Executive Summary
As 2012 comes to a close, I'm thankful to all of you, my readers, who have visited Nerd's Eye View more and more over the year, and shared this blog with your colleagues. The growth has helped to renew my energy and enthusiasm to continue writing regularly here in the coming year, as well as reinvest into the site; in the coming weeks, you'll see a significant re-design rolling out. And yes, due to popular demand, it will include a larger default font size!
With life and work as busy as it is, though, I know that most people don't have the time to keep up with everything that's written here, and it's an unfortunate "curse" of blogging that articles, once written, often vanish to the archives, never to be seen again outside of an occasional Google search or two. Accordingly, I've compiled for you this list of the 12 most popular articles that ran this year on Nerd's Eye View. So whether you're new to the blog, or simply haven't had the time to keep up with everything, I hope that some of these will (still) be useful or of interest to you!
Thanks for a great 2012, and looking forward to an even better 2013!
General Financial Planning
1) 10 Tips For New Financial Planners To Maximize Career Progression - After years of work with both NexGen and New Planner Recruiting, planners often reach out to me for tips and suggestions on how to maximize their career progression, so I decided to lay them all out in one article - which quickly became one of the most popular Nerd's Eye View posts of the year. Key tips include getting your CFP certification, becoming active with professional membership associations (both as a member and an active volunteer), getting a job and some experience (and a mentor to help you along the way), work on your weaknesses, never stop learning, and don't forget to have a little patience.
2) Dunbar's Number And How Many True Financial Planning Client Relationships You Can Really Have - British anthropologist Robin Dunbar has done extensive research looking at how human beings organize themselves into groups of limited size - from early tribal villages to military companies - and has posited that the sheer physical size of our brains limits how many people we can have real relationships with to approximately 150. The number has continued to hold up well in recent times, as even in the age of social media, the average person only has about 120 Facebook friends and rarely engages actively with more than about 100-200 people on Twitter. In this article, I apply the research to financial planning, noting that Dunbar's number may pose a real constraint to how many client relationships a financial planner can really have - which not only implies that "how many clients do you manage" may actually be a remarkably effective screen to determine the depth a financial planner engages with clients, but also suggests that even with technology advancements the average planner still may never be able to handle more than 100-150 clients at the most.
3) LearnVest: A Glimpse Of Financial Planning's Future Serving The Masses In The Digital Age? - An overview and early sneak peek at LearnVest, a fascinating new company on the financial planning scene that you're going to hear a lot more about in 2013. LearnVest is bringing financial planning to the masses - and especially to their target demographic, young women in their 20s, 30s, and 40s - heavily leveraging technology to help trained CFP certificants deliver financial plans profitably for a remarkably modest cost of $89 to $599. LearnVest epitomizes several key financial planning trends discussed on this blog, including the use of inbound marketing, a demonstration of howmarketing scale is the real key to allow financial planners to be serve the masses profitably, and the use of technology to transform how financial planning is delivered.
4) The Day I Became Ashamed To Be A CLU - In response to the announcement by incoming CEO Lauren Schadle that the FPA would (re-)adopt the "One Profession, One Designation" refrain and increase its focus on making CFP certification the hallmark of a true financial planner, Dr. Larry Barton of the American College "blasted" the FPA, criticized the CFP certification as a monopoly, and suggested that it was "anti-consumer" to advocate for a clear, uniform minimum standard for professional advisors. In this post, and several that later followed, I explain - as an American College alumni and CLU holder - why I felt ashamed of Barton's statements, and lay out why it's beneficial to rally financial planning around "One Profession, One [Minimum] Designation". I also discuss the better way to accommodate the myriad of quality designations that exist (while eliminating the specious ones as well): set the CFP certification as a uniform minimum standard, and allow the American College's designations, along with the CFA, CPA, and other similar programs, to be framed as "post-CFP" specializations, in a similar model to other professions.
Investing
5) Why Keeping A Mortgage And A Portfolio May Not Be Worth The Risk - In what proved to be a rather controversial article, this blog post makes the point that just because an investment portfolio has a higher expected return than the cost of a mortgage doesn't mean you should keep the mortgage and stay invested to earn the "spread" between the portfolio return and the cost of borrowing. The key issue is that paying down a mortgage represents a "risk-free" rate of return, while an investment portfolio is risky - which means you should only keep the portfolio instead of the mortgage if it offers a significant enough return in excess of borrowing costs to justify an appropriate risk premium. Given a historical equity risk premium of 5% on top of today's borrowing rates, this implies that you actually need to be remarkably bullish on equities to achieve their historical long-term returns in the coming years to keep a mortgage in place. Of course, if you're that bullish on equities, it would also suggest that the client should just invest more heavily in equities in the first place; which is notable because the reality is that paying off the mortgage and investing more aggressively may even be a cheaper way to generate comparable returns anyway, without the risk of leverage and the underlying borrowing costs.
6) Does The DALBAR Study Grossly Overstate The Behavior Gap? - This guest post from Harry Sit of The Finance Buff takes a deeper look at the popular DALBAR study, which is regularly cited to show how investors lose several percentage points of return every year due to poor investment timing decisions (the difference between the market returns and investor returns is often called the "Behavior Gap"). Yet the reality is that the DALBAR methodology is arguably distorting the results due to the sequence of market returns that have occurred over the past 20 years - the reality is that with systematic investments, a dollar-weighted portfolio return will always lag the market return, simply because the good returns happened early (in the 1990s) when there were fewer dollars invested, and the bad returns happened later (in the 2000s) after more money was in the portfolio. In fact, when investor returns are simply compared to systematic dollar-cost-averaging for the past 20 years, the behavior gap disappears, and investors actually don't lag the passive portfolio at all; they're actually beating it, 3.49% to 3.17%!
7) Why Being Invested In Bonds At Today's Rates May Be Entirely Rational After All - As bond interest rates continue to grind closer and closer to the zero bound, it appears that the bond bull market of the past 30 years may be soon coming to its end - at best, turning into a bear market, and at worst proving to be the next asset class bubble that pops. Nonetheless, investor dollars continue to pour out of stock funds and into bond funds, even as bond yields fall lower and lower. But is this really a case of "dumb money" chasing the tail end of a bubble? After all, if bond prices really are poised for a fall, the associated rise in interest rates would make stock valuations look remarkably unattractive, and could precipitate an economic recession... which means that even if there's a bear market in bonds, stock prices could fall even harder, and bonds would still be the superior (relative) asset class. In turn, this means that if planners and their clients are really afraid of a bond bubble, the best place to invest would not be stocks, but cash. Given cash returns today's low return environment, though, suddenly bonds don't seem like such a bad investment after all...
Tax Planning
8) Roth vs Traditional IRA: The Four Factors That Determine Which Is Best - In support of Jeff Rose's #RothIRAMovement this spring, this article recaps the research from my May 2009 issue of The Kitces Report "To Roth Or Not To Roth" that lays out the four factors that actually determine whether it's better to have retirement assets held as a Roth or traditional IRA. The four factors are: current versus future tax rates; the impact of (avoiding) RMDs; paying the tax liability with outside funds to maximize contribution limits; and managing state (but not Federal) estate taxes (where applicable). Notably, though, the first factor has dramatically more impact than the others (except for state estate taxes where relevant).
9) Forget Harvesting Losses! It's Time To Harvest Gains! - In perhaps the quintessential article of potential fiscal cliff tax planning (not to mention the onset of the new 3.8% Medicare tax on net investment income), early this year Nerd's Eye View put forth a discussion of why 2012 is the year to stop harvesting capital losses, and instead harvest capital gains - which is remarkably easier, as the wash sale rules don't apply to harvesting gains. Of course, the situation wasn't made any easier by the uncertainty of fiscal cliff negotiations that have continued to the very last day of the year; nonetheless, some gains harvesting opportunities were available throughout the year for those with very low taxable income (who could harvest at 0% rates), or those with very high income (who face the new 3.8% Medicare tax on their capital gains in 2013, regardless of the resolution to the fiscal cliff). Similarly, the second most popular "fiscal cliff" article of the year was about harvesting qualified dividends for clients who own closely-held C corporations.
10) Dodging The Income Limits on Roth Contributions - Strategy Or Abuse? - As fears of rising future tax rates have grown in recent years, there has been an increasing interest from both planners and their clients for getting money into a Roth IRAs. And with the removal in 2010 of income limits on Roth conversions, several new strategies have emerged, including trying to spltt after-tax 401(k) distributions out for a Roth conversion, and the "backdoor Roth" strategy became popular for those who were above the Roth IRA contribution income limits but still wanted to get money into a Roth, by contributing to a traditional (non-deductible) IRA and converting it immediately thereafter. Unfortunately, though, the reality is that trying to engage in an impermissible transaction by breaking it into steps that are separately allowed can still be overturned by the IRS under the so-called "step transaction" doctrine - especially when it's clearly announced that the strategy is intended to abuse the current rules by calling it a "backdoor Roth" contribution! Fortunately, though, a workaround is available - by allowing contributions to age a year, the risks of step transaction treatment can be avoided, and after the first year, the client simply converts the prior year contribution, and then later makes a new contribution for the current year (to be converted in the subsequent year).
Insurance
11) A New Way To Pay For Long-Term Care Insurance With Favorable Tax Treatment - In a lesser-known provision from the Pension Protection Act, taxpayers actually have the option of purchasing long-term care insurance via a 1035 exchange from an existing life insurance or annuity policy. Not only is the exchange itself tax free, but since the long-term care insurance benefits are never taxable, funding coverage in this manner can permanently avoid embedded gains on an existing life or annuity policy. The unfortunate caveat, though, is that as insurers have eliminated limited-pay options (e.g., 10-pay or single premium LTC insurance), the only way to accomplish this transaction is to systematically complete partial 1035 exchanges for the amount of the LTC insurance premium each year - which in turn requires the cooperation of the LTC insurer to help process the exchange, and not all companies currently do so. Nonetheless, the approach is appealing where possible, especially to wind down an existing deferred annuity with significant gains, and while not all LTC insurers can accommodate the 1035 exchanges, the biggest one - Genworth - has a paperwork to do so (and even automate it!).
Retirement
12) What Returns Are Safe Withdrawal Rates REALLY Based Upon? - With the ongoing challenges of the investment markets and a rising pessimism regarding the country's fiscal woes, there has been a great deal of scrutiny in recent years about whether the safe withdrawal rate approach can really hold up in a "new normal" where returns of the future are lower than historical averages. Yet the reality, as explained in this article, is that safe withdrawal rates are not based on average returns; in fact, average returns would produce a 6.5% withdrawal rate. Instead, safe withdrawal rates are based on historical worst case scenarios, which are generally associated with 15-year time periods where an annual rebalanced 60/40 portfolio produces less than a 1% annualized real return. Which means to break a historical 4% safe withdrawal rate, the S&P 500 in 2027 would have to still be no higher than its peak in 2007 (which, notably, would mean no price appreciation for three full decades since the late 1990s!). If you think the market will merely make new highs in 3, 5, 7, or 10 years, then the 4% safe withdrawal rate is actually far safer than commonly acknowledged!
I hope you enjoy the reading! And remember, you can sign up for a delivery of all blog posts from Nerd's Eye View directly to your email, to help keep up with everything in 2013!
Michael – thanks for a year of great posts, I think the best way to sum it up is great content packaged into an efficient number of words.
I also have trouble keeping up with your blog (and most of the rest of my regular reading) and have found that signing up for your email service (to receive each new blog post in email) and using Instapaper to “save” them to read later, usually offline and on my iPad, has been a fantastic way to keep up.
Cheers to another year of great writing!
Mark Brice
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