Kitces | Nerd's Eye View

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with a negative review of President Obama's decision to appoint Elisse Walter as a replacement for SEC Chair Mary Schapiro. From there, we look at a number of practice management and career related articles, including a discussion of how the ranks of dually registered advisors are growing ever faster than pure RIAs, some tips from Sallie Krawcheck for new advisors, a review of the rising trend of ETF asset managers, a look at some of the little things you can do to help build trust with a new client, how Google AuthorRank is changing the face of Search Engine Optimization, and a discussion of survey results from Bob Veres about the greatest fears of financial advisors in today's environment. From there, we have two more technical articles, including a discussion of the tax rules for Master Limited Partnerships (MLPs), and a response from Laurence Siegel to the rather economically forboding article last week by Jeremy Grantham. We wrap up with two more offbeat articles: one suggesting that the primary reason clients have trouble saving for retirement is that their brains physiologically think of their retired selves like a stranger; and the other that there's an important difference between persuading and convincing, with the implication that we as planners may focus too much on the latter. Enjoy the reading!

Continue reading "Weekend Reading for ... »

Continue reading "MailBag: Roth IRA ... »

As retail investor surveys show money continuing to rotate from stocks to bonds - despite sky-high bond prices and their associated ultra-low interest rates - there is increasing concern that investors may soon be blind-sided by at best a savage bond bear market, and at worst a bond bubble that pops. But are investors really buying into bonds because they're bullish on bonds, or because they're bearish on stocks with few appealing alternatives?

After all, if there really is a bond market bubble that's going to pop, the precipitous rise in interest rates could do even more harm to stock prices than bond prices, both from the relative value perspective (who wants to buy the S&P 500 at today's 2% dividend yields when bonds pay 6% again?) and from the economic perspective (a sharp rise in interest rates isn't exactly bullish for economic growth!).

Which means the reality may be that today's bond buying is not about hunting for return in bonds, but about managing the risk of equities (and/or other risk assets). Of course, if the investor really thought the popping of a bond bubble was looming, the best decision may simply be to go to cash. But given the uncertainty of timing, the next best choice for the bearish investor: stay invested, tilt the portfolio towards bonds (and likely shorten duration), and wait and see. Who knows, maybe rates will manage to go even lower from here, as they have 'surprisingly' done for the last 3 consecutive years!

Continue reading "Why Being Invested In Bonds ... »

In recent years, it has become increasingly popular for many financial advisors to call themselves "wealth managers" to differentiate themselves, just as a decade or two ago it was popular to use the term "financial advisor" to differentiate from the stockbrokers and insurance agents. Yet a recent study from IMCA has sought to better define what "wealth management" really means - and their conclusions imply that it is far more than just a fancy label for advice, and instead constitutes unique job tasks and specialized knowledge and skills different from financial planning and designed to serve a unique type of client: those with at least $5 million of net worth. If it gains momentum, the implications of the IMCA study are significant, as it implies that some advisors are using a label that is not actually an accurate description of the knowledge they have and services they provide, and that those who really do wish to work in this area may need to get further training and education. While that is arguably a conflicted perspective for IMCA, as their Certified Private Wealth Advisor (CPWA) certification is intended to target this exact space, it nonetheless remains a valid point: if the job tasks, knowledge, and skills of wealth management really are different than financial planning, then people should use labels that describe what they really know, do, and deliver to clients, and should be educated accordingly. Continue reading "IMCA Defines The Difference ... »

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with two good articles from the Journal of Financial Planning: one is a research study that shows how client "money scripts" can predict dysfunctional financial behaviors, and the other provides a nice overview of the current marketplace for long-term care insurance benefits. There are also two good articles from Advisor Perspectives: one by Wade Pfau discussing how the RetireOne "Stand Alone Living Benefit" (SALB) income guarantee works in protecting client retirement income, and the either by Bob Veres challenging our traditional inflation assumptions for retirees based on some research by Jim Shambo. From there, we look at a pair of industry articles, including a discussion of how Merrill Lynch's new training program is becoming increasingly RIA-like, and how some advisors are beginning to choose to not be in charge and voluntarily take employee rather than employer/business owner roles. There are also two investment articles, one from Nicholas Nassim Taleb (of Black Swan fame) about the concept of market and economic "fragility" and how we need to focus on systems and policies that make us more "antifragile", and the latest quarterly letter from Jeremy Grantham of GMO which provides an interesting but somewhat bleak outlook for US growth prospects in the coming decades. We wrap up with three practice management articles focused particularly around online marketing: one looks at how most advisors are due for a website update; the second provides some great ideas about how to create more content for your website and get more mileage out of the content you already are creating; and the last is a fascinating article that points out how being too polite, professional and "perfect" online may actually be detrimental to connecting with clients. Enjoy the reading!

Continue reading "Weekend Reading for ... »

As QE3 and low interest rates persist into the indefinite foreseeable future, the weak return environment may be claiming another casualty: no-lapse or "secondary guarantee" universal life policies. Although many insurance companies have already been raising premiums on new no-lapse UL policies for several years now, or ceased offering such coverage entirely as interest rates have fallen, the process of change is being accelerated by the NAIC's new Actuarial Guideline 38 (AG 38, also known as Regulation XXX), which will require insurers to hold greater reserves on both new and some existing no-lapse UL policies. The consequence of AG 38: new secondary guarantee UL policies will become more expensive, and although existing policies cannot retroactively have their premiums altered, their cash value may perform even worse than originally projected and be even slower to respond with increases in the crediting rate whenever interest rates finally do rise. Although AG 38 is not anticipated to cause the total demise of no-lapse UL policies, the time window is short to obtain coverage before all the premium increases are finalized. And heading into 2013 and beyond, the choices for policies (and carriers offering them) will continue to be fewer, the premiums may continue to rise on subsequent new policies, and some insurance companies may experience earnings hits or outright ratings downgrades - at least until interest rates finally return to more "normal" levels again! Continue reading "Actuarial Guideline 38 Puts ... »

Getting started as a financial planner is difficult. Although not quite the ugly environment of decades ago, where every prospective advisor was simply thrown out into the cold to fend for themselves trying to find clients in a brutal demonstration of natural selection and survival of the fittest, the fact that financial planning is still dominated by small firms with limited experience in hiring and training makes formal career paths rare. Sadly, financial planning still has quite a ways to go to create the sorts of clear career progression paths that exist in the fields of medicine, law, and accounting. Nonetheless, there are certainly ways to increase the likelihood that each step you take in your early career will be a positive step forward. In this blog post, I give my own top 10 tips for new financial planners looking to maximize their career progression.  Continue reading "10 Tips For New Financial ... »

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with some big announcements from industry associations, including the retirement of NAPFA CEO Ellen Turf next year, and a staff restructuring by the FPA that will result in outsourcing both the organization's lobbying efforts in Washington and meeting operations for its conferences. From there, we have a few highlights articles from this week's Schwab IMPACT conference, including a discussion from Bernie Clark that wirehouses are increasingly shifting to an AUM-based model to compete directly with RIAs, and some new technology tools from Schwab including DocuSign e-signatures and the new Schwab OpenView MarketSquare which will provide advisors a chance to provide ratings and reviews on various vendors and service providers to the advisor community. We also look at a recent announcement from the SEC that it has been stepping up enforcement and cracking down on investment advisers, a discussion of how young planners are often choosing to start their own firms or go with large institutions because the independent firms continue to try to hire more experienced planners instead of newer ones, an exploration of what does and does not constitute a niche for financial planners targeting their business, and some thoughts about how the regulatory debate on financial advisors may still be too narrow because it doesn't capture the conflicts of the financial media. We wrap up with four interesting articles: the first is an article by Angie Herbers about recent research showing what does and does not create client stress, and that often advisors themselves contribute to client stress; the second looks at how "wealth management" is increasingly distinguishing itself as a separate discipline with its own unique body of knowledge; the third is a discussion of how effective data management is not only a matter of efficiency and productivity but also impacts the client experience; and the last is an intriguing interview with LinkedIn CEO Jeff Weiner about leadership and what it really means to be a leader and not just a manager. Enjoy the reading!

Continue reading "Weekend Reading for ... »

Given the costs associated with investment advice, clients often want to maximize any available tax benefits to help mitigate the cost. Fortunately, the IRS does allow a tax deduction for certain investment-related expenses, and while the treatment isn't ideal - a miscellaneous itemized deduction subject to the 2%-of-AGI floor, and an AMT adjustment - something is better than nothing. In fact, the IRS even allows investment advisory fees to be deducted when paid on behalf of retirement accounts like IRAs and 401(k) plans. Alternatively, the IRS also allows investment advisory fees to be paid directly from a retirement account - which effectively allows the fee to be paid with 100% pre-tax dollars. However, an important caveat is that while retirement accounts can cover their own fees, paying any other fees from such accounts can trigger highly adverse results, including taxable distributions, early withdrawal fees, and even a prohibited transaction disqualification of the entire retirement accounts! In the end, the power of tax deferral means that most clients will probably simply pay fees from taxable accounts and claim whatever tax deduction they can, but clients with shorter time horizons - including and especially retirees - should consider paying fees directly from their IRAs and other retirement accounts... but be certain those fees are only for the associated retirement accounts! Continue reading "IRS Rules For Paying ... »

A longstanding challenge of financial planning has been the fact that its value is usually defined in intangible terms (e.g., "bringing peace of mind") or at least over time horizons too long to effectively evaluate (e.g., "helping people achieve their long-term goals"). Yet arguably, the value of financial planning could be better quantified, by trying to measure how much economically better off clients are by engaging in financial planning strategies than what they would have otherwise done. And in a recent research paper entitled "Alpha, Beta, and Now... Gamma" David Blanchett and Paul Kaplan of Morningstar have attempted to do exactly this - evaluating how the financial outcomes of retirees are improved by engaging in five financial planning strategies, from more effective asset allocation to dynamic withdrawal rate spending approaches to proper asset location decisions. Quantifying the difference between the baseline and financial-planning-optimal strategies as "Gamma", Blanchett and Kaplan find that good financial planning decisions increase retirement income by 29%, which is the equivalent of generating 1.82%/year of higher returns. Although there are some important caveats to the research, the new Morningstar paper may open the door to a wave of new research attempting to measure the "Gamma" of good financial planning.

Continue reading "Morningstar Tries To ... »

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with a nice article from Financial Planning magazine highlighting the top 25 schools teaching financial planning, including both adult certificate education programs and the rapidly rising number of undergraduate and graduate degree-based programs. From there, we look at a number of practice management articles, including an interesting discussion of whether it's better to segment clients based not on their assets or wealth but instead by how engaged they are with your financial planning services, a young planner's "NexGen" look at succession planning as a buyer, a look at how to keep your best new employees rather than driving them away, and a discussion about how if turnover does happen it can still be taken advantage of as a growth opportunity for the firm. From there, we look at a few more technical articles, including a discussion from Texas Tech financial planning professor Michael Finke about how neuroscience research is changing our understanding of how to manage and motivate clients towards their financial goals, a discussion of important caveats to bear in mind for clients looking to create a Spousal Lifetime Access Trust (SLAT) before the end of the year for estate planning, and a discussion from John Hussman that notwithstanding recent data the US may already be entering a recession. We wrap up with three interesting articles, one a look at how FINRA is opening up their arbitration process for (Registered) Investment Advisers that want a less expensive alternative, a list of 31 tips to improve your financial planning firm's blog, and a discussion about how technology is magnifying the positive results of good managers but also the negative results of bad ones. Enjoy the reading!

Continue reading "Weekend Reading for ... »

Many readers of this blog contact me directly with questions and comments. While often the responses are very specific to a particular circumstance, occasionally the subject matter is general enough that it might be of interest to others as well. Accordingly, I will occasionally post a new "MailBag" article, presenting the question or comment (on a strictly anonymous basis!) and my response, in the hopes that the discussion may be useful food for thought.

In this week's mailbag, we look at two recent inquiries: 1) whether or not it's a good deal to use 1031 real estate exchanges to avoid the new 3.8% Medicare surtax on investment income that begins in 2013; and 2) some thoughts on the recent Center for Retirement Research brief about using the RMD method as a retirement income/withdrawal strategy. 

Continue reading "MailBag: Problems With RMD ... »

The financial planning community was recently stunned by the unexpected announcement that Alan Goldfarb, chairman of the Board of Directors for the CFP Board, along with two unnamed members of the CFP Board's Disciplinary and Ethics Commission (DEC), had resigned amidst allegations that they had violated CFP Board's Standards of Professional Conduct. Critics of the CFP Board were quick to step forward and use the announcement as a moment of weakness and an opportunity to bash the organization. Nonetheless, it's still notable in a sign of strength that the CFP Board does have an enforcement process, and isn't afraid to use it - even to the point of ousting its own board chair and some DEC members.

In the long run, though, whether this proves to be a sign of strength or weakness for the CFP Board depends upon the transparency it uses in resolving the matter. While light on the details right now - it is, after all, an ongoing investigation - the real question is how much the CFP Board ultimately discloses about what the allegations were, the process of the investigation, the outcomes of that process, and how the matter was adjudicated - along with whatever steps it intends to take to ensure the problems, whatever they were, don't happen again. We can't ask for or expect any answers yet, but we can ask for and expect a commitment, now, for transparency at the end of the process to maintain the integrity of the organization.

Continue reading "Are The CFP Board Leadership ... »

The past 5 years have been difficult for most firms, as the financial crisis has wreaked its havoc on the economy and consumers, and we enter a "New Normal" environment where growth and returns are lower than they were in the past. In fact, data from the Federal Reserve indicates that in the aggregate, US households still have not recovered in their total net worth back to where they were before the crisis began. As a result of this difficult environment, where household net worth in the aggregate has stagnated, the financial planning industry too has been suffering, as firms struggle to grow their revenues in the midst of sluggish organic growth, rising costs, and the lack of any tailwind from markets that mostly still haven't recovered to their pre-2008 highs. These difficulties in turn have led to numerous trends emerging and underway in the financial planning world, from the turn towards alternative investments, to the search for new and different revenue models, to a struggle for marketing to new segments to reignite organic growth, an urge to merge and increase the size of firms to get better economies of scale, or outsource instead, and a drive to grow by acquisition. Overall, as long as the growth in household wealth in the aggregate remains sluggish, firms will be forced to spend more and more time fighting to capture a larger slice of the pie, since the pie itself is not growing the way that it used to. Continue reading "6 Ways The New Normal Is ... »

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with a big announcement from the CFP Board, that the current Chair of the Board of Directors and two members of the Disciplinary and Ethics Commission are resigning amid an ethics probe. There's also another article from the CFP Board explaining their current position on when the fiduciary duty does, and does not, apply to CFP certificants. From there, we have an article on how popular investment bear Gary Shilling is remarkably upbeat and bullish about the financial advising business itself, an article about how young millionaires under age 44 have dramatically higher expectations for digital and social media presence from their advisors, an interview with Behavior Gap artist and author Carl Richards, and an interesting technical article about how to plan for clients' digital assets. We also have a few investment and retirement articles, including an analysis by Wade Pfau of the new "Stand Alone Living Benefit" (SALB) income guarantee for investment accounts, a study by David Blanchett regarding a new metric and approach to measuring the efficacy of various retirement income approaches, and a discussion from Bob Veres about investment advisor Gary Miller and has rather unique and analytical approach to making investment decisions. We wrap up with two very intriguing articles - one a study that finds that the brain is actually physiologically incapable of both empathizing and analyzing at the same time, and the other a discussion about how setting bold, ambitious, unrealistic goals can actually be the best path to success. Enjoy the reading!

Continue reading "Weekend Reading for ... »