals.

Ultimately, identifying a client’s mental time horizon and, if necessary, working with them to extend it further out in the future can be a valuable service for an advisor to provide. Whether it is moving from weeks to months or years to decades, research shows that extending the mental time horizon can not only be valuable for a client’s net worth, but also their overall financial health, no matter their income!

(Michael Kitces | Nerd’s Eye View)

The very essence of financial planning is about helping clients to formulate the strategies to achieve their goals. In this context, the role of advisors is to help clients articulate their future goals, and then provide recommendations for how the client can best achieve them.

There’s just one problem: research suggests that we’re not actually very good at figuring out what our future goals will be. The fundamental challenge is that, despite recognizing how much we change over time (think back on how different you were 5, 10, or 20 years ago!), we just don’t know how to envision the ways we’ll be different in the future. In fact, researchers have dubbed the phenomenon the “End Of History Illusion” – we just don’t know how to project a future that’s any different from today (which is the end of our personal history as we know it).

From the perspective of financial planning, and the rising popularity of goals-based investing, the challenge of the End Of History Illusion is that advisors may be encouraging retirees to save towards a vision of retirement that they won’t actually care about when retirement comes. For example, a 40-year-old client might think that their priority in retirement will be to buy a boat and fish all day, but when the same client turns 50, their goal might have changed to traveling the world, and at 60, their priorities could have changed again! This doesn’t mean that retirement itself won’t be relevant, but that vision of a particular retirement home, vacations, a boat on the lake, or a certain lifestyle, may not actually be very desirable when the time comes.

Which means investors should actually be cautious about tying their saving and investing habits in a way that over-commits to a particular and specific long-term goal. Instead, if advisors recognize the uncertainty of future goals themselves, planning for flexibility to adapt to future goals may be more effective than investing for the goals themselves. In this way, whether the client decides on buying a boat or traveling extensively when they do retire, they will have the financial resources to do so!

(Jo Constantz | Bloomberg News)

The COVD-19 pandemic led many companies to send their office workers home to work remotely. But over time, employees have started to return to the office, with some companies mandating a return and others giving employees more flexible options. And recent research suggests that a return to five-days-a-week, 8-hours-per-day office work remains far off for many companies.

According to research from workplace-occupancy analytics firm Basking.io, in the first quarter of 2022, 38% of North American office workers came into the office two or three days per week, while 37% went in once per week and 25% did so four or five days per week. Notably, Tuesday, Wednesday, and Thursday were the most popular days for employees to go into the office, with Mondays and Fridays seeing less occupancy. And not only did most workers come into the office for less than a full five-day workweek, but they also spent shorter days in the office, with more than 40% of workers spending five or fewer hours in the office on the days they did go in.

These data points suggest that, while companies and employees continue to see the value of returning to the office, offering flexibility could meet the needs of all parties. For example, companies could pick one day per week for employees to come in for meetings and collaboration that can be held more effectively in person than online. For advisory firms, this could mean bunching in-person client or prospect meetings into one or two days per week, allowing advisors and staff to work from home on the remaining days. And given the costs of permanent office space, firms might even consider renting space on a short-term basis or even going fully virtual (while perhaps holding in-person retreats or other team-building events)!

(Jodi Kantor and Arya Sundaram | The New York Times)

Improvements in technology have allowed workers to move out of the office and work remotely from any part of the world. This became particularly useful during the pandemic, when many offices were temporarily shuttered. But with employees working from home and not in the office (where their work was seemingly ‘supervised’ by nearby managers), some companies are using technology to attempt to track employee productivity.

This technology has a range of features, from tracking time typing or moving a mouse, to taking pictures at random times to ensure the worker is actually at the computer, to point systems that add up the sum of a worker’s activities to give them a daily or weekly ‘score’. Notably, these tools extend well beyond office work to the service industry (where they are used to track workers from fast food cooks to warehouse workers) and appear to be especially popular for companies engaging contractors and freelancers paid on an hourly basis (but have also applied to W-2 employees as well).

Companies (and some workers) that use these tools see them as a way to promote accountability and identify the workers who are not putting in their share of the work. But many workers have cited a range of problems with the software, from inconsistent monitoring (that requires workers to challenge the software’s analysis), to penalizing non-computer-based work (such as brainstorming with colleagues, or even thinking by themselves), to having to carefully time bathroom breaks to not run afoul of the tracking system.

In the end, these tracking systems might give companies more confidence that their employees and contractors are working during the hours they say they are and validate the output they receive from their employees, but this could also come at a cost of employee morale (who wants to have their every move tracked?) and trust. And so, with many advisory firms having shifted to the remote workplace, some might be tempted to keep a virtual ‘eye’ on employees and contractors, but it is important to recognize that trust is a two-way street; those firms that trust their employees to get their work done without being tracked are likely to receive more trust and loyalty back from their workers (potentially improving employee retention and creating a stronger company culture)!

(Erica Keswin | Harvard Business Review)

The idea of office life often conjures images of workplace traditions. From an annual company barbecue to a regular Friday afternoon happy hour, these rituals do not serve a direct business purpose but nevertheless can help the business by promoting team building and becoming a part of company culture. But at a time when many businesses have moved to remote operations and when a range of tragedies have struck the country, some companies have considered whether to incorporate more profound rituals for their employees.

For example, the global communications firm Weber Shandwick established an optional monthly virtual gathering called “Time to Connect” where employees have the opportunity to discuss societal issues making national headlines or occurring in their local communities in a supportive environment, at a time when employees might not have other outlets to air their feelings and hear how others are working through the situation. The key to the success of this and other rituals, according to Keswin, is applying what she calls the “Three P’s”: psychological safety (creating an environment where employees can share their honest feelings), purpose (ensuring that the company’s values are clear, actionable, and widely distributed), and performance (implementing rituals that increase employee engagement and trust, which can lead to higher retention rates).

So while different companies will choose different types of rituals, the key point is that they are an important part of bringing team members together outside of the day-to-day flow of business. And at a time when many teams are working in different locations, establishing new rituals can encourage employee satisfaction, team cohesion, and, ultimately, business performance in a remote work environment!

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.