Nerd's Eye View blog

The Latest In Financial Advisor #FinTech (February 2019)

February 4, 2019 07:07 am 0 Comments CATEGORY: Technology & Advisor FinTech

Welcome to the February 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 big news that eMoney Advisor founder Edmond Walters is back, with a new financial planning software competitor… but one targeting an entirely different (ultra-high-net-worth) clientele than traditional financial planning tools, such that MoneyGuidePro and Envestnet (owner of FinanceLogix) have actually partnered with Walters’ new Apprise Labs to develop the solution (aptly named “MoneyLogixPro”).

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

RightCapital raises a $3.7M Series A round to scale its competition with MoneyGuidePro, eMoney Advisor, and NaviPlan in the enterprise market
AdvicePay raises a $2M seed extension round by crowdfunding within the advisor community itself to power a new enterprise solution for hybrid broker-dealers offering fee-for-service financial planning
MoneyGuidePro rolls out its own new “downmarket” solution for non-CFPs dubbed MoneyGuideOne, and announces a new, more advanced financial planning software solution to be called MoneyGuideElite
Plaid acquires Quovo to turn its account aggregation services into more actionable APIs that might actually move client assets (or manage them from afar)

Read the analysis about these announcements in this month's column, and a discussion of more trends in advisor technology, including Bridge Financial’s new portfolio performance reporting solution for small-to-mid-sized RIAs, Timeline’s new retirement distribution software to model the impact of dynamic spending rules and dynamic asset allocation on sustainable withdrawal rates, the rollout of two new client survey/feedback tools to better measure client engagement, and a look at how the latest T3 Advisor Technology Survey shows that what advisors state is their most important technology is not what they actually spend the most on (raising the question of whether there’s room for higher-priced CRM and financial planning software, and coming price pressure on portfolio performance reporting tools).

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 (Feb 2-3)

February 1, 2019 02:58 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the big industry news that eMoney Advisor founder Edmond Walters is "back", with a new high-end financial planning software to support tax, estate, and legacy planning conversations with ultra-high-net-worth clients... positioned not necessarily to compete with traditional financial planning software, but to go beyond it, as the offering is actually being developed in partnership with MoneyGuidePro and Envestnet's Logix planning software.

Also in the news this week is a great series of profiles on the leading "Women In WealthTech", as ThinkAdvisor highlights the rise of gender diversity in enterprise technology for financial advisors (even as the gender diversity of financial advisors ourselves continues to struggle).

From there, we have several articles on the (re-)emergence of fixed indexed annuities, as DPL Financial Partners facilitates the launch of a new no-commission fixed indexed annuity for the RIA channel, Roger Ibbotson publishes a study suggesting that indexed annuities may be a superior fixed income alternative to traditional bonds in a diversified portfolio, and Michael Edesess suggests that real-world annuity contracts may still be too expensive to beat bonds in practice (and for those who wish to pursue the strategies anyway, could accomplish even more by simply using options strategies themselves instead).

We also have a number of career and practice management articles this week, from tips on the first tasks to outsource to a virtual assistant as a solo financial advisor, more tips on how to make your advisory firm more attractive and compelling when hiring talent in the midst of a severe advisor talent shortage, even more tips on how to manage the overwhelm of meetings, and some fascinating insights from an advisor on what she wishes she learned in practice management sessions about running an advisory firm but instead had to learn "the hard way" instead.

We wrap up with three interesting articles, all around the theme of social media and email overwhelm and how to combat it, including: a recent study that analyzed the effects of taking a 1-month break from Facebook and how it not only created more free time (obviously, from the freed up Facebook time) but also lifted up participants' mood and reduced their political polarization (but also their political knowledge as Facebook is a key source of political news and information); the second explores the effects of taking a month off from email as well (hint: most of your emails are not as important as you think they are!); and the last explores the idea of doing a "digital declutter" and that it's not enough to just try to take a break from social media, and instead we have to rethink the kind of digitally-minimalist lifestyle we really want to live (or not).

Enjoy the "light" reading!

Kitces & Carl Ep 01: How To Value The Value Of Financial Planning

January 31, 2019 12:01 pm 1 Comment CATEGORY: Kitces & Carl Podcast Planning Profession

One of the biggest challenges comprehensive financial planners face today is that “everyone” says they do financial planning. Yet in practice, what they actually do, whether it’s really comprehensive financial planning, or even what constitutes “financial planning” as opposed to just ad hoc financial advice, has no clear and consistent definition within the industry. And if we can’t figure out what the differences are within the industry, then it’s almost impossible for the public to understand the differences between the services offered (including any potential conflicts) by a whole bunch of people who do different stuff (frequently playing by different sets of rules) yet say they all do the same thing! Not to mention trying to help the public understand the value (both financially tangible and intangible) of the financial planning choices available and being offered to them.

To explore this issue, we’re introducing you to a new experimental (but possibly recurring if you like it!) content format we’re simply calling “Kitces & Carl” here at The Nerd’s Eye View, where Michael Kitces and financial advisor communication guru Carl Richards sit down to discuss industry topics from their own unique perspectives. And in this inaugural episode, Michael and Carl talk about the Value of Financial Advice, efforts to quantify that value, and why we may need to move past the asset-based model in order to define and communicate the real value of financial planning to our clients and the public in general.

Fortunately, both Morningstar, Vanguard, and Envestnet have done some research to try and quantify an answer to this very question. Their studies suggest that, even when we ignore any potential excess investment return, the advice that advisors provide around the dollars that they are managing can amount to an additional 1.5-3.0% over what a client would have likely gotten had they “done it themselves”

But, outside of “helping clients avoid big mistakes” by re-allocating their portfolios or talking them off the proverbial “ledge” when volatility ticks up, there’s arguably another aspect to helping clients that transcends the “quantifiable” aspect of the profession. Because most clients don’t have anywhere else they can go and feel safe talking about this topic of money, that is so important yet remains a taboo topic of discussion, and for many carries an enormous amount of baggage. And those hurdles only expand geometrically when it’s a couple that’s sitting across the desk.

In fact, perhaps the greatest problem of trying to explain the value of financial advice, especially while the industry is in the midst of such rapid change, is that we are still tying all our value conversations back to the portfolio-based model... to the extent that, even when trying to quantify the behavioral aspects of planning, industry studies still scale them to a percentage of assets. Even though an increasingly amount of the value of financial planning advice is specifically about the advice that occurs outside of the portfolio!

Alternatively, perhaps instead of trying to put a dollar value on the advice we provide as advisors at all, we might just consider framing it in terms of the real-world outcomes for clients. For instance, what if we as advisors simply said to a couple having stressful arguments about money that, “We help couples have better conversations about money, so they’re not as awkward”? And then let them figure out if it’s valuable enough to them to pay for it? Because, if an advisor can help reduce marital stress and reduce the number of marriages that end out in divorce because of money issues… then clients might consider that a whole lot more valuable that we might have ever imagined anyway!

Ultimately, then, the key point is to recognize that as financial planning continues to expand beyond just building and managing diversified asset allocated portfolios, the key task as an industry is to figure out how we can frame that value beyond the context of “investable assets”. Because if we want to better communicate our value to prospects and clients, especially beyond the portfolio, we must first be willing to fully embrace and acknowledge that value ourselves.

Navigating The Capital Gains Bump Zone: When Ordinary Income Crowds Out Favorable Capital Gains Rates

January 30, 2019 11:07 am 7 Comments CATEGORY: Taxes

While long-term capital gains have had preferential tax rates for most of their history (and receive similar treatment in most developed countries around the world), it’s only in recent years that long-term capital gains have been subject to not just one, but a series of tiered preferential rates, from a 0% rate for those in the lowest tax brackets, to 15% for those in the middle, and 20% for the highest earners (albeit still a “deal” relative to a 37% top tax rate on ordinary income). Plus a 3.8% Medicare surtax that stacks on top of a portion of the 15%, and all of the 20%, long-term capital gains rates.

The significance of this phenomenon is that, similar to ordinary income tax rates, generating “too much” in capital gains can drive the household up into higher capital gains tax rates. And because capital gains income stacks on top of ordinary income, even just increasing ordinary income can effectively crowd out room for preferential long-term capital gains rates.

In fact, the interrelationship between ordinary income and long-term capital gains creates a form of “capital gains bump zone” – where the marginal tax rate on ordinary income can end out being substantially higher than the household’s tax bracket alone, because additional income is both subject to ordinary tax brackets and drives up the taxation of long-term capital gains (or qualified dividends) in the process.

For instance, individuals with as little as “just” $30,000 of income (after deductions) and some capital gains on top who would normally be in the 12% tax bracket may face marginal tax rates as high as 27% due to the capital gains bump zone. And upper-income households eligible for the 35% tax bracket may face a marginal rate of 40% as the top capital gains tax bracket phases in. The effect can be even worse for retirees who also claim Social Security benefits, where the combination of phasing in Social Security benefits, and driving up long-term capital gains to be subject to the 15% rates, can trigger a marginal tax rate of nearly 50%(!) for a household otherwise in the 12% ordinary income tax bracket!

As a result, it’s crucial to consider the coordination of long-term capital gains with ordinary income, and the phase-in of Social Security taxation. For those with negative taxable income, it is generally still appealing to do partial Roth conversions at a marginal tax rate of 0%. But for others in the bottom tax brackets, it may be preferable to harvest 0% long-term capital gains instead (and not do partial Roth conversions that will undo the 0% rate on those capital gains!). While higher-income individuals may prefer to once again do partial Roth conversions in the 22% and 24% brackets, or even the 32% bracket… while avoiding the additional capital gains bump zone that occurs in the 35% bracket.

The bottom line, though, is simply to understand that with 7 ordinary income tax brackets, plus 4 long-term capital gains brackets (with the 3.8% Medicare surtax), tax planning and evaluating marginal tax rates is a function of not just the ordinary income or long-term capital gains rates themselves, but also the interrelationship of the two and the indirect but substantial tax impact of adding more ordinary income when there are already substantial long-term capital gains stacked on top!

#FASuccess Ep 109: How A Retirement Researcher Implements Retirement Planning For His Own Clients, With Jon Guyton

January 29, 2019 07:03 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 108th episode of Financial Advisor Success Podcast!

My guest on today's podcast is Jon Guyton. Jon is the founder of Cornerstone Wealth Advisors, an independent RIA in the Minneapolis area that oversees $240 million in assets under management for about 240 mostly retiree clients.

What's unique about Jon, though, is that he doesn't only run a financial planning firm that serves retirees, he's also contributed to the retirement research himself, with several seminal articles in the mid-2000s on creating retirement withdrawal rate guardrails and decision rules, and now has spent the past decade actually implementing those strategies with clients and finding out what really works in practice.

In this episode, we talk in depth about Jon's retirement planning approach with his clients. How he separates out a client's prospective retirement expenses into core and discretionary categories, the way he applies decision rules to adjust that retirement spending in subsequent years, and the way he then creates multiple portfolio buckets, each with its own investment policy statement, to handle each of those retirement spending categories but notably does not create a cash bucket for short-term expenses because of the consequences that cash drag can have on actually reducing a client sustainable retirement income in the long run.

We also talk about the unique resident program that Jon created in his firm, similar to a medical resident program, to leverage next-generation talent. Why he deliberately chose a model that brings in young advisors with the plan that they will leave after three years, how having a limited duration financial planning resident program has actually allowed his firm to attract even better talent regardless of geography, and the key traits that Jon has found that really make a financial planning resident and in the long run a financial planner themselves more successful.

And be certain to listen to the end, where Jon shares the challenges he faced in his own advisory firm at the start and how even though today he's the owner of an incredibly successful $240 million AUM practice, in his first year in the business, he qualified for the low income Earned Income Tax Credit and had to continue for nearly 4 more years before he finally reached the point of earning a livable wage from his practice. Because the reality is that the first few years are incredibly difficult for any financial advisor, even those who are incredibly successful in the long run.
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Marketing Compliance Under Advertising Rule 206(4)-1 And Avoiding (Accidental) Testimonials

January 28, 2019 07:07 am 2 Comments CATEGORY: Marketing

The expression, “the truth will out,” appears to have originated with Shakespeare and is being used more frequently by commentators on news programs. The expression has come to mean that the facts of a situation will inevitably become known or discovered. If Registered Investment Advisers (“RIAs”) use false or misleading content in their advertisements, the truth will out when examiners conduct examinations of their firms.

Because when it comes to RIAs, Rule 206(4)-1 under the Investment Advisers Act of 1940, better known as the Advertising Rule, prohibits advertisements for SEC-registered Investment Advisers that are false or misleading in any way. Advertising regulations governing state-registered Investment Advisers are often modeled after Rule 206(4)-1 as well. As the very essence of a fiduciary duty for investment advisers starts with the principle to say (only) what you’ll really do… and then be prepared and capable of actually doing (and proving that you can do) what you said.

In this guest post, Les Abromovitz, an attorney with deep expertise and experience with the RIA Advertising Rule, discusses what RIAs should be doing and thinking about when it comes to marketing compliance. As a starting point, RIAs should avoid promissory language, guarantees, and statements that cannot be proven (i.e., only statements that can be supported with objective evidence should be used). In addition, RIAs should avoid marketing hype, which may be tempting to differentiate in an increasingly competitive environment… even though “hype” is inherently misleading. RIAs must also satisfy strict compliance requirements if they refer to past specific investment recommendations in an advertisement, and especially when they advertise their performance returns.

Unfortunately, though, even with good faith attempts to do things right, many Investment Advisers inadvertently use advertisements that are false or misleading as they attempt to woo clients. In many instances, advisers may have no idea that the content (or particular keywords) they are using would be deemed “misleading” by regulators. And although securities regulators are unlikely to bring a full-scale enforcement action against an RIA because of these innocent mistakes, they can give examiners a bad impression of the firm’s compliance program and suggest to examiners that they should dig deeper in reviewing the firm (to ensure that the misleading advertising smoke isn’t a sign of a bigger compliance fire to address). In addition, after completion of an examination, examiners take note of these errors, as well as other compliance mistakes, in a deficiency letter sent to the firm. The RIA must then respond to the letter and correct (or dispute) the examiners’ findings. If an RIA fails to address those deficiencies, the SEC might then bring an enforcement action against the firm.

To further address areas of potential examiner concern when reviewing RIAs, the SEC periodically publishes Risk Alerts to highlight compliance problems identified by its Office of Compliance Inspections and Examinations (“OCIE”). On September 14, 2017, OCIE released a Risk Alert, which identified the most frequent Advertising Rule compliance issues uncovered by examiners during their examinations. Advisers would be wise to familiarize themselves with the deficiencies identified by examiners and should make sure their compliance manuals and processes are designed to prevent the same mistakes.

Weekend Reading for Financial Planners (Jan 26-27)

January 25, 2019 02:52 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the big news that the Nevada Securities Division has released a working proposal of its new fiduciary rule, which would expansively apply a fiduciary duty to both investment advisers and brokers who give advice or merely hold out as an advisor in the state, as more and more states move to implement their own uniform fiduciary rules in the absence of any effort from the SEC to do so instead.

Also in the news this week is the announcement that Raymond James is buying boutique RIA M&A investment bank Silver Lane (in what signals an anticipation of even more growth in RIA mergers and acquisitions in the coming years), and updated regulations from the Treasury on the new Section 199A Qualified Business Income deduction (including important clarifications and some new restrictions for real estate investors).

From there, we have a few articles on savings and spending habits, including advice on how to not just save more effectively but to lift your savings rate over time, tips for juggling multiple credit cards to maximize credit card rewards points, and a look at the rise of "luxury concierge" services for the affluent providing "bespoke experiences" as the affluent increasingly focus on not just buying goods but services and experiences as well.

We also have a number of retirement articles this week, from a look at how the "bucket approach" to retirement actually tends to decrease retirement success by almost any measure, how deferred income annuities improve retirement readiness (by only using, but only needing, a small portion of the portfolio in the first place), and the unanticipated challenges that one early retiree faced when he actually retired early at the age of 41.

We wrap up with three interesting articles, all around the theme of income and wealth inequality, which has been increasingly in the news lately: the first looks at a recent study by Oxfam, which finds the top 26 billionaires now have as much wealth as the bottom 50% of the entire population of the planet, with the top 1% overall capturing nearly 82% of the world's annual wealth increase last year (further amplifying wealth and income inequality); the second looks at Senator and president-candidate Elizabeth Warren's recent proposal of a new wealth tax of 2% to 3% as a means to raise government revenue and reduce wealth inequality; and the last explores the recent proposal from Representative Alexandria Ocasio-Cortez, who has proposed a new top tax bracket of 70% on those earning more than $10M, based in part on the fact that the US had top tax brackets from 70% to 90% through the 1950s, 60s, and 70s... except as it turns out, the high tax rates were also accompanied by a wide range of tax shelters and other tax avoidance schemes at the time, and that in reality the effective tax rate on the top 1% wasn't all that different back then than it is already today.

Enjoy the "light" reading!

How To Effectively Change Domicile For Tax (And Other) Benefits

January 23, 2019 11:33 am 7 Comments CATEGORY: Taxes

“Home is where the heart is.” Or at least that’s what they say. When it comes to state income taxes and other legal matters (from family law to asset protection), though, home is where your domicile is… whether your heart – or your body – is there or not.

Fortunately, for many or even most people, determining domicile is rather straightforward – it’s the state in which you live in your one and only residence. But technically, domicile is a person’s fixed, permanent, and principal home that they reside in, and that they intend to return to and/or remain in. Which means for those who have multiple residences, or may be living somewhere else temporarily, where they live may not actually be their domicile.

In fact, it can be remarkably difficult to determine domicile for those who have multiple residences in multiple states, because the key factor is the “intent” of the individual, which isn’t always able to be known clearly. Accordingly, individuals who wish to change to a new state of domicile and don’t clearly leave and sever ties with a prior state of domicile can run into problems, with the old state challenging the change of domicile based upon a perceived lack of intent. Thus, even though a person can technically only have only one true domicile, two states may each believe that single domicile is their state!

In addition, even if an individual does not have domicile in a particular state, maintaining a residence in a state and using it for extended periods of time can trigger “residency” status in that non-domicile state as well, under the “statutory resident” rules. Which, ironically, means that multiple states may claim an individual as a resident under statutory resident rules.

And ultimately, knowing which states an individual is a resident of – whether triggered by domicile status or as a statutory resident – is crucial, because any state in which the individual is a resident has the right to tax that individual on all income worldwide. Which means if residency is triggered in multiple states at once, worldwide income may be subject to income tax in any/all of those multiple states (though certain offsetting credits for taxes paid to another jurisdiction are generally available).

As a result of these rules, determining domicile and the state (or states) of residency for tax and other legal purposes requires not just careful consideration of which state(s) the individual wants to reside in, but the exact rules that each state uses to determine domicile (and/or statutory residency), and that in the end changing state of domicile isn’t just about meeting an arbitrary time-based test but actually showing and being able to prove the intent to live in a particular new state (for which individual behaviors, from voting to driver’s license registration, using local service providers and even moving your pet, are crucially important), along with showing intent to sever ties and not live in the prior state as well!

#FASuccess Ep 108: How To Take A Sabbatical Even When Your Clients Depend Primarily On You, With Lisa Kirchenbauer

January 22, 2019 07:03 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 108th episode of Financial Advisor Success Podcast!

My guest on today's podcast is Lisa Kirchenbauer. Lisa is the founder and president of Omega Wealth Management, an independent RIA in the Washington, D.C. area that oversees more than $100 million of assets for nearly 100 affluent clients.

What's unique about Lisa, though, is her targeted focus with two specializations: entrepreneurs and people in transition, to whom she charges a financial planning fee that starts at $7,500 a year while forming deep client relationships by implementing George Kinder's EVOKE Life Planning process and has still managed to achieve what is completely impossible for most advisors, take 2 6-week sabbatical vacations in the past 6 years.

In this episode, we talk in depth about Lisa's unique financial planning services for clients. The way she truly differentiates her services from the very start in prospect meetings by discussing everything from communication preferences to George Kinder's famous three life planning questions, the additional assessment tools that she uses, from Riskalyze to Kolbe, to better understand and connect with her clients, the four-meeting financial planning process she takes all clients through before she ever talks about signing an investment management agreement, and the way she's further honed her services into two niches: for entrepreneurs and people in transition, which aren't the only types of clients that Lisa has but are, as she puts it, the specialties where she does her best work with clients.

We also talk about how despite developing a financial planning process with clients that are especially a deep on the advisor-client relationship, Lisa still managed to take two six-week sabbatical vacations in the past six years. The way she works with her staff for an entire year in advance to prepare the firm, train the team and transition relevant and necessary tasks to take that sabbatical, how she trained clients as well to become less dependent on her and more comfortable working with the other members of her team, the way she breaks the news to clients, and her lessons learned about how she might have still done the sabbatical a little bit differently for the next time.

And be certain to listen to the end, where Lisa shares how the growth of her firm ultimately led to a rising level of turnover until she began to reallocate her own time to focus less on just the clients and more and truly managing and developing her team, and the entrepreneurial operating system that she ultimately implemented to help better run and scale her practice.

So whether you're interested in learning about what it takes to really unplug and take a sabbatical as an owner of an advisory firm, tools you can use to develop and deepen your relationships with your clients, or how to set a clear strategic direction for your firm, then we hope you enjoy this episode of Financial Advisor Succcess!

Taking Maternity (Or Any Extended) Leave As A Financial Advisor Without Losing Your Clients

January 21, 2019 07:03 am 1 Comment CATEGORY: Personal/Career Development

One of the most rewarding aspects of being a financial advisor – both financially, and psychologically – is forming deep relationships with clients that makes the advisor an indispensable resource that clients can depend on when needed. From the advisor’s ability to provide timely advice as needed, walk clients off the proverbial ledge in times of market volatility, or simply provide ongoing management of the client’s investment portfolio… success as an advisor with existing clients is all about being available to provide value if/when/as the clients may need.

Yet the challenge is that being under a constant state of “potential need” from clients makes it remarkably hard to ever get away from the business for a vacation, and especially for any kind of “extended” leave… including (and especially) maternity leave. Which in turn can become a deterrent for younger female financial advisors who want to someday start a family but are concerned about the consequences of wanting to step away for maternity leave in the future.

In this guest post, financial advisor Ashley Micciche shares her own story and perspective about how she was able to successfully step away from her practice and her clients for a collective 7 months over the span of 3 ½ years for two separate maternity leaves… from the steps she took in advance to prepare, the necessary infrastructure it takes to succeed (or at least make it easier), the benefits of a recurring revenue (e.g., AUM or fee-based) business model to help support the process, how the maternity leave plans were communicated to clients, and why it’s so crucial to set ground rules with both clients and staff to make maternity leave work.

Ultimately, the end result was that, while Ashley did experience a setback in growth of the firm – as time away from the office is still time lost that could have been spent doing business development, and clients rarely provide referrals while the advisor won’t even be there to receive them – clients not only didn’t leave while Ashley was out on maternity leave, but were actually remarkably supportive of her personal journey along the way!

In fact, Ashley makes the case that there are few professions better than financial planning to support starting a family and that allows the flexibility and freedom to step away for a period of time while still being able to control your business and income in the long run!