Thoughts on Succession Planning

Practitioner Concerns on Succession Planning.  In taking a group of students to a Financial Planning Association chapter luncheon today, I encountered several financial planners concerned about succession planning.  Two common concerns were: (1) the time (and money) spent to train new financial planners to a firm - often 2-3 years before a high level of productivity; and (2) the risk of a possible departure of a financial planner after being trained - and taking clients with him or her at the time.

As to the first concern, it is my experience that there are few experienced financial planners out there.  Those who seek to leave one firm to join another are often low in production - either lacking in technical skills through lack of dedication to ongoing learning, or lacking in relationship building, or both.  Of course, some financial planners will leave one firm and seek out another for other good and valid reasons - but again, finding good and experienced talent is rare these days.  Also, some of the "training" may have to be "undone."  The need to combat preconceived notions of workflows and client service philosophies can sometimes be daunting, especially when a person moves from a non-fiduciary culture to a fiduciary platform.

Hence, in my view, many firms should seek to hire new talent emerging from undergraduate programs.  (Admittedly I have a bias here, as a professor, but hear me out.)

The hiring process should begin with an internship.  Preferably one in which enough pay is granted to cover the intern's living expenses during the period of the internship.  But, even barring that, an internship is the perfect way to begin the hiring process.  Why?


Primarily, the leveraging of an advisor’s time is possibly the most important short-term benefit of hiring an intern. With more time – your most valuable commodity – you are able to focus on things many have neglected for a long time -- things such as your own personal life, your health, or tackling the things you need to do to evolve your  practice into a more efficient, viable,  and sustainable business (including process improvement and documentation, marketing, and succession planning).  But the benefits don't stop there ...


Understand The Potential Benefits.  The uses of an intern (aside from providing a well-rounded experience to the intern) include:

• Utilize interns to get to projects that have lingered for far too long
• Develop and/or update “total client profiles” for all of your clients utilizing mind-mapping or CRM software
• Verify beneficiaries on IRA and other accounts
• Review and ensure clients’ estate planning documents are obtained and properly filed and indexed
• Use technology-savvy interns to assist in implementing new CRM, PMS, financial   planning, or other software
• Have the “connected” generation spur on  your marketing efforts, especially through      the implementation of social media

Aside from projects like those mentioned above, consider these benefits:

• As discussed above - leverage your time - your most important commodity
• Facilitate “getting your feet wet” before committing to hiring permanent staff
• Try out a future potential employee … you can discern a lot more from 3-4 months than you will see in a one-hour interview, or even a series of interviews
• Show off you firm as a great place to work … interns bring back their experiences to their colleges, and to peers through FPA NextGen, NAPFA Genesis and other programs
• Give back to this emerging profession … enable an intern to discover the benefits of a fee-only practice, and encourage appropriate stewardship from the next generation

Plan the Experience.  Key to a good internship is setting reasonable expectations, for both the firm and the intern.  Here's a few tips about a possible process to follow.

• Submit recruiting information and the job description to colleges and universities
• Interview, undertake appropriate background checks, and make job offers — typically 2-8 months before the internship will start
• Assist interns with housing, if needed
• Have all staff members contribute to the formulation of a project list for the intern
• Some work that is all about the firm (e.g., updating databases, re-organizing files, etc.)
• Some work that is all about the intern (e.g., mentoring, education, etc.)
• Ideally, a lot of work that is both a genuine help to the firm and genuine learning (e.g., supporting updates to financial plans, gathering information from clients, taking notes during client conferences, preparing total client profiles, assisting with marketing and promotional efforts)
• Assign a mentor for each intern — to develop agenda for and to coordinate training, ensure  appropriate prioritization of projects to be  assigned, and to provide periodic feedback
• Have an “expectations meeting” with the intern, and with senior advisors and the assigned mentor present, when the internship commences
• Encourage staff to meet with interns over lunch and in appropriate social settings
• Conduct an exit interview

The Permanent Hire - The Roadmap.  If the intern performs well, and you are ready to bring them into the firm, you should have a clear roadmap on how the intern is trained in all aspects of the firm and moves from new hire to licensed junior advisor to senior advisor to principal of the firm.  Having a S.M.A.R.T. plan in place - with specific assignments for which the new hire (and the new hire's mentor) are responsible to achieve - is essential.  Semi-annual goal-setting and evaluation conferences are recommended, as part of this overall process.

Incentive Compensation.  Depending upon the new advisor's function, establish appropriate incentives (within regulatory requirements).  I'm a big fan of incentive-based compensation, whether it be at the firm level, the team level, and/or the individual level.

The Difficult Issues.  The second concern expressed by practitioners, as noted in the first paragraph of this post, deals with the potential loss of clients should an advisor depart the firm.  As set forth below, protection of intellectual property through non-compete, non-solicitation, and trade secrets clauses is an imperfect solution.  But I suggest a better way.

Nonsolicitation and Noncompete Agreements.  Thorny issues arise when preparing covenants to protect your firm.  First a background on the issues, and then I offer a suggestion.

Non-compete agreements generally prohibit a person who departs the firm from working within a reasonable geographic area.  This might be a number of miles radius from the firm's existing location, or within a specific town, city, or county, etc.  These agreements must be reasonable both in terms of geographic scope (typically 15 miles radius or less from where work was previously performed, although exceptions apply) and in terms of time (typically 2-3 years).  The problem, of course, is that persons in today's connected world can easily work out of their homes, or even in a somewhat distant office, and still serve clients in your geographic area.  Another problem is that courts don't like to enforce non-compete agreements, for they are a restraint on competition.  In some states non-compete agreements are not enforceable at all against financial planners; in other states they are enforceable.  The key to having a good non-compete agreement (despite its limited utility) is to have local counsel research and carefully prepare the document.

More common in financial services are non-solicitation agreements.  These typically state that specific acts of solicitation of the firms' clients cannot be undertaken by a departing advisor for a reasonable period of time - again, typically 2-3 years.  However, these types of agreements don't bar an advisor from being contacted by the client.  Nor can they prohibit the advisor from engaging in general advertising - such as by placing an ad in a local newspaper announcing that he or she has opened a new office, or joined a new firm, etc.  And - the protocol many broker-dealer and investment advisory firms have joined further limit the utility of this technique.  Still, and again, a well-drafted non-solicitation agreement can offer some protection to the practice.

A third, but often overlooked, aspect of the protection process is the protection of "trade secrets."  These might include information about the clients (see Reg S-P for the list of the limited information a broker/adviser may take when departing a firm), processes used by the firm in serving clients, marketing strategies, etc.  Again, a well-drafted trade secrets clause offers some protection.  As do copyright rights and trade name rights (both essential to protect).

A Better Way to Deal with Departing Advisors?  If you have a clear career path laid out for an advisor, with appropriate incentives, and you implement this path properly, the chance of an advisor departing the firm is much lower.  But it is still a possibility.  The best advisors tend to also be entrepreneurial, and want to own their own firm (or, over time, co-own the firm they've joined).

Rather than trying to tie the hands of an advisor solely through non-complete, non-solicitation, and trade secrets clauses - all of which can often be wholly ineffective - is there a better way.  I think so.

First, always have 2-3 team members serve each client.  If one team member departs for any reason, this leads to continuity for the client (and non-loss of the client, in most instances).  Of course, an entire team might choose to depart the firm.  And one departing team member may have such a deep relationship with the client that the client chooses to sever the relationship with the team members who remain with the firm.

Another way begins with recognition that both the firm and the advisor have a stake in the client relationship.  If the advisor undertook significant efforts in securing the relationship with the client, the advisor's interest in that relationship can be great.  If the advisor was "handed" an existing relationship of the firm, at no cost to the advisor, the advisor's quantifiable interest in the client might be less.

Of course, the firm has an investment in each client.  Numerous persons in the firm - from support staff to compliance personnel to vendors (paid for by the firm) - render services to the client, especially during the first year of any engagement.

So, why not recognize that both the firm and the advisor should "co-own" the relationship with the client.  And, if the advisor should depart the firm (for any reason), why not have one party "buy out" the other party's relationship, over time.

The value of each relationship can be quantified, using valuation measures common in the financial services industry.  For fee-only investment advisory firms, often the value is 2x annual revenues of that client, or even higher.  For commission-based relationships with clients, the multiple is usually far less.

Whatever the value assigned, both the firm and the advisor can "co-own" that relationship.  For example, for a client acquired by the firm, but assigned to an advisor, perhaps the advisor only "owns" 10% of the value of that client after serving the client for a year, then 20% after serving the client for two years, etc. - perhaps up to a maximum value of 50%.  The remaining percentage is owned by the firm.

For a client acquired largely through the advisor's marketing and promotional efforts, perhaps up to 50% of the client relationship is "owned" by the advisor, with the remaining part owned by the firm.

Then, if the advisor leaves, wherever the client lands - i.e., with the advisor or with the firm - the agreement can be that the party retaining the client will pay the other party that party's value of the relationship.  Typically this payment occurs over time - perhaps in quarterly installments over a five-year period (with interest at a reasonable rate).  [Whether to tie the amount of the payment to the continued retention of the client (and revenue from the client) is a subject of debate.]

Again, having a well-drafted legal agreement containing such terms is essential.  Research by the attorney as to the efficacy of this arrangement - i.e., purchase of an interest of the other party, and the enforcement mechanisms associated with same - is essential for each jurisdiction in which this arrangement is attempted.  Agreements with clients may have to be modified (as well as Form ADV Part 2A disclosures) to reflect the sharing of client information upon the departure of an individual client - or specifying that the client has a period of time to choose who to retain.  The tax implications of the purchase of a client relationship should also be known, when such an agreement is drafted (i.e., what are the tax consequences to the purchaser, and to the seller, of a partial interest in a client).

Also important is the ongoing documentation of who owns the relationship - and in what percentage.  Disagreements over ownership of a client relationship, whether between the firm and the advisor, or between advisors themselves, could be submitted to a person designated to resolve such disputes, whether inside or outside the firm.

Advisor Solely Owns the Relationship?  There are many advisors in the financial services industry who believe that the advisor should always own the entirety of the relationship.  This is a 180 degree swing from the traditional wirehouse model, in which the wirehouse owned the entirety of the relationship.  Again, I don't believe either perspective is entirely correct; both firms and their advisors have interests in client relationships.

The Co-Ownership Model:  A Path for Succession Planning?  Rather, as stated above, I believe both the firm and the advisor have legitimate interests to protect, as to the client relationship.  The key, in my view, is to acknowledge these competing interests, and to structure a fair and reasonable arrangement to address these interests.

If properly done, significant litigation need not occur when an advisor departs a firm.  And, in this way, a firm that desires to expand by hiring new financial planners can protect its interest, while ensuring that the efforts and contributions of its new employees are also respected.

Any thoughts on this?  I'd love to hear your opinion .... - Ron

Examining DFA Funds: Are the Right Measures Being Utilized?

An article appearing on CBSMoneyWatch on Jan. 17th, "Should You Invest in DFA Funds," located at http://www.cbsnews.com/8301-505123_162-57357831/should-you-invest-in-dfa-funds, led me to make this comment.  (I encourage you to read the article first, before reading my comment thereon.)

This article makes me question whether "risk-adjusted performance" as applied to individual stock mutual funds is a valid measurement criteria.  It depends on the use of the fund, of course, in connection with an overall portfolio.

Risk-adjusted performance seems more appropriate to apply to an entire portfolio, rather than to particular funds.  Especially if such higher-volatility funds are utilized to form a portfolio which has less volatility.  This could be done, for example, by including Dimensional's funds for their higher probability of long-term (15 years or greater) out-performance in the portfolio's allocation to equities(due to the value and small cap effects, and the ability of these funds to capture such effect).  Then, the investment adviser could lower the overall allocation to equities in the individual client's investment portfolio by 10% to 15%.  This would likely achieve a similar long-term return, but with far less PORTFOLIO-LEVEL volatility than a portfolio which has a "balanced" equities portfolio - especially during most stock market downturns.

I would note that Modigliani risk-adjusted performance (M2 or RAP) is a measure of the risk-adjusted returns of investment portfolios. It measures the returns of the portfolio, adjusted for the deviation of the portfolio (typically referred to as the risk), relative to that of some benchmark (e.g., the market).

I would also question the implied conclusion that holding cash in a mutual fund portfolio is a bad thing.  Holding cash represents an opportunity cost to investors.  I always perceived large cash holdings in stock mutual funds as a negative for individual investors, who should be "fully invested" in my view in equities, fixed income investments, or other asset classes.  Settling for funds which often hold 6% to 12% (or more) in money market funds, and settling for the drag on returns resulting from such holdings, seems problematic - or at the minimum a factor which must be taken into account when forming an asset allocation for the overall portfolio.  (If this was done, then a greater allocation to equity mutual funds would be undertaken - if those equity funds had high cash holdings.  Again, this means the individual funds may have lower risk-adjusted returns, but to compensate for the cash holdings within the funds the overall portfolio could have greater exposure to equities - and hence the same - or higher - risk-adjusted returns at the portfolio level.)

There are some very low-cost (web-based) advisors who provide access to DFA funds.  Some charge a very low percentage fee, or even a flat annual fee.  Other advisors charge higher fees, but usually throw in a lot of additional services (financial planning, wealth management) for such higher fees and personal service.

I look forward to Thursday's column.  However, and regardless of whether the result you ascertain is a positive or negative for Dimensional's funds, I would caution that taking a "snapshot" of returns of funds at any one point of time often comes up with incorrect results.  If funds have been around for 20 or more years, why not measure them over rolling 10-year time periods, or rolling 15-year time periods, or over the entire time period?  Since funds and indices rarely have the same exposures to book-to-market and market cap-driven factors, "starting points" and "ending points" over any 5-year or 10-year period can lead to poor analyses.  For example, did a significant overvaluation or undervaluation of large cap stocks vis-a-vis small cap stocks, or value stocks vis-a-vis growth stocks - exist at either the beginning or the end of the period chosen to be viewed?  This could really skew results over a discrete time period - even 10 years.

Since some sector indices have been around for 30+ years (i.e., Russell), comparing long-term returns of a fund (which has been around a long time) relative to indices may be a better indication of the fund's performance.  Yet, rolling 10-year time periods for a fund which has been around a long time can be useful.  It can be helpful as a means to weed out funds which may have possessed exceptional performance as a small starter fund, for example, but only mediocre performance thereafter.

Lastly, I would note that even Morningstar has admitted that fees and costs are a more significant factor in predicting future returns than its own ratings.  Since Dimensional's funds - especially its micro-cap and "core equity" funds - either have very low internal transaction costs, or add to returns through block purchases of (small-cap, mid-cap) stocks at discounts, or add to returns through securities lending practices (possible for a passive and diversified fund), these positive cost/fee attributes should show up in the long-term performance data.

LACK OF TRUST = LACK OF CAPITAL = POOR U.S. ECONOMIC GROWTH

A recent article in ADVISORONE noted the ongoing flow of hundreds of billions of dollars into direct deposit accounts in banks, savings & loans, and credit unions.  See  http://www.advisorone.com/2012/01/13/investors-flee-stocks-and-bonds-stuff-cash-in-matt?utm_source=weekendreview11412&utm_medium=enewsletter&utm_campaign=weekendreview

Why is so much cash flowing into bank accounts, and not into the stock and bond markets, here in the United States?  It all comes down to a LACK OF TRUST.

No longer do major investment bankers adhere to only dealing with quality products.  The financial world, already much more complex than just a few years ago with its plethora of new investment products and different tax rules, is more “dangerous” than ever.  And more costly – as product manufacturers and their distributors find more and more ways to divert from investors the returns of the capital markets.

WITHOUT TRUST - investors won't deploy cash into the capital markets. We could end up being like Greece ... Lots of money in bank accounts, very little money available for use as capital.

Our policymakers must realize that restoring trust in all aspects of our financial system will require mandatory principles of conduct.

One major part of the solution to this complex and (for individual investors) dangerous financial world is to enable consumers to TRUST their financial advisor.  And that can only be done if a bona fide fiduciary standard of conduct is imposed upon all providers of financial advice.

The product sales business model can still exist – but product sellers must be prohibited (as regulators have done in some other countries) from furnishing ADVICE.  Once advice is provided, the consumer RIGHTFULLY HAS THE EXPECTATION that he or she can TRUST his or her financial advisor.

The future of capital formation in the United States is at stake.  And with it, future economic growth.  And the financial security of hundreds of millions of individual Americans who both want and need a trusted financial advisor.

The many issues relating to the regulation of investment and financial advice, among different business models and across different regulatory regimes (and different regulatory agencies) are complex. But the ANSWER to questions posed is quite simple and direct ... impose a true fiduciary standard upon all providers of investment and financial advice.  Educate advisors and consumers on such standard.  And stand back and watch such a principles-based regulatory scheme work its magic to restore investor confidence in our financial markets system, thereby providing the fuel for capital formation and the resulting new era of U.S. economic growth.

My 2 cents ... I hope our policymakers share the same views.

Thoughts on the Undergraduate Personal Financial Planning Program Degree

The Certified Financial Planner(tm) designation has become the most recognized designation in the minds of consumers who are seeking financial advice.  This is not to take anything away from other designations.  For example, the CFA certification requires extensive study and the passage of three exams, and is widely acknowledged to be a tougher (albeit different) certification to achieve.  The AICPA (CPA/PFS), IMCA (CIMA, etc.), and other groups also offer worthwhile designations.

To obtain the CFP(r) certification has, for several years now, required (generally speaking) a 4-year college degree, completion of certain coursework in the topical areas of financial planning, three years of experience in financial services, and passage of the CFP(r) exam.  There are various other requirements, and exceptions to the requirements, which are detailed on the CFP(r) web site.

If one already has a 4-year college degree, many CFP(r) certificate programs exist which provide the requisite course work (7 courses, if one includes the financial plan requirement recently adopted) necessary to sit for the CFP(r) exam.

But if you don't possess a 4-year college degree, there is a real opportunity available to you - obtaining a Bachelor's Degree in Personal Financial Planning.

There are some commonality of the college programs with the various "certificate" programs.  They both seek to accomplish all of the learning objectives established by the CFP Board, for example.  Some of the textbooks utilized are the same.  But there, largely, the similarities end.

Each four-year college program has its own emphasis.  Some programs, for example, focus on the theory which underlies financial planning.  Others appear to possess a focus on investments.  Still others focus on "client counseling" skills.

To a large degree each program reflects the faculty who teach there.  Lead faculty who enter teaching directly after graduate school, with Ph.D.'s in hand, are likely to be well versed in the theory of financial planning, or they may emphasize knowledge of consumer issues which arise in the financial planning area.  Lead faculty who possess a background in psychology or related disciplines are more likely to emphasize client counseling in their curriculum.

At Alfred State College, one of the "Technology" colleges within the SUNY system, nearly all of the professors in the Business Department have worked in the business world.  As a result, they emphasize not only attainment of the learning objectives for the curricula in which they are involved, but also the relation of that knowledge to "real-world" scenarios.  For students of financial planning, in my view, this is a decided advantage.

I have often heard practitioners remark that students emerging with undergraduate (or Master's) degrees in financial planning often are not trained in real-world applications.  I have sometimes heard professors respond with their view that "our job is to train them in the theory, the practitioner's job is to train new practitioners as financial planners."  Or professors may take the view that "my job is to train them to think, and to instill basic (or fundamental) knowledge in them."  There are nuggets of truth in these views, but I have another view.

I believe that, at certain colleges (such as Alfred State College) the mission of the program can be to prepare students for the "real world" - as well as to achieve a base level of knowledge in all areas of financial planning.  In this regard, the largest benefit of having professors who have worked (and continue to work) as financial advisors, such as Professor Stolberg and myself, is that we can bring our current experiences into the classroom.  We are better able to see the connections between the knowledge and "what's really important" to clients.  We bring in readings, and forms, and literature, which are actually used or seen in our own practices, to supplement the standard materials.

Also, since four-year colleges such as Alfred State have eight semesters of time with the student, much more can be taught in related disciplines.  For example, at Alfred State students receive all-important instruction in macro- and micro-economics, as well as how our monetary system works.  In addition, the advanced investment planning course and Capstone course touch upon counseling clients who are concerned about the macro-economic environment.  All of these courses are mandatory, and go well beyond the CFP(r) curriculum's base requirements, due to our view that most clients of financial planners will need - from time to time - assurance of macro-economic conditions, and the financial planner of today should know how to explain economic concepts to clients (and temper clients' fears, in the process).

Other courses at Alfred State College emphasize (as electives) entrepreneurship, with the view that students, with a little experience, should be equipped to open their own financial planning firm within a few years after graduation, if they so desire.  Of course, running a professional practice requires much more knowledge that that taught within the CFP(r) core curriculum.

I often encourage financial planning students to take elective courses in public speaking, as well as psychology.  A Professional Business Seminar at Alfred State College seeks to enhance students' networking skills, as well as to prepare them for interviews.

And the enhanced education Alfred State College provides to its Financial Planning Program students does not just exist in the classroom.  Frequent field trips are undertaken to Financial Planning Association (FPA) Chapter luncheons and to local firms each semester.  Guest speakers - usually practitioners - are frequently invited to address students.  We are also scheduling visits to a one-day conference for practitioners put on by the Northeast Region of the National Association of Personal Financial Advisors (NAPFA). This Spring we hope to expand our visits to include two local Chartered Financial Analyst societies.

In addition, each Fall we hope to take Financial Planning Program seniors to a 2-3 day conference, where they connect with their future peers, learn of different approaches, and engage in interest discussions in the hallways and in the Hospitality Center for the conference.  This past Fall of 2011 ten students attended the NAPFA Practice Management and Investments conference in Brooklyn, NY, along with a subsequent visit to Merrill Lynch's downtown Manhattan main office, and presentations from their top wealth management team.  For many they learned that there are many varied perspectives about financial planning, the many benefits of discussing practice methodologies and marketing tips with practitioners, and so much more.  Needless to say, it was a very popular happening for the students.  Already we have our eyes set on an early Nov. 2012 3-day conference in Baltimore, for our students to attend.

Unlike many programs, Alfred State College requires each of its Financial Planning Program students to complete a one-semester full-time internship with a financial services firm.  With our faculty's substantial connections to alumni. financial planner organizations, and the greater financial services community, we are usually able to generate multiple opportunities for each student to choose from.  Being centrally located, we are about a day's drive from approximately 2/3rds of the U.S. population.

For students transferring from community colleges with an Associate's degree in Business, our Financial Planning Program is structured so that often the transferring student can complete the program in only two more years.  (Of course, an evaluation must be made of each student's transcript; with certain community colleges Alfred State has established agreements which facilitate this process.)

An added bonus of Alfred State College is the relatively low tuition (even for out-of-state students), the fact that most students reside on-campus (thereby aiding in building a real campus community), the small class sizes, and the open-door policy and dedication of the faculty members.

In summation, I think the big advantage of a four-year program focused on "real world" instruction is not only that of time - the ability to provide a much more diverse education and more in-depth in many areas - but also of preparation to "hit the ground running."  Many other advantages exist, including better connecting with practitioners (including the many alumni who lend their time and wisdom in support of the program and its students).


If you:

• are in college now, or desire to enroll in college;
• are interested in pursuing financial planning as a career;
• have a strong desire to assist and counsel others;
• possess a passion for investments, retirement planning, tax planning, or other subject areas of financial planning; and
• you desire a "hands-on" education designed to enable you to hit the ground running as a financial planner,

then check us out, or drop me a line.  I can be reached by e-mail at RhoadeRA@AlfredState.edu.

I also encourage you to check out the resources found on:

• the Alfred State College Financial Planning Program web site:  https://sites.google.com/site/sevensecretsofinvesting/about-me/home; and
• the Alfred State College Financial Planning Program Facebook page:  http://www.facebook.com/groups/274572649241238/

Thank you, and enjoy the day.

Ron

Do Fund Complexes Dump Expensive, Poor Funds Into Target Date Funds?

Do fund companies which put together Target Date Funds include, from their internal funds, higher-cost and weak-performing funds?  "Yes" is the conclusion found in a paper presented today at the American Finance Association annual conference in Chicago, Dr. Vallapuzha Sandhya of Georgia State University explored "Agency Costs in Target Date Funds."  A complete copy of the paper is available at http://digitalarchive.gsu.edu/cgi/viewcontent.cgi?article=1018&context=finance_diss.

Among the points raised today in the presentation and subsequent review by the discussant:

• 88% of Target Date Funds (TDFs) are found in qualified retirement plan accounts at present.
• The Pension Protection Act of 2006 permitted TDFs to be designated as default options in retirement plans.
• Internal "fund-of-funds" TDFs underperformed single fund (stock/bond mix) TDFs, and underperformed balanced funds with similar asset allocations.  This underperformance exceeded 50 bps per year, on average, for the period studied (2001-2008).
• On average, internal "fund-of-funds" TDFs included from their fund families higher-annual-expense-ratio funds, and funds with weaker performance histories.
• The discussant observed that Fidelity, Vanguard and T. Rowe Price, who together dominant so much of the market, might be evaluated as to their TDF offerings separately.  It is possible that the underperformance of internal "fund-of-funds" Target Date Funds may be attributable to high-cost fund families, such as those found in many group annuity insurance contracts.

I observe ... Query as to whether plan sponsors or other fiduciaries to the plan may incur liability for permitting such a result to occur, if this data withstands scrutiny.  This paper seems to be an important contribution to research in this area; more research is desired (including, in my view, an analysis incorporating estimated transaction and opportunity costs arising with funds), in order to further explore this important area, and to guide our policy makers. - Ron

The Personal Economics of Cancer and Financial Planners

As a financial planner, I lost a client to cancer in each of the past two years.  Two of my other clients continue their (successful, thus far) cancer treatments.  So naturally, as part of my quest to assist them, I have sought out from time to time insights as to their medical conditions, and also illumination as to the effect of the cancer and treatments therefore on the accomplishment (or non-accomplishment, or delay) of each client's personal financial life goals.

Permit me to first observe that I am constantly amazed by technological innovation, particularly in the areas of materials science, renewable energy, and health care.  As to the area of health care, we can applaud the continued ability of medical research to fuel longer, healthier lives.  For example, new treatments for various forms of cancer have significantly increased cancer survivorship rates over the past two decades.

Yet, despite the important progress to date, especially in the past 40 years (after the enactment of federal legislation spurred on cancer research in the U.S.), cancer remains one of the world’s most serious health problems. In the United States, approximately 500,000 people still die from cancer every year, and the disease is expected to become the nation's leading killer in the years ahead. Worldwide, the number of new cancer cases is projected to rise from 12.7 million in 2008 to more than 20 million by 2030.

While hundreds of promising research endeavors are underway, transferring success from animal trials to human trials is often problematic.  Still, dozens of new advances or improvements in cancer treatment or therapy were approved or adopted in 2011.  Tantalizing early results offer hope for breakthroughs in treatments (or vaccines) not only for specific forms of cancer but also for broad ranges of various types of cancer.

Given the continued progress, it seems that at times our society inadvertently takes a step or two backward -and unnecessarily. The ongoing shortage of many long-available cancer drugs remains a troubling issue.  Some cancer patients die due to the inadequate manufacture of needed amounts of cancer therapies.  More troubling is the continued trend of excluding many expensive cancer treatments from health insurance policies.

It is amazing how many cancer patients suffer not only physical stresses, but severe financial (and emotional) stresses, after commencing treatments.  One telling indicator - cancer diagnosis is now a known risk factor as to the potential filing of personal bankruptcy.

As financial planners, we may be called upon to assist individuals with the often-dramatic adverse financial consequences of cancer treatments and other forms of medical care.  This may often require both our diligence and our creativity, in seeking out resources to ensure our clients will not miss out on care due to financial hardship, and in connecting our clients (and their families) with support organizations.

We can only hope, and pray, that the continued dedication of hundreds of thousands (if not tens of millions) of researchers, physicians, and the supporters of cancer research will soon lead to far-ranging breakthroughs in the "war on cancer." In the meantime, if - as financial planners - we are called upon to assist one or more clients in navigating the shoals (financial and otherwise) of cancer treatments, let each one of us take such matters to heart and apply our fullest capabilities to assist the client in need.

P.S. - One of my students, all of 20 years old, is also engaged in a difficult battle with cancer.  A talented kid with a great personality, his courage over the past several months is inspiring.