Nerd's Eye View blog

Segmenting Retirement Expenses Into Core Vs. Adaptive To Create Retirement Buckets

June 12, 2019 07:07 am 4 Comments CATEGORY: Retirement Planning

In recent years, a growing number of retirement “bucket” strategies have been developed to tie specific portfolio allocations to specific expenditures – most commonly by tying “essential” expenses that a retiree cannot outlive to guaranteed income streams (or at least highly conservative portfolios with low withdrawal rates), while “discretionary” expenses are supported with more volatile portfolios in recognition of the fact that if the portfolio performs poorly the expenses can be cut (since they are “discretionary”).

The caveat, however, is that it’s not always easy to determine what constitutes an “essential” vs. “discretionary” expense in the first place. The classic approach is to tag the food, clothing, and shelter kinds of categories as “essential” (along with perhaps healthcare in the modern era), while travel and entertainment expenses are discretionary.

Except in practice, if a retiree lost out on such “discretionary” expenses, it would likely not only be a traumatic impact to their real-world lifestyle, but such discretionary expenses often support genuinely psychological needs (e.g., funding activities that empower social well-being). And at the same time, many classically “essential” expenses in the areas of food, clothing, and shelter, really aren’t essential at all. From the house that’s bigger than what a retiree couple truly needs to survive, to eating out at expensive restaurants instead of dining frugally at home, or buying “designer” clothes versus generic or lower-cost brands (or buying at a second-hand thrift store).

In essence, separating “essential” vs. “discretionary” expenses by looking at categories of spending doesn’t necessarily work. Instead, the better approach is perhaps to segment spending within each category into the “Core” expenses that form the nucleus of the household’s lifestyle, from the truly discretionary (and more easily adaptable) expenses within each category (from the upscale restaurants to the designer clothes). In other words, there’s a potential layer of Core vs. Adaptive expenses in every spending category.

And importantly, the distinction isn’t mere semantics. By attaching specific portfolio “buckets” to each of the Core vs. Adaptive spending types, it’s easier for retirees to actually see that their “Core” spending really is secure, while a more-volatile portfolio (with more downside risk but also more upside potential as well) is tied more directly to the expenses that are truly adaptable and flexible, while giving retirees a clear resource bucket to consume (and know when it’s exhausted). Which in turn opens up the door for retirees to decide how much they want tied to each of the associated retirement buckets.

The bottom line, though, is simply to recognize that what defines more flexible “discretionary” spending to fund wants (rather than needs) isn’t just a function of certain categories of expenses, or funding solely the expenses necessary to ensure base-level safety and survival needs. Instead, retirees can upgrade their lifestyle across any number of traditionally “essential” spending categories as well… as long as there’s a clear resource bucket to show how long that spending can be sustained, and when the retiree really may have to adapt!

#FASuccess Ep 128: Advising Small Business Owners By Helping Them Increase Their Own Enterprise Value, with Justin Goodbread

June 11, 2019 07:07 am 3 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 128th episode of Financial Advisor Success Podcast!

My guest on today's podcast is Justin Goodbread. Justin is the founder of Heritage Investors, an independent RIA based in Knoxville, Tennessee that supports nearly $150 million of assets under advisement for 120 client households.

What's unique about Justin's firm, though, is the way they've crafted a niche in working with small business owners to the point that the primary asset they advise on is the client's business, not their portfolio, and performance is tracked not via the returns of the portfolio relative to a benchmark, but by how the owner's net worth increases over time through creating enterprise value in their business.

In this episode, we talk in depth about what exactly Justin does to advise small business owners. The way his process starts with traditional financial planning but then shifts in great depth into business planning instead, the tools that Justin uses to do an informal valuation for every small business owner client to start the conversation on increasing enterprise value, the 8 business areas of leadership, planning, sales, marketing, people, operations, finance, and legal that Justin advises on, and why Justin has found it most effective to work with small business owners by breaking his advisory fee that may be as much as $10,000 to $20,000 a year into a more business cash flow-friendly monthly subscription fee instead.

We also talk about how Justin built his marketing to reach small business owner clients. The way he created the marketing avatars of "Frazzled Frank" and "Frantic Frannie" to hone and focus his marketing messages, how becoming more laser-focused in the small business owner niche helped his marketing, the content website and podcast he launched to reach more of his target clientele, and how going deeper into the small business owner niche ironically ended out bringing him more prospects outside of his niche as well.

And be certain to listen to the end, where Justin shares the unique certifications and designations including the CEPA and the CVGA that he obtained to build his expertise in advising small business owners. The five business books he reads over and over again every year to bolster both his business advice and how to run its own advisory business more efficiently, and his perspective on how we as financial advisors can do a better job creating more enterprise value in our own firms as well.

Summer Reading List of “Best Books” For Financial Advisors – 2019 Edition

June 10, 2019 07:03 am 10 Comments CATEGORY: Personal/Career Development

For so many, the season of summer is a time of vacation and family trips, whether for some rest and relaxation or just to get away from the local heat. And the fact that clients tend to travel more during the summer means some slowdown in meetings and business activity as a financial advisor is almost inevitable. Which in turn frees up more of the advisor’s time to take a vacation of their own, or at least slow down and relax with family… and catch up on some good books.

The question, of course, is then to figure out “what’s a good book to read these days?” As a voracious reader myself, I'm always eager to hear suggestions from others of great books to read, whether it's something new that's just come out, or an "old classic" that I should go back and read (again or for the first time!). And so, in the spirit of sharing, a few years ago I launched my list of "Recommended (Book) Reading for Financial Advisors", and it was so well received that in 2013 I also started sharing my annual "Summer Reading List" for financial advisors of the best books I'd read in the preceding year. It quickly became a perennial favorite on Nerd's Eye View, and so I've updated it every year, with new lists of books in 2014, 2015, 2016, 2017, and a fresh round last year in 2018.

And now, I'm now excited to share my latest 2019 Summer Reading list for financial advisors, with suggestions on books about everything from how to better execute a merger or acquisition (if that’s how you’re looking to grow!), build a better “story-based” sales process and your own story-brand (if that’s how you prefer to grow!), some books on practice management and how to run a better business, new perspectives on client psychology and decision-making, how to facilitate better financial health for your clients, and how to better instill your own habits for long-term self-improvement.

So as the summer season gets underway, I hope that you find this suggested summer reading list of books for financial planners to be helpful… and please do share your own suggestions in the comments at the end of the article about the best books you've read over the past year as well!

Weekend Reading for Financial Planners (June 8-9)

June 7, 2019 02:49 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the huge news that the SEC has officially passed Regulation Best Interest (by a 3-1 vote), which will require brokers to act in the "best interests" of their clients when making a recommendation but stops short of actually requiring a fiduciary duty or for broker-dealers to mitigate their conflicts of interest... and raising the question of whether the SEC is so expanding the advice exemption for broker-dealers beyond its "solely incidental" roots that, like the Department of Labor's fiduciary rule, Reg BI may soon end out subject to a legal challenge.

Also in the news this week was the revelation that, with the CFP Board's own coming fiduciary obligation for CFP certificants, Edward Jones is considering whether to force its nearly 2,000 CFP certificants to drop their marks to avoid the fiduciary obligation (at the risk of having them recruited away by broker-dealer or RIA competitors who are willing to embrace an obligation to do the right thing for clients), the announcement that Fidelity is working on a new Managed Account Xchange (FMAX) akin to other model marketplaces but wrapping together Wealthscape and eMoney Advisor into a potential head-to-head Envestnet competitor, the official release of the Envestnet Fiduciary Insurance Exchange (FIDx) to facilitate RIA access to no-commission annuity products, and a look at the current landscape of independent broker-dealers from Financial Planning magazine's annual survey (finding that while IBDs are struggling, the largest are growing, in part by increasingly reinventing themselves as fee-based RIA support platforms less reliant on traditional commission-based revenue!).

We also have a few articles this week around the intersection of money and children, including a look at the rise of "allowance apps" that parents are using to dole out allowance and oversee chores in the digital age, Morgan Housel's advice to his newborn daughter on her financial children, a research study on what children of affluent families are really concerned about (hint: carrying on the family legacy matters to them more than most people realize!), and how to find the "Goldilocks zone" of personal finance, recognizing that while it's very stressful for those who don't have enough, it can be similarly very stressful to have "too much" as well!

We wrap up with three interesting articles, all around the theme of having and managing stress: the first looks at how, while we tend to think of stress as being "bad," a moderate amount of stress can actually be a positive that encourages us to step up and achieve more (as long as we get breaks to refresh and recover, too); the second explores a recent FPA study finding that financial advisors, in particular, are very stressed, despite the ongoing bull market, due to the rising challenges of operating an advisory business; and the last explores the "theory of cumulative stress" and how best to recover when you've been carrying too much stress for too long and need some personal relief.

Enjoy the "light" reading!

Kitces & Carl Ep 9: How Do You Optimize Your Practice To Maximize Your Happiness As A Financial Advisor?

June 6, 2019 08:03 am 6 Comments CATEGORY: Kitces & Carl Podcast Personal/Career Development

Generally speaking, there are two types of unhappy financial advisors. One is the advisor who is having trouble just making it in the business in the first place, who is struggling to find enough clients to make ends meet. The other type is the advisor who might have all the outward markers of success (clients, revenue, profits) but has reached a point in their career where they are supremely unhappy… and often end out feeling trapped, too.

Because, as is often the case for advisors practicing under the recurring revenue AUM model, clients tend to stick around. And while that is undoubtedly a great thing, it can also end out being a double-edged sword, and lead to “practice creep”... where, after a certain number of years of building a book of business, an independent advisor with an otherwise solid lifestyle practice may grow past their personal capacity and find that they have accumulated more clients than they can service by themselves. Which then forces the advisor to hire some staff to help. And (again) while that’s not a bad thing, the advisor can ultimately reach a point where they’re the CEO of a small advisory firm and are spending most of their time managing employees rather than doing what they set out to do in the first place, which was to serve their clients! Which ultimately leads to the question: How can advisors avoid this “accidental business owner” trap, and instead build a business that is optimized to maximize your own happiness?

In our ninth episode of “Kitces & Carl”, Michael Kitces and financial advisor communication guru Carl Richards sit down to discuss why some advisors wind up being unhappy in an otherwise “successful” practice, how some advisors have maximized their happiness by being intentional about building their business the way they want - or even “right-sizing” the advisory practice if necessary – and a few actionable ideas for advisors to do the same.

One strategy that has worked well for advisors is to figure out what outcome you’re trying to reach in the first place (whether that be a certain level of income, or amount of time you have to spend with the people you care most about) and make that the primary thing that you measure in the business. After all, our natural tendency is to direct our efforts to improve whatever we see measured and look at on a daily basis… so it a good idea to make sure that we’re measuring the things that really mean the most to us. Whether that’s the number of clients or amount of revenue in the business… or the number of hours we work, the number of hours we don’t work, or the vacation days we take.

And for those advisors who have already reached the point where they’re feeling unhappy with their current business structure and need to figure out how to get off the proverbial rollercoaster, it’s essential to understand that, although we have a duty to our clients, we also have a duty to ourselves as well. Because if we are absolutely miserable with whatever situation that we are in, we will eventually (and inevitably) experience a negative impact not only for ourselves, but for our clients as well. Which means it’s our responsibility and even our obligation to try to fix it.

So, if you’ve gotten to the point where you’re feeling squeezed by practice creep – unhappy with the business despite it being outwardly financially successful – or if you simply want to avoid that in the first place, then remember that it’s perfectly okay to give yourself permission to build your business in a way that actually makes you happy. And measure and optimize for whatever really matters most to you!

Finding Your Own Money Story To Better Communicate With Clients

June 5, 2019 07:06 am 1 Comment CATEGORY: Client Trust & Communication

It’s difficult to give financial advice to others if you don’t have your own financial house in order, first; not that anyone – including financial planners – is “perfect” when it comes to their own money, but in the end, if financial advisors can’t even follow the advice and go through the process themselves, it suggests that, at the least, there’s room for improvement in the advice itself or how it’s delivered.

In fact, arguably, one of the best ways for financial advisors to really understand what it takes to give good financial advice is to better understand their own financial challenges and what they need to change to improve their own situation… akin to how therapists become better at providing therapy by going through the process themselves.

Money exercises that financial advisors can go through (by themselves, perhaps for future use with clients as well) include the Money Egg (sketching out some of your earliest money memories, reflecting on whether they were positive and negative, and considering how those embedded money memories may be impacting your decisions today), assessing your Money Scripts (do you tend towards Money Vigilance, Money Status, Money Worship, or Money Avoidance?), and considering how your prior money experiences may have created Money Narratives that now impact (or even burden) your everyday decisions (e.g., my advisory firm is a reflection of my self-worth, so I have to keep growing my firm to grow my status… even if I really don’t financially need a larger firm at all!).

Ultimately, many (or even most) financial advisors may feel uncomfortable doing such deep self-reflection on their own financial situation and may find it awkward and intimidating to get help and outside advice around their own money challenges. Yet at the end, when clients are asked to do the same things themselves with a financial advisor, arguably going through the process as an advisor provides a good perspective (and perhaps even empathy-building) for the stress and emotional turmoil that clients may be feeling in the financial planning process as well!

#FASuccess Ep 127: Creating A Stewardship Report To Show Your Ongoing Value To [401(k) Or Other] Clients, With Jania Stout

June 4, 2019 07:07 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 127th episode of Financial Advisor Success Podcast!

My guest on today's podcast is Jania Stout. Jania is the co-founder of Fiduciary Plan Advisors at HighTower, an advisory firm focused on 401(k) plan consulting that's responsible for nearly $4 billion of plan assets across almost 120 businesses.

What's unique about Jania, though, is the way that she's been able to rapidly grow her 401(k) practice to $4 billion entirely from scratch over the past 5 years by leveraging nearly 20 years of immersing herself into the 401(k) community to build her own personal brand and reputation as a trustworthy fiduciary.

In this episode, we talk in depth about the 401(k) plan consulting model. The way Jania's business operates as either a 3(21) or 3(38) fiduciary on a flat fee structure for 401(k) plans but tier to asset levels because plans still benchmark their fees to AUM competitors, what it takes to service and support mid-to-large-sized 401(k) plans with tens or even hundreds of millions of dollars for a fee that itself may be tens of thousands of dollars a year, the tools that Fiduciary Plan Advisors uses to support its fiduciary governance consulting with 401(k) plans, and the unique stewardship report that Jania built and automated in her CRM to show all of her clients all the behind-the-scenes work that the firm does on their behalf every year as a means to justify why her clients should stick with her and even accept an increase in their fees going forward.

We also talk about Jania's own path in growing the 401(k) business. From getting involved with SHRM, the Society for Human Resource Management and doing CE education classes for members of their association to being active on LinkedIn and leveraging LinkedIn Groups as a way to network with other professionals, leveraging the industry's various best firms list to generate more inbound requests for proposal inquiries for 401(k) plan opportunities, and why Jania was ultimately willing to break away from her prior firm despite a non-compete and needing to start over entirely from scratch in her mid-40s in order to build her business independently the way she wanted.

And be certain to listen to the end, where Jania talks about the challenges in going independent, where you no longer have a national brand's name and logo on your business card, and what she did to establish her own credibility, even when the firm was little more than her and just a team member or two.

So whether you're interested in learning how Jania built her 401(k) advisory business, how she and her team demonstrate their ongoing value to clients by using "Stewardship Reports", or her advice on how to enter the 401(k) space, then we hope you enjoy this episode of the Financial Advisor Success podcast.

The Latest In Financial Advisor #FinTech (June 2019)

June 3, 2019 07:06 am 1 Comment CATEGORY: Technology & Advisor FinTech

Welcome to the June 2019 issue of the Latest News in Financial Advisor #FinTech – where we look at the big news, announcements, and underlying trends and developments that are emerging in the world of technology solutions for financial advisors and wealth management!

This month's edition kicks off with the news that Vanguard is apparently working on a new "technology" platform for advisors – adapted from its own Personal Advisor Services solution – that, at a minimum, appears to be a form of robo-advisor-for-advisors offering, and may even be an entire RIA custodial platform to compete with the likes of Schwab, Fidelity, TD Ameritrade, and Pershing… and potentially force the other custodians to stop charging more for Vanguard (and DFA) trades and instead reconfigure their own custodial business models to be better aligned with the advisors they serve?

From there, the latest highlights also include a number of other interesting advisor technology announcements, including:

Goldman Sachs acquires United Capital for $750M, at the least to expand into the "mass millionaire" wealth management marketplace… and possibly to leverage UC’s FinLife technology platform to power its own RIA custodial solution in the future?
Morningstar launches its own Model Marketplace but chooses a more "fee-only" approach of charging for its software directly and not being compensated by asset manager incentives, even as most model marketplace competitors are reducing the costs of their software (subsidized by asset manager revenue-sharing commissions)
Carson Group partners with Galileo Money+ to offer independent RIA clients traditional banking services, from a checking account paying 1.24% to a savings account paying 2.20%, along with a debit card, online bill pay, and mobile check deposit.
280CapMarkets announces its first enterprise partnership (with United Planners) to offer its BondNav solution for individual bond trading as rising interest rates increase the demand for advisors to build individual bond ladders
OpenInvest launches Optimus, a new Direct Indexing solution structured as an SMA that relieves advisors of the need to implement their own Direct Indexing strategies but with the flexibility to customize index funds to specific client ESG preferences

Read the analysis about these announcements in this month's column, and a discussion of more trends in advisor technology, including Redtail’s cybersecurity incident that exposes a slice of private client data (as the challenges of managing a growing web of third-party integrations becomes exponentially more complex every year), RIAInABox launches its own cybersecurity training solution for RIAs and their employees, Salesforce rolls out a new "big data" initiative for Financial Services Cloud users in partnership with its Einstein AI platform, and North Capital launches its own proprietary financial planning solution for free to consumers for lead generation as Zoe Financial wins the Morningstar FinTech competition for its new digital lead generation platform for advisors… as the FinTech world struggles to recognize that the real challenge to serving the masses is not the technology to serve them, but the marketing difficulties and high client acquisition costs to reach them (and gain their trust) in the first place!

And be certain to read to the end, where we have provided an update to our popular new “Financial Advisor FinTech Solutions Map” as well!

I hope you're continuing to find this new column on financial advisor technology to be helpful! Please share your comments at the end and let me know what you think!

*And for #AdvisorTech companies who want to submit their tech announcements for consideration in future issues, please submit to [email protected]!

Weekend Reading for Financial Planners (June 1-2)

May 31, 2019 02:49 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the revelation that, buried in one of the retirement bills making its way through Congress, is a provision that would allow more retirement advice to be paid for on a pre-tax basis (directly from an employer retirement plan)... a potential boon to those who offer retirement advice (at least when working with/through the 401(k) plan provider themselves). Also in the news this week is the latest Morningstar 529-plans study, which finds growing interest in a new form of "advisor-supported" 529 plans for RIAs (who can't use "broker-sold" solutions without a FINRA license, but need more of a connection to the plan than just using a traditional direct-sold offering).

From there, we have several marketing-related articles, from a look at the different types of content marketing material advisors can publish (from evergreen to timely news to personal interest/humanizing articles and third-party content sharing), the rise of "search intent" as an SEO factor, the look at the opportunities in the podcasting landscape (overall and including for financial advisors), and some interesting examples of "high-converting" fee pages on advisor websites (i.e., how advisors who share their fees on their websites are doing so in a manner that doesn't spook their clients).

We also have a few retired planning articles this week, including: the dilemma that new retirees face once they actually do retire and potentially lose and have to rediscover their sense of purpose (when it's no longer about pushing for the goal of retirement that they just achieved!); the research showing how much of a struggle early retirement often turns out to be personally, with a growing volume of research showing both adverse health impact, cognitive decline, and social isolation that can result from retirement (when we no longer have the purpose and engagement of work); and what retirees should focus on doing in order to thrive in retirement (by finding ways to keep themselves mentally engaged and socially connected).

We wrap up with three interesting articles, all around the theme of coaching and mentoring: the first provides some perspective on the benefits of getting a coach, and how to find/select one; the second looks at the phenomenon of "reverse mentoring," where more senior organizational leaders get mentored by more junior staff members (to better understand the needs and perspective of the next generation of employees and customers/clients); and the last looks at the power of having a dedicated coach over "just" a good mentor... someone who is really willing to roll up their sleeves and get engaged on behalf of the person they're coaching and hold them accountable for making the changes they need to make in themselves to improve.

Enjoy the "light" reading!

Financing College Tuition With Student Loans Vs. “Equity” Via An Income Share Agreement

May 29, 2019 11:57 am 8 Comments CATEGORY: Debt & Liabilities

First proposed in 1955 by Milton Friedman, an Income Share Agreement (ISA) is an alternative to traditional loans for students when funding their college educations. Instead of borrowing money, the student enters into an agreement with their school (or some other institution) whereby the student agrees to pay a percentage of their future earnings for a certain period of time. In other words, the student is effectively funding their education using equity (in themselves), rather than debt.

The upside of ISAs, at least in theory, is that as with other types of equity (vs debt) financing, the student can ensure that the payments to finance their education remain a reasonably manageable percentage of their income and avoid getting to a point where they can’t afford to pay their monthly student loan payments. The caveat, however, is that Federal student loans already have income-sensitive features to protect from student loan payments becoming unduly burdensome, and as it turns out Federal student loan programs are actually more favorable over ISAs for low-income students. Which means that, depending on the student’s specific circumstances, answering the equity over debt question may not be as simple as it seems.

In this post, Derek Tharp – lead researcher at Kitces.com, and an assistant professor of finance at the University of Southern Maine – examines Income Share Agreements, and delves into the question of how they compare to, and when they might be a better option, over a more traditional loan for students looking to finance college.

As a starting point for comparing the two options, we can calculate the difference in the net present values of cash flows resulting from utilizing an ISA versus taking out a student loan, with the important caveat that an income share agreement will have different rates and terms depending on a student’s major due to the variety of job outlook and projected earnings in different industries. So, for instance, an English major, whose rates and terms are on the less favorable end of the ISA spectrum, will receive different terms than an Aerospace Engineering major, which is on the most favorable end of the ISA spectrum.

Using some assumptions based on the ISA offered by the Purdue Research Foundation (a leading innovator in this new type of financing), hypothetical cash flow projections suggest that students will generally come out ahead when using a federal loan compared to an ISA. However, the case is less clear when comparing ISAs to private loans. Since private loans do not have some of the same income-sensitive features as Federal loans, ISAs can provide some downside protection, but can also do so at a significant cost assuming that a student eventually earns an income roughly average or above within their field.

The caveat, however, is that ISAs do provide a significant opportunity to engage in adverse selection (a problem which ISA providers must solve if these arrangements will be viable in the long-run)., Whenever students possess private information about themselves and their future career desires that a counterpart cannot possibly know (e.g., a desire to become a stay-at-home parent shortly after graduation or a desire to work in a field with substantially lower pay than is normal for a graduate with their degree… and thus don’t anticipate having any income which can be “shared” back to the lender), ISAs look relatively more attractive. Additionally, depending on how “income” is defined in an ISA (which appears to only be W-2 and Schedule C income in the Purdue agreement), ISAs may look attractive for students working in nontraditional fields or who can structure their income as something that does not meet an ISA definition of income (e.g., “passive” rental income is not treated as Earned Income for ISA repayment purposes).

The key point, though, is simply that although “equity financing” college with an ISA may seem to intuitively be a favorable alternative to student loans, the advantages don’t pan out when we start looking at the total costs and the impact they have on future cash flows. And while ISAs may provide some significant downside protection when compared to private loans, that protection comes at a material long-term cost if the student earns at least an average income in their field of choice. In other words, the answer to the question of when it would be better to finance a college education with “equity” in a student’s future earnings is a resounding: rarely. Instead, most of the time it’s better to simply engage in fixed-debt financing to fund a student’s long-term upside career potential!