6 Hot topics for fee-only fiduciary financial planers
Wall Street is anti-fiduciary
Tax policy trainwreck
Long-term care insurance isn't insurance
Budgeting is the dieting of financial planning
New FAFSA and education costs
Investing in a prolonged inverted yield curve
Courageously and gently challenging norms yields good results. I have always tried to bring maverick energy to my three careers: IT engineer, nonprofit CFO and financial planner. Last week I was at a conference in Atlanta of financial advisor mavericks. We were hosted by a terribly named organization called XYPN that functions like a membership association for fiduciary, fee-only, small advisors trying to provide unique audiences with an alternative to Wall Street. One member specializes in serving people trying to move to tiny houses. Others focus on streaming content providers, women and the underserved, and people in the performing arts.
XYPN is not a large community. There are 1300 tiny firms and about half sent members, mostly owners, to Atlanta for the week to discuss what was on their minds. But it’s an important one. By one count, XYPN members represent 12% of the small/boutique advisory firms in the USA.
Here’s what’s on our minds.
Wall Street is anti-fiduciary
The biggest agenda item at the XYPN conference continues to be the David-and-Goliath framing when describing our “small guy” industry position. An inapt analogy, yes, because we have no chance of “defeating” Wall Street. But we can undercut them and provide a better service. Wall Street will always be in the business of packaging products that appeal to your emotional hopes and fears rather than your real-life family needs. Wall Street is not a fiduciary.
Tax policy trainwreck
In 2020, the AICPA announced that 75% of the professional accounting workforce, many of whom prepare taxes, are at retirement age. The Bureau of Labor and Statistics estimates that demand for accounting will outstrip supply for the next decade. In 2021, 17% of them quit and who could blame them after the covid-related bill passed in Dec 2020, which created so much extra work on tax preparers. The IRS was completely underfunded to do even its regular job much less a special pandemic response one.
The complex tax trend isn’t ending. With Secure 2.0 and other changes, the complexity and chaos of law without guidance (or even proper forms) has grown. Tax rules are being used as political carrots and sticks causing so many more options for businesses. I get a call a week from the public asking if I have a tax preparer, and wouldn't you know it, mine just announced retirement.
As rules get more complex, change faster with each administration, and qualified tax preparers retire, consumers are in for headache. (Note: You do NOT need a CPA to prepare your taxes and it usually isn't worth the money for the kinds of circumstances we see with clients. Use an EA instead.)
Long-term care insurance isn’t insurance
The biggest problem with long-term care insurance is that (other than Medicaid) it doesn't exist. Insurance is a system where members of large groups contribute modest amounts of money into a pool that is later distributed to the few that suffer a serious financial crisis. Some things are labeled insurance, like dental, that are simply prepaid service plans with some potential for small savings.
Small savings is not the goal of insurance. Avoiding catastrophe is the goal of insurance! It’s not the average that we want to cover, it’s the 10 year stays that bankrupt the household. When will real LTC insurance be available?
Budgeting is the dieting of financial planning
Does your doctor help you with your diet? No, but it’s critical to your health. They don’t because it’s difficult and costly to coach people into better eating habits. Budgeting is similar for financial planners. Like diet, budget coaching and guidance upstream of the problem has efficacy and is cheaper in the long run, but few are doing it because clients don’t want to pay for the support. The most effective budgeting tool is like calorie counting and regularly remind yourself of your goals. There are a million apps now making this easier, but they are complex to use and require upkeep and maintenance. AI coaching helps, but humans still do it better.
New FAFSA and education costs
Student loans are back with a new "SAVE" mode that is income-based with lowest ever payments, a guarantee that the loan will be discharged with 20-25 years of payment and negative amortization. Also, there is no need to include spousal income if you file separately. This combo means that many students will legally never pay back the whole loan. Although the Supreme Court blocked the original loan cancellation plan, this is a form of federal subsidy that is currently allowed.
In addition, FAFSA changes are coming this fall simplifying the form but eliminating some key provisions like need for multiple children in college same time. And a new 529 pre-paid college plan for top-ranked schools (but not Ivy League) have emerged. It looks very interesting.
Investing in a prolonged inverted yield curve
The crowd in Atlanta (mostly younger than 54, my age) were scrambling to figure out what it means to have a prolonged inverted yield curve with the highest rates in 22 years. An inverted yield curve is when safer, short-term bonds are rewarding investors with interest payments that are higher than normally riskier long-term bonds. This is odd because you shouldn’t get more reward for less risk and it’s an indication of market concerns about the economic future. As a child of the 80s and 90s, 5% federal funds rates are average. In the last few years with ultra-low interest rates plus the echo chamber of social media and the gamification of investing, an obsession with stocks (STONKS!) and a disregard of bonds (unaided by their lousy performance in 2022) have emerged. Bonds are important, even more so in a higher, sustained interest rate environment.
