2015 Highlights – The Top 20 Nerd’s Eye View Blog Posts You Might Have Missed

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Highlights Categories: General Financial Planning | Retirement Planning | Tax Planning | Personal/Career Development | Advisor Technology/FinTech | Practice Management | Industry/Profession Trends | Nerd's Eye View |

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General Financial Planning

6 Key Value Propositions A Good Financial Planner Can Provide For Clients Seeking A Better “Return On Life” - In the world of investing, establishing a value proposition is fairly straightforward: either you provide alpha, or you don't, and the Return On Investment can be measured. When it comes to financial planning, though, it's far more difficult to clearly define exactly what the value proposition is, given that most people have never experienced the intangible service in the first place. Financial life planning pioneer Mitch Anthony suggests that the best way to describe the value of financial planning is to describe its "Return On Life" in six key areas: a financial planner helps you with organization (bringing order to the client's financial life), accountability (helping the client follow through on financial commitments towards goals), objectivity (providing a third-party perspective to avoid emotionally-driven decisions), proactivity (helping clients anticipate life transitions and be financially prepared for them), education (assist clients in getting the specific knowledge they need to succeed), and operates in a partnership with you (working not just for the client, but with the client, to achieve their goals). Of course the caveat is that once stated, it's still necessary for the financial planner to be certain they're actually living up to these commitments, but this is one of the best articulations I've ever seen of the value that financial planning brings!

How To Raise Children To Be The Opposite Of Spoiled – Using Money To Teach Values - No parent wants to knowingly raise a spoiled child, yet there is remarkably little guidance on how to turn a child into the opposite; in fact, our language even lacks a word to define "the opposite of spoiled"! New York Times personal finance columnist Ron Lieber tackled this issue in 2015 with his book "The Opposite Of Spoiled" and explores the available research into best practices on teaching children about money. The core conclusion is that beyond basic financial literacy, the real opportunity in teaching children about money is how to use money to teach them values like curiosity, patience, thrift, modesty, generosity, perseverance, and perspective (values we generally use to describe someone who is "the opposite of spoiled"). Accordingly, Lieber's book explores ways to use money as a mechanism for teaching, from starting children early on an allowance, teaching them to divide it into groups for Spending, Saving, and Giving, and providing children larger allowances with more discretion about how to use it (they may do it wrong, but that's actually good because it's a teaching/learning opportunity when they make a mistake!). Somewhat controversially, Lieber also advocates introducing these money conversations to children at a relatively young age, suggesting that ultimately children are curious and are going to ask questions and start watching their parents' financial habits anyway, so ignoring the issue just means they'll learn it from their peers in school and reading online (which may or may not send them the messages you want to teach). Ultimately, it's worth reading "The Opposite Of Spoiled" in full, and I'd even suggest you consider it as a book you can give to your clients (with children), too!

Retirement Planning

Congress Is Killing The File-And-Suspend And Restricted Application Social Security Strategies - The biggest financial planning "surprise" from Congress this year was a provision in the Bipartisan Budget Act of 2015 that killed the so-called File-and-Suspend and Restricted Application rules. Under the new rules, anyone who suspends will suspend not only their own benefits, but also the benefit for anyone else payable based on their earnings record, which effectively "kills" the strategy of doing file-and-suspend to activate spousal or dependent benefits. The new rules also stipulated that any application for spousal benefits will also be a deemed application for individual retirement benefits (and vice versa), eliminating the so-called "claim now, claim more later" strategies of taking spousal benefits at full retirement age and switching to individual benefits at age 70 after earning the 32% delayed retirement credit increases. Notably, the original version of the legislation would have even cracked down retroactively on File-and-Suspend for those who had already done so. The final version of the rules were not retroactive and would only apply on a forward-looking basis, but with fairly narrow deadline to be grandfathered under the 'old' rules; File-and-Suspend must be done by April 29th of 2016 to retain the currently favorable treatment, while Restricted Application will remain available through 2019 (grandfathered for anyone who had already attained the age of 62 by the end of 2015). Notably, voluntary suspension of benefits rules do remain available though, for those who file early and get Social Security benefits for a period of time, and then change their mind later and want to suspend.

Understanding The Role Of Mortality Credits – Why Immediate Annuities Beat Bond Ladders For Retirement Income - While the focus of annuities over the past decade has been on deferred annuities, particularly of the variable or equity-indexed type, and their various guaranteed retirement income riders, arguably one of the most valuable (and underappreciated) types of annuities out there is simply an "old-fashioned" immediate annuity, where a lump sum payment is made to the insurance company in exchange for receiving "checks for life" in return. The key benefit of the immediate annuity is the so-called "mortality credit" - the fact that with a group of annuity buyers contributing to a common pool, the insurance company can promise to pay out more to the group than any individual could take on his/her own. The reason is that for any individual, funds must be held in reserve "just in case" he/she lives to an advanced age (e.g., age 100), while the insurance company knows in advance that most of the group will not live that long and therefore can pay out more in advance knowing that some will pass away later. In fact given this structure, an immediate annuity can always pay out more than a bond ladder over a similar maximum retirement time horizon with identical underlying investments, simply because the investor can only spend principal and interest, while the insurance company can pay out the same principal and interest, plus mortality credits to account for those who won't live the whole time period. And notably, a similar benefit also applies - in even more concentrated form - for those who buy a so-called "longevity" annuity, either in lieu of an immediate annuity, or in a retirement account as a QLAC (qualified longevity annuity contract).

How Has The 4% Rule Held Up Since The Tech Bubble And The 2008 Financial Crisis? - Given difficult markets over the past 15 years, from the tech crash of 2000-2002 to the financial crisis in 2008-2009, plus today's low-yield environment, it has been increasingly popular to suggest that the so-called "4% safe withdrawal rate" to defend against sequence of return risk may no longer be relevant. Yet the reality is that the safe withdrawal rate is not based on average historical market returns; the 4% rule is actually based on horrible market returns in time periods where a balanced portfolio gave a real return of less than 1% for 15+ years! In fact, an analysis of how a retiree who started in 2000 or 2008 would be faring today by just following the 4% rule reveals that the safe withdrawal rate approach is holding up just fine; a 2000 retiree's withdrawal rate today would be similar to retirees in other "bad" years like retiring in 1929 or 1966, but no worse, and a 2008 retiree is actually doing better than any of the historically-unfavorable scenarios (in fact, the 2008 retiree with a balanced portfolio would already have a higher account balance than the pre-2008 market highs, even after 7 years of ongoing withdrawals!). Of course, this still isn't a "guarantee" that markets couldn't turn out to be even worse than any historical scenario going forward from here, but the fundamental point is that recent market challenges are actually a case-in-point example of how robust the 4% rule really is.

Tax Planning

How To Do A Backdoor Roth IRA Contribution (Safely) - The basic concept of the "backdoor Roth contribution" is relatively straightforward: those who cannot make a contribution to a Roth IRA because their income is "too high" can instead make a (non-deductible) IRA contribution, and then convert the IRA into a Roth, thereby getting the money into the Roth as a "backdoor" contribution. However, while the tax rules do permit IRA contributions (as long as you have earned income it is permissible even at high income levels, the only question is whether the contribution is deductible) and also do permit Roth conversions (which since 2010 can be done regardless of income limits), there are caveats to the strategy. The first is the IRA aggregation rule, which stipulates that when there are multiple IRAs, the tax consequences of a withdrawal (or a Roth conversion) from any IRA is treated as a pro-rata distribution from the aggregated value of all IRAs, which means it's not possible to do the backdoor Roth contribution of just a non-deductible IRA contribution if there the individual has other pre-tax IRAs as well. In addition, it's important to be cautious of the so-called "step transaction" doctrine, which stipulates that even if multiple steps were individually permissible, if they are done in quick succession as a "single" transaction it can be taxed as such (which would make the "backdoor" Roth contribution into an outright excess contribution subject to an excess contribution penalty tax). Although there is no clear safe harbor to avoid the unfavorable treatment, the suggestion is to wait one year from the date of contribution until the subsequent conversion to reduce the potential risk of a step transaction challenge from the IRS. And for those who want to clearly claim that this was not an inappropriate Roth contribution, it's probably a good idea to stop calling it a "backdoor Roth contribution" too!

Does Tax Loss Harvesting “Almost” Substantially Identical Mutual Funds And ETFs Trigger A Wash Sale Problem? - Tax loss harvesting, where an investment that is down in value is sold and then bought back again to recognize the tax loss but keep the investment, is a popular strategy to help clients save on (or technically, defer) their tax liabilities. The caveat, however, is the so-called "wash sale" rules that require an investor who sells an investment for a loss to avoid buying a "substantially identical" security for 30 days before or after the sale. In the context of stock and bond investing, it's always been fairly straightforward to determine what is "substantially identical", in a world where Ford stock is clearly different than GM, and a corporate bond is clearly different from a muni. Given the rise of mutual funds and now ETFs, though, the lines have blurred; after all, two large-cap funds from different managers can still have significant overlap of stocks, and different ETF index funds often overlap even more (for instance, the S&P 500 and the Russell 1000 match on 24 of their top 25 stocks, and have a whopping 0.991 correlation to each other!). So how similar can mutual funds or ETFs be to each other and not be substantially identical, in a world where directly holding the underlying stocks that overlap would clearly be a wash sale? While the IRS has provided no concrete guidance, at a minimum the article suggests caution when swapping funds that are designed to track the same underlying index (even if offered by different investment companies). Of course, with investments that are substantively different, there's a risk of "tracking error" that the replacement investment may underperform the original one, so be certain the loss being harvested is large enough to be worth taking the risk!

Using Systematic Partial Roth IRA Conversions And Recharacterizations To Fill The Lower Tax Bracket Buckets - The strategy of converting an IRA to a Roth in order to enjoy future tax-free growth has been popular ever since Roth accounts were first made available in 1998, and with the removal of Roth conversion income limits in 2010 they have only become even more popular. The caveat, however, is that doing a Roth conversion today incurs an immediate tax liability now, which is money no longer available to grow for the future. As a result, Roth conversions are not always a winning proposition; they work best in scenarios where your tax rates are lower today and will be higher in the future. Yet even if your tax rates are low now (and expected to be higher down the road), doing a Roth conversion creates income that can drive up the tax rate itself! The solution? Do partial Roth conversions, where you convert just enough to fill the lower tax brackets (whatever "low" means for the particular client situation) without crossing the line into the higher brackets. Done systematically over the span of many years, this can materially reduce a retiree's long-term tax exposure and the potential impact of future required minimum distributions (RMDs), without triggering top tax brackets today. In fact, with the Roth recharacterization rules, it's even possible to convert the exact amount necessary to fill the tax bracket by deliberately converting "more than enough" to fill the bracket, and then recharacterizing the excess after the close of the tax year (you have until April 15th, or October 15th if an extension is filed!) to back into the exact conversion amount that is desired!

Personal/Career Development

The 12 Best Conferences For Financial Advisors To Choose From In 2016 - With my participation as a speaker at upwards of 70 conferences this year, I get the opportunity to see almost every major financial advisor event, and in this article I share my perspective on which are the "best" for advisors to attend. Of course, the reality is that which is "best" really depends on what the advisor is looking for - for instance, the T3 Advisor Technology conference is best for those seeking out new technology solutions for their advisory firm, while AICPA's Personal Financial Planning conference is consistently the best out there for technical educational content. On the other hand, for those seeking deep technical content in a particular area, the Heckerling Institute is best for those specifically interested in advanced estate planning sessions, and Morningstar and the IMCA National conferences are best for those focused on investing. In this list, I share my "Best Of" picks in a dozen different categories, including practice management, conferences for young/new advisors, advanced wealth management, and more, along with descriptions of who they're best suited for, what to expect at the conference, and the timing, location, and costs. Several conferences have also extended special discounts for Nerd's Eye View blog readers (redeemed by using the discount codes indicated for each conference).

Summer Reading List of “Best Books” For Financial Advisors: 2015 Edition - One of my most popular perennial posts on Nerd's Eye View, this year's "Summer Reading List" selections included new books on the psychology of money and happiness and some best practices on succession planning in advisory firms, along with "old" but popular books on how to sell "invisible" services (like financial planning) to consumers and the definitive book on the History of Financial Planning. Of course, we're long past summer, but if you're looking for something to read during the slow winter months, these books remain as relevant as ever!

Advisor Technology/FinTech

Why Robo-Advisor Technology Still Won’t Help Most Financial Advisors Reach Millennials - If last year (2014) was the rise of the robo-advisors, 2015 was the rise of the robo-advisors-for-advisors, from the launch of Betterment Institutional (which technically happened in late 2014), to Schwab's Institutional Intelligent Portfolios, and likely more coming with the Blackrock acquisition of FutureAdvisor this fall to turn the consumer-focused robo-advisor into an advisor solution likely to be deployed through broker-dealers and insurance companies. Yet the caveat is that despite all the media coverage, robo-advisors continue to have no more than about a 0.02% market share of the investable assets marketplace, driven in large part by the fact that it's still very expensive to get new clients (and unlike established financial services firms, the robo-advisors don't have an existing national brand to leverage). And in a world where robo-advisors are struggling to get a sufficient volume of clients at their low price point despite the incredible amount of free media coverage, the reality is that the average individual advisor who has little-to-no experience in digital marketing will not realistically be able to get enough assets to justify much of any investment into robo-advisor technology. In other words, the virtue of robo-technology platforms is that they improve the "back-office" efficiency of an advisory firm at the point it's time to onboard a client, but does nothing to actually get the client in the first place, which is where most advisory firms really struggle. So for advisory firms that really want to grow - including and especially with younger Gen X and Millennial clients - the starting point is still crafting a relevant service for them and figuring out how best to market it, because a "robo" platform isn't an "if you build it, they will come" solution.

Is Financial Planning Software Incapable Of Formulating An Actual Financial PLAN? - The verb of plan(ing) is defined as "deciding upon or arrange in advance" about how to handle a potential future situation. And by this remarkably simple definition, the stunning reality is that virtually all financial planning software today is incapable of formulating an actual plan. After all, while financial planning software does provide the ability to project the trajectory of a current saving/spending path, it provides no means to model a plan of how to dynamically adjust saving and spending in the future based on uncertain outcomes. For instance, if a client is retired, and a 20% market decline that occurs 5 years from now would cause the plan to fail, how much of a spending adjustment would the client need to make to get back on track? A 5% cut? A 10% cut? Would it have to be a 15% cut? And how much of a decline needs to happen before any spending cuts are necessary in the first place? Does a 5% market decline require a spending cut, or no changes until the portfolio is down 15%? Ideally, the point of formulating a plan is that the client actually has a plan in advance how to handle the bear market - if the portfolio is down by X%, then cut spending by Y% to stay on track - so that the advisor and client can craft an appropriate Withdrawal Policy Statement from the start. Yet unfortunately, that's almost impossible to test in any planning software today, which is roughly akin to having clients test their retirement plan in a 'flight simulator' that is programmed to crash and can't be steered!

Practice Management

Retainer Fees Vs The AUM Model: Red Ocean Differentiator Or Blue Ocean Opportunity? - Whether it's been fear of fee compression from robo advisors, or simply the struggle of the typical advisor to differentiate in an increasingly crowded AUM-fee landscape, one of the hot advisor topics of 2015 is whether it's time to abandon the AUM fee and adopt some form of (typically annual) retainer fees instead. As the criticism typically goes, AUM fees aren't a great way to align the value of financial planning with the cost to deliver it (e.g., a client with $800,000 of AUM isn't really "twice as hard" to service as a $400,000 client), AUM fees can have highly volatile revenue as the markets swing up and down, and there are non-trivial conflicts of interest with AUM fees (e.g., encouraging clients to keep their mortgage in retirement and not take a portfolio withdrawal to pay it down). Yet on the other hand, the reality is that the "volatility" of AUM fees goes up far more often than it goes down (given that bull markets are more common than bear markets!) which is crucial to be able to afford raises for employee advisors, and retainer fees are so "salient" when clients have to write a check that it can trigger adverse fee resistance (even for a firm that is otherwise delivering value). Accordingly, it's not entirely clear whether retainer fees can really win out over AUM fees in practice. Nonetheless, there actually is a significant opportunity for retainer fees to explode as a popular advisor business model in the future - not by competing against AUM firms, but by utilizing them to serve the "blue ocean" of clients who don't have AUM available to manage and otherwise aren't being served at all!

The Emergence Of The “Location-Independent” Virtual Financial Advisor - Historically, financial planning has been something that advisors do face-to-face with clients, sitting across from them to talk about solutions. Yet the rise of technology is creating a new service model for financial planning - the "virtual" advisor, who uses web-based tools and technology like Dropbox and Skype to serve and interact with clients, independent of the location of the client (and the advisor). The key benefit of the virtual advisor is not simply that it's an opportunity to operate the business entirely in the cloud, and that it saves on office space, but more importantly that it becomes possible for advisors to have a highly focused and differentiated advisory firm because nearly any niche is viable when the potential clientele could be anywhere in the country. In other words, in the past advisors were constrained to types of clientele that could be reached in their local geographic region, which made a narrow niche difficult (because there might not be enough of "those" types of clients nearby); with online content and inbound marketing, though, niche clients can be attracted and serviced by the advisor "independent" of the location of the client! Notably, though, the rise of virtual financial advisors is not unique to solo and small advisory firms; the approach is also being adopted by "big" startup firms like Personal Capital, and the new virtual advisor juggernaut Vanguard Personal Advisor Services!

Crafting An Annual Client Service Calendar To Illustrate A Financial Planner’s Value To Prospective Clients - One of the greatest challenges for any financial advisory firm with ongoing clients is demonstrating the value that the firm is providing to justify its ongoing fees, in a world where ironically the advisor tries to do work behind the scenes on behalf of the client which leads the client to being unaware of all the work the advisor did! And it can be even harder to explain to new clients up front what exactly it is the firm will do for the client all year long, to justify the cost of ongoing financial planning in the first place! A potential solution to the dilemma is to craft an "annual client service calendar" that details, on a systematic basis, exactly what the advisory firm will be doing for clients from month to month throughout the year, including the "shadow work" done on the client's behalf behind the scenes. For instance, the annual client service calendar might detail in one place everything from the monthly internal portfolio reviews and investment committee meetings, rebalancing trades, and anticipated client meetings, to the updated financial planning projections and ongoing check-ins, client education and appreciation events, and the firm's quarterly newsletter. For ongoing clients, the firm can then print out from the advisor CRM a list of all of those completed tasks at the end of the year, to further demonstrate and validate the work that was done. And notably, the effort to craft the client's annual service calendar can also be an effective way to focus on systematizing the processes and workflows of the firm (to deliver on the promised services!).

Essential Requirements In Crafting A One-Page Financial Advisor Business Plan - As we approach the end of the year, it's time to do some strategic planning for the coming year. Yet the challenge of most advisory firms is that they either have a business plan that is so long and complex it's impossible to implement, or they have no business plan at all (perhaps because of creating overly-long and impossibly-complex business plans in years past!). So what's the solution? Get to the core of what you really plan to focus with a simple one-page business plan, covering the six key elements to really move the business forward: 1) Who will you serve? 2) What will you do for them? 3) How will you reach them? 4) How will you know if it's working? 5) Where will you focus your personal time in the business? 6) How must you strengthen the foundation? From there, you can formulate a projection of anticipated revenues and expenses to understand the financial ramifications of your planning decisions, and bounce your business plan off of colleagues, mentors, your advisor study/mastermind group, or even your client advisory board. If you haven't thought through a strategic planning process for the coming year, there's no time like the present to dive in as 2015 closes and 2016 begins!

Industry/Profession Trends

Are Vanguard And RIA Custodians The New Disruptive Threat To Independent Financial Advisors? - Historically, financial advisors have served clients, and RIA custodians and asset management firms have served advisors by providing them investment solutions and a platform to deliver them. Yet an emerging transition appears to be underway, with a growing number of asset management and custodial platforms no longer just providing support services for financial advisors, but outright competing with them directly. From Schwab pairing its new Intelligent Portfolios with increasingly-CFP-based branch consultants (and aggressive expansion plans to add more), to Fidelity's push for hiring CFP professionals and acquisition of financial planning software provider eMoney Advisor for its branch financial advisors to use, and the explosive growth of Vanguard's Personal Advisor Services financial planning solution, large firms are increasingly "insourcing" financial planning and using their own financial advisors to deliver their own (often proprietary) solutions. The significance of this threat for independent advisors is that many of these large firms are so large, the marketing scale of their existing national brand gives them the ability to offer advice solutions with rapid growth by the 100s or 1,000s of clients while the typical solo advisor still struggles to acquire clients one at a time. From the perspective of the financial planning profession, though, the rise of these mega firms is good news, and may finally provide the industry's largely-still-missing financial planning career track, and these firms have the potential to significantly expand the reach of financial planning to new groups of consumers as well. But for the typical advisor, is it really realistic to compete head-to-head against a national brand, or will most advisors be driven towards niches and specialization to differentiate themselves in this mega-firm future?

The Solo Financial Advisor Is Not Just Surviving, But Thriving, By Serving The Mass Affluent! - The popular view of the world of financial advisors today is that we're all in a collective race for size and economies of scale, because only the largest can survive and everyone else is doomed to a world of declining profit margins and burdensome overhead costs. Yet the latest industry benchmarking research for RIAs reveals that a subset of financial advisors operating as "solo" practitioners with a handful of administrative staff and a lot of technology are actually some of the most profitable firms out there. In fact, the latest data shows that advisory firms need to grow all the way to $1B+ AUM "Super Ensemble" firms with multiple partners just to generate the same take-home pay as the most successful solo advisors! Furthermore, the studies also show that the largest advisory firms are hardly enjoying any "economies of scale" at all; to the extent they are slightly more profitable as Super Ensembles, it's primarily because the largest advisor firms tend to have the wealthiest clients that pay the biggest fees (where the average client of a solo advisory firm has about $300k of AUM, compared to $2.7M for the average Super Ensemble client! In turn, what this also means is that despite the popular critique that RIAs primarily just serve the wealthiest of clients, in reality it's only a small subset of highly visible RIAs serving the wealthy, and the broad base of highly profitable solo advisory firms are actually succeeding by serving the mass affluent instead!

What Robo-Advisors Truly Threaten To Disrupt: Index ETFs and Mutual Funds, Smart Beta And Algorithmic Investing, Custodians and Their Advisor FinTech Ecosystem - While the focus of the "robo-advisor" debate has been on whether robo-advisors will be a real threat to human advisors or whether the solutions that combine technology and humans will be the ultimate victors, the real "threat" of robo-advisors may be towards other segments of the industry instead. For instance, the ability of software tools to manage a large number of stocks at a very low cost makes it feasible for investors to create their own index funds, potentially disintermediating much of the existing mutual fund and ETF industry; these "Indexing 2.0" solutions will be aided by a tailwind of tax-loss harvesting that can be done when the stocks are owned individually but is impossible for funds (which cannot pass through their losses). And once software makes it feasible to manage large baskets of stocks, Indexing 2.0 won't "just" compete with traditional index funds; it could be used to design and automate the implementation of smart beta or various factor-tilt or other rules-based trading strategies as well! And as advisors shift to adopt such platforms - particularly younger advisors who don't have the legacy constraints of using a "traditional" RIA custodian - the possibility emerges that these robo-advisor-for-advisor Custodian 2.0 platforms may actually disrupt today's existing custodians over the next decade!

Nerd's Eye View

Celebrating My 5 Year Blogiversary, And A Look At How I Get Paid For “Free” Blogging - This fall, the Nerd's Eye View blog celebrated its 5-year anniversary ("blogiversary"?), which after nearly 1,000 cumulative articles has grown to a whopping 120,000 unique visitors coming to the site every month. Given that all of these articles are available for free, one of the most common questions I get is how I can 'afford' to give away so much of my time and content (without selling out to third-party advertisers)? The answer is that the business model "works" because no matter how much free information there is available online, there will always be a subset of people who need help implementing the ideas and strategies they read, and I now have a growing number of companies that provide various business solutions for advisors and their firms (and also several financial planning advice offerings for consumers). And given the size of the site, if "just" 1% (or even 0.1%) of the Nerd's Eye View readers decide they need help to implement and want to work with one of the various solutions businesses I own, or want me to speak at their event or consult with their company, we all win. This simple strategy has more-than-quadrupled my personal income in the past 5 years, even as I give away more and more for free! Accordingly, in the coming year you can expect to see my continued commitment to high-quality, advertising-free content, valuable new features and benefits in our premium Members Section, and hopefully the launch of a new podcast for financial advisors as well!