MEDIA REVIEWS – February 8-15, 2020

I didn’t comment on Financial Planning’s ultra-thin January issue because, well, it was actually larger than Investment Advisor’s (no January; they put out a combined Jan/Feb issue), and because it appears that Financial Advisor won’t issue a February issue at all (nothing posted so far on its website).  But this is the second ultra-thin magazine Financial Planning has put out in a row, which doesn’t bode well for its long-term health.   But this is a magazine with Carolyn McClanahan and Michael Kitces as regular contributors, and a good young lineup of columnists in the front of the book, so there is still reason to pay attention to it.

Speaking of which, you might wince a bit when you read Allan Boomer’s column, which says out loud what I think many advisors have been thinking: the high fees that advisors charge via AUM might not be sustainable long-term.  Meaning: advisory firms may have to live on lower revenues and margins as the Baby Boomer cohort gives way to Gen X and Millennials (who are allergic to AUM).

The other truly notable article here is Michael Kitces arguing that scale is not the margin or economies panacea that some people might think it is, and that it is an entirely rational financial decision for an advisory firm to limit its growth.  Meanwhile, the in-house written articles (that is, not contributed by industry professionals) are mostly a lot of filler.

Articles that received a “high” relevance rating:

“My Plan B for Succession”
by Carolyn McClanahan
Financial Planning, February 2020
https://www.financial-planning.com/opinion/succession-planning-for-financial-planners
Relevance: high

McClanahan’s Plan A includes saving for her retirement, so her wants and needs are fully funded by the time her disability insurance runs out.  That way, no matter what value she receives from her practice (or not), she and her husband will be okay.  She will sell to her team for a bargain price.

Plan B provides for some nice extras should she receive a return from her practice.   That means developing staff people who can manage parts of the overall business, and having well-documented processes in place.  Not only do these form a bridge to the potential successor, but they also increase the attractiveness of your firm in a potential sale.  She pays for individual work with coaches for her team.  McClanahan’s long-term plan is to gradually cut back on work, cut back her pay and possibly work another 20 years, putting her in her 70s.  The team is equipped to take care of clients, there is a buy/sell agreement in place and the work that McClanahan does now can be handled by a new hire.   (p. 9)

“The Day I Lost It Over a FAANG Stock”
by Kimberly Foss
Financial Planning, February 2020
https://www.financial-planning.com/opinion/how-to-follow-the-ground-rules-for-asset-allocation
Relevance: high

Foss says that she, herself, had trouble selling a tech stock that had grown in value to way beyond a normal asset allocation.  Why sell a winner?  Hat if the price continues to go up?  She was her own client, wanting to follow rational advice, but it was not easy.

Ultimately she did sell the position, and the next day the darling stock experienced a major sell-off.  She cashed out close to the top and dodged a bullet.  The fact that the decision was hard stuck in her mind as she gives the same advice to clients.  There is a magnetic pull of the big score.  Just let the chips ride one more time.  Her limit with clients is 10% in any one stock, and she sets a firm upside target, at which point she and the client agree in advance to take profits off the table and reallocate according to the asset allocation plan.  (p. 12)

“Are Advisors Overpaid?”
by Allan Boomer
Financial Planning, February 2020
https://www.financial-planning.com/opinion/are-financial-advisors-overpaid
Relevance: high

Boomer makes some great points.  He says that in no other profession do service providers have the luxury of basing their prices on what their clients can afford to pay.  Would a lawyer have an hourly rate for one group of clients, and a higher rate for another, wealthier group?  Do doctors charge higher copays to their patients who make more money?  Some financial planning clients, even with fee breakpoints, pay two to three times what other clients pay for very similar advice and services.  Wealthier clients are supplement the less-wealthy.

But Boomer is not advocating moving to a flat fee model.  Instead, he suggests that you institute different service models for lower- and higher-fee clients.  Give clients online portals, apps and calculators.  Create a calendar where you regularly discuss planing topics more often, rather than conducting financial planning on-demand.  Create experiences like targeted client dinners, plus games and activities for their children to learn about financial stewardship.  Focus on life goals, not just financial goals.  (p. 16)

“Building—Then Leaving—A Support System”
by Dave Grant
Financial Planning, February 2020
https://www.financial-planning.com/opinion/do-you-need-a-financial-advisor-support-group
Relevance: high

Grant created a study group five years ago, but now it is no longer supplying the support structure he needs.  The study group met every two weeks via video conference and then tried to meet in person each year.  Of course, not everybody could make the calls, and the in-person retreats became more difficult to schedule.  The relationships began to weaken, so Grant stepped away from the group.

He has moved to quarterly one-on-one conversations with select advisors, which is working better.  He has a group of three advisors he talks to regularly, and a group of four advisors he meets online to discuss practice management issues of lifestyle practices.  They challenge each other on topics and opinions without the risk fo a group dynamic making it uncomfortable.  (p. 18)

“The Next Move”
by Michael Kitces
Financial Planning, February 2020
https://www.financial-planning.com/news/how-to-be-a-financial-advisory-firms-with-scale
Relevance: high

Advisors who switch from sales/transactions to an advice model find they can serve fewer clients.  That means hiring more advisors and administrative staff to handle the same number of clients.  But Kitces wonders if this makes business sense, and also if it takes away from the advisor’s quality of business life (adding management responsibilities).  The article offers an example of an advisor who hires an assistant and a paraplanner, and has to move into larger space, and with insurance, payroll taxes and new office equipment, her take-home income drops from $105,000 to $70,000.  And she is now stressed out and unhappy—despite serving more clients.

Later, the article focuses on industry studies which show that growth does not seem to create greater efficiencies and economies of scale.  Income growth is much slower than revenue growth as firms grow past their founder’s capacity.  According to the industry benchmarking studies, the top-performing solo advisory firms can generate the same take-home pay as the average partner at the largest super-ensemble firms.  (Later Kitces acknowledges that the larger firms are building equity value.)

Kitces proposes that instead of focusing on growth, the smaller firms grow to become the best at whatever services they offer.  The focus is not on maximizing the value of the company, but on being excellent.  The founder must focus on a mission-driven purpose, and service leadership, and an employee-first culture.  Then, later, he proposes three models: the lifestyle firm, the small giant that focuses on quality and generates a good income, and the enterprise for those who feel driven to transform to an advisory firm business owner.  Make a choice; don’t be an ‘accidental business owner’ who finds your business moving down an undesired path.  (p. 20)

“New Tax Law Obliterates IRA Trust Planning”
by Ed Slott
Financial Planning, February 2020
https://www.financial-planning.com/news/secure-act-tax-law-change-undermines-stretch-iras
Relevance: high

The SECURE Act means you need to go back and contact every client who has named a trust as their IRA beneficiary.  The stretch IRA has been eliminated for most IRA beneficiaries, so see-through trusts that also qualified for the stretch IRA could spread RMDs over 50 years or more if the beneficiaries were younger grandchildren.  Now that money has to be paid out during a 10-year period, at which time the funds would be taxed if the money is in a traditional IRA, and the language of the trusts would require all the nosy to be paid out and taxed at the end of ten years. 

If a trust is still deemed necessary to protect the assets, then a discretionary trust would work, since the inherited IRA funds could be protected within the trust, but the money could be distributed over ten years, minimizing the movement into higher tax brackets.  A better option would be to have the client convert traditional IRA assets to a Roth IRA and leave the Roth IRA to a discretionary trust providing post-wealth control and eliminating taxes.

Slott actually doesn’t seem to favor trusts at all, post-SECURE. Instead, make the spouse the beneficiary, since the spouse is exempt from the 10-year rule.  Even a 75-year-old spouse will have a longer life expectancy than the 10 years that the 25-year-old-grandchild would have to take the money out in.  Or, as mentioned earlier, convert to a Roth and the money will get 10 years of compounding after it has been inherited, before the distribution has to be taken—tax-free.  The article also talks about qualified charitable distributions, where the required minimum distribution comes out of the traditional IRA and goes directly to a charity.  (p. 31)

“A Succession Wake-Up Call”
by William Mullin
Financial Planning, February 2020
https://www.financial-planning.com/news/succession-planning-and-a-merger-followed-a-financial-advisors-personal-tragedy
Relevance: high

The author’s brother died suddenly during a triathlon, and his successful service business (he was a lawyer) plummeted after his death.  His family never made up the shortfall from the lost income—three children two in college.  The value of the firm dropped every day, and the author realized that his six-person firm could not survive without him.  He merged firms with a partner who shares the same concerns.  The punchline: don’t wait for a tragedy to rock your world.  Make your own plan now.  (p. 40)

The rest of the articles:

“A Ton of Inbound Calls for Betterment”
by Charles Paikert
Financial Planning, February 2020
https://www.financial-planning.com/news/schwab-td-ameritrade-deal-may-boost-betterments-custodial-business
Relevance: low

The Schwab planned takeover of TD Ameritrade has resulted in TDAI-affiliated firms calling Betterment, looking for an alternative to Schwab.  Betterment now has $20 billion in client assets, and is shifting toward advisors and away from consumers.  The firm has introduced high-yield cash reserves.  But…  One imagines that there are other custodial platforms that are getting phone calls too.  What about them?  This is from the InVest Conference that the magazine puts on; one hopes that not all InVest sessions are this lame.  (p. 26)

“Wealthfront Takes on Banks”
by Tobias Salinger
Financial Planning, February 2020
https://www.financial-planning.com/news/wealthfront-ceo-andy-rachleff-discusses-banking
Relevance: low

The company has expanded into mortgages, and plans to offer a debit card, automated bill pay and direct deposit.  An arrangement with an online banking company called Green Dot will enable the services.  This, too, is from the InVest conference; maybe all of its sessions ARE this lame.  (p. 27)

“Should Firms End Forced Arbitration for Sexual Harassment Claims?”
by Charles Paikert
Financial Planning, February 2020
https://www.financial-planning.com/news/ending-forced-arbitration-for-sexual-harassment-claims
Relevance: moderate

Forcing victims to go through arbitration benefits the employer, and is a reason more women don’t speak openly about their experiences with sexual assault and harassment.  Also: reports about sexual harassment don’t appear on FINRA reports such as Broker Check.  And there is a ‘cult of secrecy,’ we are told, in the advisory and fintech industries.  This, too, is from the InVest conference.  We should call this the InVest issue of Financial Planning magazine.  (p. 28)

“Do Rivals Lurk After Advisor Group-Ladenburg Deal?”
by Tobias Salinger
Financial Planning, February 2020
https://www.financial-planning.com/news/how-advisor-group-ladenburg-thalmann-aim-to-retain-financial-advisors
Relevance: low

Venture firm Ladenburg Thalmann purchased The Advisor Group’s five independent BDs and 4,400 reps, pairing them with four other BDs to create a package of 11,500 reps.  Now, we are told, the challenge is retaining advisors from recruiting efforts by LPL, Cetera Financial Group, and Commonwealth Financial Network.  (Do you really care about BD recruiting issues?  Does the magazine think you do?)  (p. 29)

“Avoid the FAFSA Tripwire With Grandparent 529 Plans”
by Don Korn
Financial Planning, February 2020
https://www.financial-planning.com/news/grandparent-owned-529-college-savings-plans-and-fafsa-financial-aid-eligibility
Relevance: moderate

If a grandparent sets up a 529 plan, and doesn’t pay the grandchild’s college until after the FAFSA form has been filled out, those funds are not counted as assets to the child or the child’s parents.  There would be no reduction in financial aid.  But beware; qualified distributions ARE counted as income on the subsequent year’s FAFSA, and assessed up to 50% for the student who is the account beneficiary.  So make the distribution after January 1, keeping the distributions away from the calculation.

One clever strategy is for the grandparents to execute a partial change of ownership of their 529 plan to the student’s parent.  Let’s say the total cost at a college for the year is $45,000, and $35,000 of aid has been awarded, the gap would be $10,000.  Therefore, $10,000 of the 529 plan would be changed to the parents’ ownership.  That wouldn’t trigger income to the student, and be negligible on the next year’s parental income.  (p. 34)

“Breaking Clients of Their S&P 500 Addiction”
by Craig Israelsen
Financial Planning, February 2020
https://www.financial-planning.com/news/educating-clients-on-mean-regression-while-breaking-them-of-their-s-p-habit
Relevance: low

Before any of Israelsen’s columns, you ask yourself: will he insert a plug for his patented 7Twelve Portfolio?  The answer is always “yes.”  The author offers a graph which shows that 52% of the time a portfolio invested in the S&P 500 will be more than 500 basis points above or below the mean three-year rolling historical return of 10.95%.  So?  If you’re experiencing the upside, you can better prepare clients for the downside that is sure to come.  And then you can put them in the 7Twelve Portfolio.  (p. 36)