Top 14 Nerd’s Eye View Blog Posts Of 2014

Author: Michael Kitces

Team Kitces

Michael Kitces is Head of Planning Strategy at Buckingham Strategic Wealth, which provides an evidence-based approach to private wealth management for near- and current retirees, and Buckingham Strategic Partners, a turnkey wealth management services provider supporting thousands of independent financial advisors through the scaling phase of growth.

In addition, he is a co-founder of the XY Planning Network, AdvicePay, fpPathfinder, and New Planner Recruiting, the former Practitioner Editor of the Journal of Financial Planning, the host of the Financial Advisor Success podcast, and the publisher of the popular financial planning industry blog Nerd’s Eye View through his website Kitces.com, dedicated to advancing knowledge in financial planning. In 2010, Michael was recognized with one of the FPA’s “Heart of Financial Planning” awards for his dedication and work in advancing the profession.

Read all of Michael’s articles here.

Income & Estate Tax Planning

Understanding The Two 5-Year Rules For Roth IRA Contributions And Conversions - Planning for Roth conversions has become increasingly popular in recent years, especially as growing deficits create a (possibly overstated) fear that Congress will increase taxes in the future, but effective Roth conversion planning requires navigating two different 5-year rules, which are often confused for one another. In this article, we explore in detail the two different 5-year rules - one for growth to be tax-free, and the other for conversion principal to be penalty-free - to understand how they work, when they apply (and when they don't!), so that they can be navigated effectively. Navigating the rules can be especially important for those who plan to further leverage the Roth conversion strategy of splitting conversions into multiple accounts to isolate the performance of investments in each account to recharacterize strategically!

IRS Notice 2014-54 Acquiesces On Splitting After-Tax 401(k) Contributions For Roth Conversion - An old rule for 401(k) plans allows after-tax funds to be distributed separately from a pre-tax rollover, allowing those who made after-tax contributions in the past to get their money back at the time of retirement. In recent years, though, retirees have been attempting to take the two checks, roll over the pre-tax portion, but convert the after-tax check into a Roth IRA to generate future tax-free growth. For years, the IRS has objected to this after-tax-splitting Roth conversion strategy, but in the "surprise" IRS Notice 2014-54 this year, the IRS reversed its position and acquiesced to the strategy. Under the new rules, the IRS will allow individuals to split their pre-tax and after-tax distributions into two rollovers - one to a traditional IRA, and the other to a Roth - and allocate the after-tax portion however they wish, implicitly allowing after-tax funds to be isolated for a Roth conversion while the rest is rolled over. Notably, though, the funds are still distributed from the plan on a pro-rata basis, which means an account must be liquidated entirely in order to get all the after-tax funds out in order to convert them in the first place!

Understanding The Mechanics Of The 0% Long-Term Capital Gains Tax Rate: How To Harvest Capital Gains For A Free Step-Up In Basis! - The rules allowing a 0% long-term capital gains rate for those in the bottom two tax brackets has been around since 2008, yet there is still a surprising amount of confusion in understanding exactly how the rules work. In this article, we look in depth at the mechanics of how the 0% capital gains rate actually works, the amount of gains eligible for the 0% rate depending on an individual's situation, and how to coordinate between capital gains and other ordinary income that can both fill up the bottom brackets. And notably, for those who have not already filled up the lower brackets, the 0% capital gains rate is not just a benefit for any capital gains that happen to occur; it actually creates an incentive and opportunity to proactively harvest capital gains specifically to take advantage of the 0% rate for a "free" step-up in basis on investments!

Retirement Planning

How Delaying Social Security Can Be The Best Long-Term Investment Or Annuity Money Can Buy -Discussions of delaying Social Security have been increasingly popular lately, with Delayed Retirement Credits accumulating at 8% while the time value of money is much lower in today's low-return environment; increases in life expectancy since Social Security formulas were last adjusted creates a nice tailwind in favoring of delaying, too. Of course, the decision to delay Social Security requires consuming money that could have otherwise been invested, and/or that might have been allocated to other lifetime income vehicles like an immediate annuity. As this article shows, though, for those who are most concerned about outliving their money by having the "bad luck" to live a very long time, the implied return from delaying Social Security benefits is astonishingly good, creating the equivalent of a more-than-5% real return for those who live to age 90 (and over 6% real returns for those who make it to age 100!), and a payout rate that's nearly 70%(!) better than buying a commercial annuity at today's rates! Of course, planning to coordinate the delay of Social Security with other strategies like file-and-suspend just makes the approach even more appealing for married couples (and provides a unique "undo" opportunity for individuals who delay Social Security, too!).

Valuation-Based Tactical Asset Allocation In Retirement And The Impact Of Market Valuation On Declining And Rising Equity Glidepaths - Following on last year's incredibly popular joint research project with Wade Pfau on the benefits of the so-called "rising equity glidepath", this new joint study with Wade looks at how the effectiveness of a rising equity glidepath is actually contingent on market valuation at the start of retirement. When equities are "expensive" at retirement, a rising equity glidepath provides valuable protection, but at moderate to "cheap" valuations, the conservative rising glidepath is unnecessary, and a moderate balanced portfolio provides the best retirement income results. Alternatively, the optimal retirement strategy may not be to choose a rising glidepath versus a balanced portfolio at all, but instead to simply adjust equity exposure dynamically throughout retirement based on market valuation. Notably, the study also found that when market valuations are high, taking the risk of bonds on top of equities may not be worthwhile, and a combination of equities and Treasury Bills may be a more effective defensive approach.

Insurance

Why You Should Only Buy Insurance Protection And Annuity Guarantees Expected To Lose You Money (On Average) - It is an interesting 'paradox' that technically, insurance coverage that is too "cheap" is actually risky, and getting coverage for pricey premiums can actually be the most secure. The reason is that ultimately, insurance companies must be certain that they generate more in premiums plus growth than what they spend on overhead and pay out in claims (with anything left over going to profits). Insurance policies that are priced too low require insurance companies to subsidize the claims out of their own reserves, which can eventually be depleted, resulting in a policy that lapses from a defunct insurance company! As a result, it's actually a dangerous proposition to purchase insurance that is expected to "make money" on average, and instead consumers should seek to purchase coverage that will knowingly pay out less in claims than is paid in premiums. So why purchase a known-to-be-losing value proposition? For the true purpose of insurance - because sometimes, the losses are so extreme (even if low probability), that it's better to take a small known (insurance premium) loss than risk a big unknown one.

Practice Management/Career Development

Sage Scholars Tuition Rewards: A “Loyalty Points” System For Providing Wealth Management Services? - As wealth management firms seek to differentiate themselves through offering more "value-adds" for their clients, there is growing interest in "perks" programs that advisors can provide to clients. In this new offering, SAGE Scholars, advisors can actually create a "loyalty points" perks system for clients, who generate 5%/year of their AUM in SAGE Tuition Rewards points that can be used dollar-for-dollar as college tuition at more than 300 (private) colleges. Advisors pay a relatively low flat fee to enroll their advisory firm (and all of its clients) into the offering, which is technically serving as a matchmaker between the affluent clients of advisors, and colleges and universities that are willing to offer significant guaranteed discounts on tuition to those families (recognizing that affluent families with discounted tuition may still pay more as private payers, tend to have higher graduation rates, and ultimately may donate more as alumni). The program is primarily available for RIAs, though now being considered by some broker-dealers as well.

What Comes After CFP Certification? Finding Your Niche Or Specialization With Post-CFP Designations - With the rising "crisis of differentiation" for advisors, it's no longer enough to "just" be a credentialed, experienced financial planner. Instead, many advisors are starting to seek out a niche, and others are looking to extend their education beyond "just" the CFP marks. In this article, we look at a wide range of "post-CFP" education, that adds relevant knowledge and depth beyond the "generalist" designation. Some programs are focused specifically on a particular subject matter expertise (e.g., the CFA for investments, the CLU for life insurance, or the AEP for estate planning), while others provide advisors the knowledge pursue to directly pursue a niche (e.g., CDFA for specializing in divorce, ADPA for same-sex couples, or ChSNC for being a consultant to families with special needs).

XY Planning Network and the Future of Getting Paid For Financial Planning - As I've written in the past, I believe that "monthly retainers" or financial planning for an ongoing subscription fee may become the next big business model for advisors (especially to serve younger clientele who simply don't have the assets to be served by an AUM model). In addition, I believe that just as the Turnkey Asset Management Platform (TAMP) has been a breakout category in the past decade, the Turnkey Financial Planning Platform (TFPP) will be a huge business opportunity for supporting advisors in the coming decade. Accordingly, this year I decided to partner up with someone to put the two together, and announced the launch of the XY Planning Network, a TFPP built specifically for "younger" Gen X and Gen Y clients who want to work directly with their Gen X and Gen Y peers utilizing a monthly retainer business model. The launch generated a tremendous amount of buzz, starting with this post that discussed in detail a vision of the future of financial planning and how we hope to help the profession move forward to reach it!

Effective Succession Planning For Financial Advisors And The Problems With Advisor Compensation Based On Revenue Sharing - This article is a review of the recently released book "Succession Planning for Financial Advisors" by FP Transitions founder David Grau, Sr., which I believe is one of the best books ever written on the subject specifically for advisors. In the book, Grau draws on his deep experience in working with advisors to value firms and facilitate succession plans, providing advice not only around best practices in succession planning itself, but also sharing some fascinating insights into why succession plans often fall apart, and the problematic incentives created by the industry's "standard" compensation model of paying advisors a percentage of revenues.

Industry Trends/Professional Issues

The 8 Best Conferences For Financial Advisors In 2015 - As someone who has been speaking at nearly 70 advisor conferences every year, I've seen and participated in nearly every major conference our industry has to offer; based on my experiences, this article offers up my suggestions for the best conferences to check out in 2015. This year, my picks are organized into the categories of: Best Technical Content, Best Estate Planning, Best for Advisor Technology, Best Investment Management, Best for Advanced Practitioners, Best Overall Value, Best International Conference, and Best Practice Management. Each listing includes an in-depth description of the conference, the type of advisor audience it's best suited for, and the event location, timing and cost details... along with coupon codes that several conferences have offered to provide discounted rates for the Nerd's Eye View blog readership!

Indexing 2.0: How Declining Transaction Costs And Robo-Indexing Could Disintermediate Index Mutual Funds And ETFs - Although much has been written in the past year about the threat (or lack thereof) that robo-advisors may pose to human advisors, in this article I make the case that the biggest disruption the robo-advisors may cause is to the traditional index mutual fund and ETF industry. As transaction costs grind lower and lower, and robo-advisor-style tools make it increasingly feasible to manage portfolios with a large number of positions (and to do so with fractional shares), suddenly it is becoming possible for people to skip buying an index fund or ETF and simply use software to buy all of the underlying positions instead. And notably, there is an important reason to do so - because owning the more granular individual positions makes it more feasible to take advantage of the (modest but non-trivial) benefits of tax loss harvesting that cannot pass through when using a pooled investment vehicle. Accordingly, we may soon see a rise of "Indexing 2.0" solutions available to advisors, that use software to create customized, individualized "index funds" for clients without actually using pooled investment vehicles in the first place - a plus for advisors, but a massive potential disruption to today's asset management industry!

Is There A “Robo-Advisor” Bubble? Wealthfront, Betterment, & LearnVest Raise $95M In Capital In Two Weeks! - There was an absolutely massive volume of venture capital flowing into a wide range of online financial technology startups this year, culminating in a single week in April when three leading companies (Wealthfront, Betterment, and LearnVest) collectively announced almost $100M in new VC funds. Yet while the buzz of robo-advisors dramatically increased in 2014 (as predicted!), this article shows that as large as the robo-advisor platforms have become already, with several billion of cumulative AUM, they must become drastically larger still to actually justify their investors with a reasonable return on investment. In fact, some rough math suggests that while many of the robo-advisor platforms might reach a breakeven and begin to become profitable at "just" 5-10X their current size, to validate their current valuations they may need to become more than 100X of their (then-)current size - generating AUM of $50B to $80B in more in just another 3-5 years - raising the question of whether there could already be a bubble emerging in the robo-advisor space.

Investments

Should We Forget Shiller CAPE Ratios And Focus On E/P Instead? - The so-called Shiller CAPE (Cyclically-Adjusted Price-Earnings) ratio had an explosive year of both popularity and controversy this year, as its namesake and creator Robert Shiller had just won the Nobel Prize at the end of 2013, and the ratio reached levels high enough that Shiller himself has suggested caution. Yet CAPE critics suggest that the ratio is flawed and/or otherwise just not valid in today's environment, or more generally that market returns just shouldn't be predicted using such P/E ratios in the first place. Yet as this article notes, a P/E ratio at the end of the day is just the inverse of the E/P ratio, or the earnings yield of a stock. So while it might seem controversial to debate whether stocks with a P/E ratio of 25 will outperform those with a P/E ratio of 12, it is really so odd to suggest that a stock with an earnings yield of 4% is going to give less return than a stock with an earnings yield of 8%? When viewed as a more concrete earnings yield instead of an abstract P/E ratio, the significance becomes clearer... supported by the fact that a stock's Shiller E/P (or P/E) ratio really does predict long-term returns quite well (though not necessarily in the short term).

Bonus: Top Advisor Blogs And Bloggers List

Introducing The Top Advisor Blogs And Bloggers - In partnership with BrightScope, this year Nerd's Eye View launched the first dedicated list tracking the top advisor blogs and bloggers in the industry. The top-50 listing, updated with new data at the end of every month, is intended to highlight examples of advisor blogging success, provide ideas and insights about what to do (and what not to do) in advisor blogging and social media, and hopefully serve as an inspiration for more advisors to begin to engage in the financial planning blogosphere and build their own social media and digital presence!

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 2014 and beyond!