Friday, September 16, 2022
HomeFinancial AdvisorWeekend Reading For Financial Planners (Sept 17-18) 2022

Weekend Reading For Financial Planners (Sept 17-18) 2022

Executive Summary

Enjoy the current installment of “Weekend Reading For Financial Planners” – this week’s edition kicks off with a report from Future Proof, dubbed the “world’s largest wealth festival”, held this week on(!) Huntington Beach, California. In addition to being held outdoors, the event stood out from ‘standard’ industry conferences in other ways, from the wide scope of its content to the diverse makeup of its attendees.

Also in industry news this week:

  • How the SEC appears poised to issue new or amended rules regarding its Custody Rule and 12b-1 fees by the end of the year, and what advisors can do to prepare their firms
  • A new report suggests that smaller firms have seen lower employee attrition rates than larger ones during the pandemic, and the steps firms can take to maintain a stronger company culture to attract and retain staff

From there, we have several articles on retirement planning:

  • A survey indicates that while pre-retirees largely understand the benefits of delaying Social Security benefits, only 11% plan to wait until age 70 to claim them, suggesting that advisors can play an important role in influencing clients’ retirement income decision making
  • Recent research shows that spending often declines throughout retirement, not because retirees have less income or fewer assets, but rather due to changes in health and preferences, offering advisors an additional data point to help project client expenses in retirement
  • With Medicare’s open enrollment period approaching in less than a month, advisors can add significant value to their clients by assessing whether changing their coverage could save them money

We also have a number of articles on spending and cashflow:

  • With an increasing number of retirees holding mortgages, advisors can add value by helping clients explore the financial and emotional considerations that go into the decision of keeping a mortgage or paying it off early
  • While some clients coming off a summer vacation might be tempted to buy a vacation home, advisors can help them consider the full range of consequences of doing so, from unexpected expenses to the potential for family conflict
  • How the travel industry has added to the growing number of subscription services, offering everything from discounted flights to access to luxury accommodations

We wrap up with three final articles, all about parenting and family dynamics:

  • The importance of friends for middle schoolers, and why ‘peer presence’ might be a more important dynamic than ‘peer pressure’ for parents to consider
  • How some parents helped develop an entrepreneurial mindset in their children, often by taking a step back
  • Why a growing number of family foundations are choosing a time-limited, rather than perpetual, approach in order to donate money faster

Enjoy the ‘light’ reading!

Adam Van Deusen Headshot

Author: Adam Van Deusen

Team Kitces

Adam is an Associate Financial Planning Nerd at 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.

(Ryan Neal | InvestmentNews)

The COVID-19 pandemic brought in-person advisor conferences to a screeching halt, leading some to be canceled, while others shifted to a virtual format. But as the country has started to emerge from the pandemic’s shadows, in-person conferences have returned with full force, offering advisors the opportunity to see colleagues face-to-face, learn from educational sessions, and perhaps just get away from home for a few days. In addition to the return of long-standing advisor conferences, a new event, Future Proof, was announced almost a year ago, promising a new type of “wealth festival”.

After months of anticipation among those in the advisory industry (both those looking forward to attending and others wondering whether organizers could pull it off), Future Proof was held this week, bringing advisors, investors, FinTech companies, asset managers, and more to Huntington Beach, California. And while many conferences are held in plush locations (though attendees often spend most of their time in hotel conference rooms), Future Proof took advantage of its surroundings by taking place outside, along the beach. And while the outdoor setting created a few hiccups (from loud motorcycles cruising down the street next to the event to mild heat that led attendees to frequent the water bottle refill station), the setting offered significantly more fresh air than the standard conference.

Sessions during the festival covered a wide range of topics related to the future of wealth, from practice management trends to changes in the investing world to the future of cryptoassets to strategies for improving diversity in the wealth management industry. Of course, many advisors come to conferences more for the networking opportunities, and Future Proof offered plenty of space for this as well, from the opening reception (held outdoors at sunset) to plentiful tables near the caravan of food trucks that served up food throughout the event.

A quick stroll along the “boardwalk” where sponsors offered glimpses into their products from colorful tents, also demonstrated that attendees at Future Proof were different from a standard advisor conference, with the average age of attendees likely being two decades younger than the average financial advisor, with significant gender and racial diversity among the crowd as well (at least compared to broader industry demographics).

Ultimately, Future Proof represents a unique addition to the advisor conference/wealth festival calendar. While it might not offer the depth of conferences explicitly designed for comprehensive financial planners on technical or practice management topics (e.g., AICPA Engage or Insider’s Forum), its dramatic breadth (from the range of issues discussed to the sheer distance from one end of the event to the other) and unique surroundings could make it a choice destination for the wide range of participants in the wealth management industry going forward.

(Melanie Waddell | ThinkAdvisor)

From its start in 1980, the 12b-1 fee was controversial – a distribution charge assessed against current mutual fund investors, that the fund company can use to market the fund to new investors. In theory, this use of the mutual fund investor’s own money to market the fund company’s products was supposed to be good for the investor, because it would help grow and scale the fund and bring down its operating expense ratio. However, several decades later, subsequent analysis has found that while mutual funds that charge 12b-1 fees are successful at incentivizing salespeople to bring in more assets under management, the 12b-1 fee isn’t living up to its promise of helping to scale up and bring down the expense ratio as the mutual fund grows.

In March, the SEC released its exam priorities for 2022, which included a focus on revenue sharing agreements, recommending or holding more expensive classes of investment products when lower-cost classes are available, and recommending wrap fee accounts without assessing whether such accounts are in the best interest of clients. In addition, the SEC appears to be interested in changing regulations related to fees and fee disclosure (potentially including 12b-1 fees) through a rulemaking on its agenda called “fund fee disclosure and reform”, though it remains unclear whether the updated rule would merely cover enhanced disclosures of fund fees, or restrict the use of fund share classes with 12b-1 fees.

In addition to fund fee arrangements, the SEC’s recently released “Regulatory Flexibility” agenda indicates it is considering amending or adding rules this year to improve and modernize RIA custody regulations. Demonstrating its interest in this area, the SEC last week announced settlements (ranging from $50,000 to $330,000) with 9 RIAs for custody rule and Form ADV violations. According to the SEC’s orders, some of the firms failed to have audits performed or to deliver audited financials to investors in certain private funds in a timely manner, while others failed to promptly file amended Form ADV to reflect they had received audited financial statements after having initially reported that they had not yet received the audit reports. Which may not affect most financial advisors – who traditionally use third-party custodians, rather than taking direct custody of client assets – though the SEC’s attention on custody could sharpen its focus on RIAs that may be triggering custody through Standing Letters Of Authorization (SLOAs) or by using annual retainer structures that can result in custody to the extent that more than $500 of fees are billed more than 6 months in advance.

Altogether, RIAs will want to be on the lookout for new or amended rules from the SEC related to fund fees and custody issues in the coming months, although they can also take proactive steps now to consider whether any fund fee arrangements (including 12b-1 fees that go to the RIA or related broker-dealer entities) fit with their fiduciary obligations, and whether their Form ADV filings are complete and up to date. Because doing so can not only help prevent a firm from coming into the SEC’s crosshairs, but also ensure that it is living up to its responsibilities to its clients!

(Jeff Benjamin | InvestmentNews)

As the pandemic emerged in early 2020, many advisory firms made the decision to make their operations remote, at least temporarily. And while working remotely brought several benefits (from likely lowering the COVID risk for employees to allowing more location flexibility), it also created challenges for firms, both technical (from creating remote meeting systems to avoiding running afoul of compliance issues) and intangible (e.g., maintaining a strong company culture in a remote environment). More recently, a tight labor market (and higher inflation) has led to increased compensation demands from some workers, who might have more opportunities than they might have in the past.

Reflecting these trends, a new report by consulting firm DeVoe & Company, Culture and Engagement in a Post-Covid World, suggests that pandemic-related changes negatively affected company culture, retention, and job satisfaction for advisory firms. According to their survey of more than 100 executives from firms with at least $100 million in Assets Under Management (AUM), about a quarter of respondents reported that their company culture took a negative hit in the past two years (though a similar number reported that their culture improved somewhat). Notably, firms with less than $1 billion in AUM saw less of an impact on their ability to retain employees than bigger firms, as the smaller firms had a 29% employee attrition rate during the past year, compared to 45% for their larger counterparts. Altogether, 37% of firms reported having somewhat or much higher attrition last year, while only 9% said they experienced lower attrition compared to the past.

This employee attrition also appears to be affecting firm succession planning, as the departures of younger employees can make creating such a plan more challenging. According to the report, 11% of RIA executives said that they do not have next-generation leadership at their firm, and 68% of those surveyed said their firm isn’t ready for a succession (compared to 61% in 2021 and 57% in 2019). Only 47% of firms surveyed said they have or are currently implementing a formal succession plan.

These results suggest that whether a firm is back in the office, still remote, or taking a hybrid approach, building a strong company culture is an important part of attracting and retaining talent. In addition, it could be a good time for firms to consider whether their compensation structures, employee benefits and perks, and career tracks reflect best practices to ensure they continue to thrive in the current tight labor market (and it can’t hurt to create or review the firm’s succession plan either!).

(Michael Fischer | ThinkAdvisor)

With longevity risk becoming an increasingly salient issue, advisors and their clients often look for ways to create a stream of income that can last through the client’s lifetime. And while a variety of annuities and similar products are available for purchase, Social Security represents a key source of ‘guaranteed’ income for retirees. Further, electing to delay Social Security until age 70 can be one of the best ways to generate an increased amount of income for the duration of a client’s life.

At the same time, advisors are well aware that clients often elect not to wait until age 70 to claim Social Security, despite the potential benefits for many individuals. In fact, according to a new survey by asset manager Schroders of 1,000 Americans, only 11% of respondents said they plan to wait until age 70 to claim Social Security benefits (despite 86% of those surveyed saying that they recognize that they would receive larger payments by waiting). And many respondents do not even plan to wait until their Full Retirement Age, as 48% of those surveyed plan to take their benefits starting between age 62 and 65 (thereby accepting an even smaller benefit for the duration of their lifetime). Among the reasons reported for taking Social Security before age 70, 32% of respondents said they are concerned Social Security may run out of money or stop making payments, while 31% said they expect to need the money sooner.

In the end, Social Security represents a key part of the income plan for many retirees, and a significant number of pre-retirees appear to recognize that there are benefits to delaying benefits even if they do not currently plan to do so themselves. This can open up an opportunity for advisors to not only demonstrate the magnitude of these benefits (and perhaps explain why a complete stoppage of Social Security benefits is extremely unlikely), but also to offer alternative plans that could help them delay taking them (e.g., taking advantage of six-month ‘reversible’ delays)!

(Dinah Wisenberg Brin | ThinkAdvisor)

There are many challenges to retirement planning for a given client, including their unknown lifespan and their uncertain spending preferences multiple decades into the future. But looking at aggregate data can help advisors understand how spending is likely to change for the average retiree. For example, retirement researcher David Blanchett previously found that the shape of spending in retirement resembles the shape of a smile, with real spending declining through much of retirement with a notable upturn at the end.

And now, a new study published by the University of Michigan’s Retirement And Disability Research Center used data from the 2019 wave of the Consumption and Activities Mail Survey to consider whether the observed decline in spending throughout most of the years in retirement is the result of changes in health or of declining available income. The researchers found significant support for the health hypothesis, as the average scores on enjoyment derived from several activities (including travel, transportation, and clothing) declined at an accelerating pace with age, while spending on gifts and donations (and health care) increased with age, suggesting that retirees shift their spending priorities as their enjoyment (and ability to participate) in certain activities changes over time.

Further, the researchers found that financial satisfaction levels actually increase with age, reaching almost 45% among those over age 80. Similarly, the fraction of those dissatisfied with their financial situation declines from almost 45% among 55- to 59-year-olds to under 20% for ages 80 and older (perhaps as individuals recognize their money has to last for progressively fewer years as they age).

Altogether, this study provides further support for the idea that spending patterns in retirement are impacted by the retiree’s age and health. After a period of increased travel and activity in the early years of retirement, a real spending decline kicks in that lasts until the later years, when health care costs can increase significantly. The key point is that spending in retirement is not linear for many retirees, which can help advisors adjust client spending projections accordingly!

(Mary Beth Franklin | InvestmentNews)

Fall comes with many traditions, from the changing leaves to the fun of Halloween. But Fall also brings a (perhaps) less exciting, but important ritual: the opportunity to make adjustments to health insurance coverage for the coming year. And this period is not limited to those who are currently working; in fact, the Medicare open enrollment period can represent an important planning opportunity for seniors, whose healthcare costs and access can vary depending on the plan they choose.

This year’s Medicare open enrollment period runs from October 15 to December 7 and gives Medicare enrollees the opportunity to make a variety of changes to their coverage. These can include changing their Medicare Advantage plan or Medicare Part D prescription drug plan for 2023 (or joining a new plan). They can also elect to switch from traditional Medicare to a Medicare Advantage plan, or vice versa (although those moving back to traditional Medicare face underwriting requirements if they want to sign up for a Medigap plan).

Despite this opportunity, many Medicare enrollees decline the opportunity to review or change their plans, whether by inertia or confusion about the options. This presents a significant planning opportunity for advisors, who can help clients choose the options that best fit their expected healthcare needs for the coming year. Notably, advisors do not have to conduct this analysis on their own, as a range of software tools are available to assist with the calculations. The key point is that for advisors with clients who qualify for Medicare, conducting a coverage analysis during open season (and helping them make any changes) can be an important way to demonstrate their ongoing value!

(Anne Tergesen | The Wall Street Journal)

When individuals think about their expenses in retirement, they might consider the range of trips they want to take or perhaps spending money on their favorite hobbies. What they are likely not considering is having a mortgage payment. But with an increasing number of retirees holding mortgages into retirement, these individuals (and their advisors) have to weigh the costs and benefits of keeping the mortgage versus paying it off early.

According to the Federal Reserve, as of 2019 33.2% of individuals between ages 65 and 74 had a mortgage or home equity loan (compared to 20.7% in 1989), while 22.6% of those 75 or older did so (compared to only 5.8% in 1989). A key contributor to this shift has likely been the declining interest rate environment during this period, which has allowed mortgage holders to refinance their loans to a lower rate (often resetting their mortgage to 30 years in the process).

With more pre-retirees and retirees holding mortgages, advisors can play an important role in helping them decide whether to pay down the debt early (if they have the funds to do so) or continue to make payments for the life of the loan. Typically, this involves a comparison of the mortgage rate with the return the client could expect to receive if their assets were invested rather than used to pay off the mortgage (while also taking into account the potential tax benefits of holding a mortgage and investment-related taxes).

While many clients during the bull market of the past decade might have chosen to keep their mortgage (particularly if they had taken advantage of the historically low interest rates available), this calculus could be changing. For instance, the weak stock and bond market performance seen so far in 2022 could serve as a wake-up call that strong investment returns are not necessarily a given, and the ‘guaranteed’ return of the loan’s interest rate when paying off a mortgage could become more attractive. On the other hand, the rise in interest rates has also led to improved bond yields, which could exceed the interest rate for many mortgages, making holding the mortgage (and instead using available funds to buy bonds) appear more attractive (as the after-tax coupon return on the bonds could be greater than the interest rate paid on the mortgage).

Ultimately, the key point is that many factors go into the decision of whether to hold onto a mortgage in retirement or pay it off early. These not only include the ‘mathematical’ factors described above (as well as liquidity considerations), but also the emotions that go into holding debt, as some individuals can feel a sense of pride or relief by not having debt on their net worth statement as they go into retirement (and no longer receive paychecks from a job to support the required payments). And so, advisors can add value for their clients by not only analyzing the financial considerations of paying off a mortgage, but also helping their clients work through the emotional aspects as well!

(Veronica Dagher | The Wall Street Journal)

As clients look back on their summer vacations, they might be considering whether they would be better off buying their own beach house rather than renting one out each year. As the thinking goes, not only could they use it when they wish, but the house could also appreciate in value, and generate income (and potential tax benefits) by renting it out when not in use. But at the same time, buying a vacation home can come with many unexpected risks and costs that might cloud this sunny picture.

First, there are several financial risks involved in buying a second home. For instance, appreciation on the second home is not guaranteed (like any home), but values can be particularly volatile in vacation destinations as circumstances change (e.g., regulatory changes or shifts in demand for a given area). Further, potential buyers will want to be cautious when assuming a certain amount of rental income, particularly in the offseason for the destination and taking into account weather-related events (e.g., a hurricane that puts a beach house out of commission for key weeks during the summer or floods near a mountain home that lead to cancelations) And just like a primary residence, these homes come with regular maintenance bills that must be paid whether or not rental income is coming in.

In addition, vacation homes can create strife within an extended family. For example, vacation home purchasers might imagine spending years with their children and grandchildren enjoying the home, and then passing it down after their deaths so that it can continue to be used by their family for years to come. But without advance preparation, passing the home down could create squabbles among the recipients, who might argue about who gets to spend prime weeks in the house and who is in charge of covering certain maintenance costs.

Ultimately, the key point is that while buying a vacation home has the potential to be a worthwhile investment (both financially and emotionally), the net benefits of making such a major purchase are not necessarily clear cut. This is where an advisor can play an important role, not only by helping clients explore the ramifications of buying a vacation home for their financial plan (including running a range of scenarios for appreciation and income), but also by ensuring that those who do have vacation homes have an estate plan that reflects their wishes for the home after they pass away.

(Elaine Glusac | The New York Times)

Subscriptions are ubiquitous in today’s society. Whereas in decades past, an individual’s subscriptions might have included a newspaper and a magazine, subscriptions today cover a wide range of areas, from news to music to food and, increasingly, financial planning. And while subscriptions can offer discounts to consumers (as the annual subscription price is typically less than buying the products à la carte), they are also quite profitable for companies (who benefit from the recurring revenue and inertia on the part of consumers who often forget to cancel unused subscriptions). And now, the travel industry appears to be increasing its use of subscriptions to appeal to a range of travelers.

Travel industry subscriptions come in a variety of forms. A long-running type of travel ‘subscription’ services are airline- and hotel-branded credit cards, which offer a package of benefits (from free checked bags to upgrades) in return for paying an annual fee. More recently, travel search websites have started to offer subscriptions that offer members the opportunity to receive notifications of exceptional deals on flights or hotels, or fixed discounts on the rates from specified companies.

As many busy professionals do not have enough time to plan out full trips, other subscription services offer curated lists of discounted hotels, activities, and tours (to reduce the time spent searching through hundreds of options). At higher price points, luxury subscription services offer discounts on high-end hotels and vacation homes in return for an up-front initiation fee. And for those taking advantage of the remote work environment by bouncing between cities, subscription services are available that give digital nomads access to curated short-term rentals around the country.

In the end, travel subscription services can help consumers save time (by curating travel providers and experiences) and money (by offering discounts). Nevertheless, consumers (and their advisors) will want to keep tabs on the subscriptions they do use and their expiration dates (perhaps by setting calendar reminders) to ensure they are only using those services that are actually delivering them sufficient value to compensate for the cost!

(Lydia Denworth | The Atlantic)

Middle school can be a time of dramatic change for kids. They exit elementary school, where they typically saw the same classroom of students during the day, and enter middle school, where they are introduced to a broader social circle (as multiple elementary schools often combine into one middle school) with less structure (as students interact with a wider range of students and have more freedom during periods like lunch). Combined with the physical changes going on at the same time, middle school can be a stressful experience for many teens.

But researchers have found that having good friends can help a middle schooler thrive during this period. Kids with good friends tend to feel less isolated, anxious, and depressed, and are less likely to be bullied. And middle school can often provide a fruitful environment to find new friends, as kids rotate through more classrooms and are involved in more extracurricular activities (where they can encounter other kids with similar interests). Psychologically, researchers have found that kids at this age start to get decreasing psychological comfort from their parents and are more rewarded psychologically by being around their friends.

Notably, the influence of friends can either be positive or negative. For instance, when a middle schooler is around friends who are academically motivated, they are likely to become more academically driven as well. On the other hand, if the friends are involved in activities like drinking or shoplifting, teens will often join in, not necessarily because of explicit peer pressure, but, as researchers have found, because the brain during adolescence is hard-wired to be especially sensitive to be more reward-seeking in the presence of peers.

The key point for parents of middle schoolers (or for any precocious teens reading this!) is that friends play a highly influential role in the activities and mental health of middle schoolers. And by finding strong friends with productive habits, a middle schooler can not only make it through these often-stressful years, but instead thrive!

(Margot Machol Bisnow | CNBC)

All parents want the best for their children, but guiding them on the path to success and happiness can be a challenge, as there is no manual to do so. For some individuals (perhaps a few advisory firm owners?), instilling the entrepreneurship bug in their children is a priority. And so, Bisnow interviewed 70 parents of entrepreneurial adults to see if there were any common threads.

Her first finding was that these parents gave kids both responsibilities and the independence to complete tasks on their own. Another common feature was that the parents actively nurtured compassion in their children, helping them develop the mindset of trying to make things better for others (whether by creating a business that solves the problem or a charity to help alleviate it). In addition, these parents welcomed failure early and often (rather than trying to save their kids from failing), which they said helped build resilience in their children as they navigated the inevitable ups and downs of life. Finally, the parents she interviewed suggested letting children follow their own path rather than having the parents try to chart a course for them. For example, instead of pushing a parent’s passion on a child, the parents could see what sparks the child’s interest organically and then nurture that interest to give them more confidence.

Altogether, while there are likely several confounding variables influencing a child’s journey to entrepreneurship, Bisnow’s interviews suggest that giving children a broad sense of independence and possibility (while avoiding putting the parents’ thumbs on the scales too hard) are key factors in developing a budding entrepreneurial mindset!

(Paul Sullivan | The New York Times)

Wealthy families often establish private foundations with the goal of having their wealth be used charitably for decades, or even centuries, to come. By investing the principal and limiting the amount granted each year, a foundation could theoretically last for perpetuity, allowing many subsequent generations to participate in the family’s giving.

But in recent years, a new trend has emerged: the time-limited foundation. Also known as spend-down, or limited-life foundations, the creators of these foundations (or sometimes, their descendants) elect to spend down the foundation’s assets much more quickly, frequently with a set date by which it is to be zeroed out. Rather than a slow drip of funds over multiple decades, these foundations give money where it is needed most urgently (based on the wishes of those who oversee it). For a donor who is still living, this can give them the pleasure of having their assets put to use, and, hopefully, seeing positive results.

Before the 1980s, there were virtually no time-limited foundations, but by the 2010s, 44% of new foundations were set up to spend the assets over a set period, according to a report by NORC at the University of Chicago. And while foundations created in perpetuity represented 71% of all foundations (limited-life foundations accounted for only 21% as of 2020, which is to be expected given that they have defined terms!), some of these foundations end up adopting the limited-life structure later on (perhaps because those controlling them at the time decided there were urgent needs that needed to be addressed).

The key point is that for advisors with wealthy, charitably minded clients, deciding whether to create a perpetual private foundation (or a Donor Advised Fund alternative) or one that is time-limited is an important question for the clients to consider, with a range of considerations, from the target recipients of the foundation’s assets to the interest of their children in participating in its operations. But for some donors, whether they attempt to spend down the foundation’s assets during their lifetimes or in a certain number of years after, using a limited-life foundation can bring more immediate rewards, both to the donor and the recipients of their grants!

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.

Print Friendly, PDF & Email



Please enter your comment!
Please enter your name here

Most Popular

Recent Comments