Nerd's Eye View blog

Weekend Reading for Financial Planners (Oct 20-21)

October 19, 2018 02:43 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 despite all the recent buzz, it appears that the SEC may be waiting nearly a year to release a final version of its Regulation Best Interest advice rule... but only because the Department of Labor may also be working in coordination with the SEC on its own version of an updated fiduciary rule as well. And also in the news this week is an announcement by the CFP Board that the organization is expanding its Mentor Match program, from what over the past two years was focused primarily on mentoring for young women entering financial planning (as part of its Women's INitiative or WIN program), to be available to any CFP certificant instead.

From there, we have a number of additional articles on retirement planning, from a look at the rise of "financial freedom" and "financial independence" as an alternative to the traditional label and approach of "retirement," to a fascinating look at the spectrum for total financial dependence to total financial independence (on a 17-step scale!), and the phenomenon of "microadventures" as a way to have more enjoyable vacation experiences even when you don't have the time for an extended vacation (whether during your working years, or in "busy" retirement itself!).

We also have several practice management articles this week, including: an articulation of the key difference between being a manager and a leader; a different way to think about who your most "valuable" clients are (based not just on their revenue or referrals, but how much they value what you do as a financial planner in the first place, which makes them more likely to become your long-term advocates); why it may be better to ditch the Annual Review for As-Needed Reviews instead; and a look at ideas about how to name (or re-name) your advisory firm if you don't want to simply name it after yourself as the lead advisor/owner.

We wrap up with three interesting articles, all around the theme of how to make better decisions: the first explores the so-called "distinction bias," and how we tend to overweight and overvalue small differences (and misjudge how much we'll really care about them in the future) when we compare objects side by side; the second looks at how delaying decisions tends to increase their stakes, so often the best way to make "easier" decisions is simply to proactively make more/faster small decisions instead; and the last looks at the growing base of research around decision-making itself, and how to better frame decisions for yourself with techniques like creating a "premortem" analysis or doing proactive scenario planning... or if you want to use the traditional "Pros and Cons" list, at least be certain to assign values or weights to them so that you give each factor its proper consideration!

Enjoy the "light" reading!

Why All Financial Planners Need To Create A Sample Financial Plan

October 18, 2018 02:15 pm 0 Comments CATEGORY: Client Trust & Communication

One of the biggest challenges we consistently face as financial advisors when creating a financial plan for clients is simply getting the data we need to actually do the plan in the first place. Because, without any information to enter into the financial planning software to begin with, it’s impossible to assess a client’s financial situation, show them the consequences of various trade-offs, and ultimately make our recommendations. Yet while for at least some clients, the problem with getting data is that they literally don’t know their own financial details in the first place – thus their need to hire a financial planner! – more often, the real issue is that the client doesn’t actually understand why they need to provide the data in the first place, and what they’re going to get out of the process.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss why it’s not enough to just make the data gathering process mechanically easier for clients (e.g., with online data gathering forms instead of manually entering data into a printed data sheet), and why creating a Sample Financial Plan for prospective and new clients is an essential step in building enough trust with clients that they’re willing to gather and comfortable in sharing their financial information with you in the first place.

Historically, getting clients to complete data gathering forms has been a challenge simply because it’s tedious and time-consuming to fill out a paper form. And the situation is even worse for those who most need financial planning – because their financial lives are currently so disorganized – as the disorganization that makes them want financial planning is also the disorganization that means they don’t even know (and potentially don’t even know where to find) their own data to enter into a form in the first place!

Fortunately, as we move towards a more integrated digital age, the difficulty in obtaining financial planning data in the first place will be mitigated by account aggregation tools. Instead of manually entering information into a form, in the future all clients will have to do is link their accounts to their advisor’s portal, which will then automatically download the pertinent data into the planning software!

Still, even though some of these automations are starting to come online, a client’s hesitation to share their personal financial data often has less to do with the time involved, and more to do with the trust that clients need to feel – in the advisor themselves, and the value of the advisor’s process – before they allow an outsider to have a peek into their personal financial lives.

Because in a world where one of the biggest challenges financial advisors face – besides actually finding prospective clients in the first place – is demonstrating the real value of an intangible financial planning service, one of the most effective ways to get buy-in from new clients is to actually show them a Sample Financial Plan of exactly what they’ll get, and tangibly prove why it’s worthwhile. As even though the real value of what financial planners deliver is the actual process of defining goals, getting clients organized, and delivering advice, that sample financial plan is often the one and only tangible deliverable that clients can see to judge the value of the process.

The bottom line, though, is simply that if you are struggling as an advisor to get clients to share their financial information with you (whether via a data gathering form, or account aggregation), or are having trouble even getting prospective clients to sign on with you in the first place, it implicitly suggests that clients are just not seeing the value that you say you bring to the table. Because, even though we know that the financial planning process is worth it, ultimately, the onus is on us to show our clients that investing their dollars, time, and trust in your services is justified. For which the starting point is to create a Sample Financial Plan to really show clients the relevant value you can bring to them!

Getting Real About (Annual) Health Care Costs In Retirement

October 17, 2018 07:03 am 0 Comments CATEGORY: Retirement Planning

In its latest update, Fidelity recently estimated that the average 65-year-old couple will need a whopping $280,000 just to cover their health care costs in retirement, between Medicare Part B and Part D premiums, and additional out-of-pocket costs (or the Medigap supplemental insurance plan to mitigate them). Not including the potential cost of long-term care needs as well. As a result, one recent study of prospective retirees found that more Baby Boomers are actually less afraid of running out of money in retirement than they are specifically fearful of handling health care costs in retirement.

Yet the reality is that health care costs in retirement aren’t needed as a “lump sum” on the day of retirement, and the Medicare system actually makes health care costs a remarkably stable annual cost that can be planned for. And in fact, looking at health care expense in retirement as a lump sum masks a number of more direct and substantive planning issues, from the fact that unhealthy retirees may face fewer years of costs but much higher annual costs, to the challenges (and additional costs) of navigating health insurance as an early retiree via state health insurance exchanges.

Accordingly, a recent joint study by Vanguard and Mercer Health and Benefits analyzed the typical (and potentially unexpected) costs of health care in retirement, and showed that the "scary" lump sum cost of retiree health care is actually little more than spending a few hundred dollars per month, per person… for the better part of 2-3 decades in retirement, with the average female spending just $5,200/year throughout her retired years including all health care-related costs (albeit excluding long-term care needs).

Of course, individual health care costs may still vary… but it turns out they vary in rather predictable and plannable ways, from the increase in health care costs for those entering retirement with one or several chronic health conditions, to those who must plan for the additional costs of health insurance via state marketplaces for early retirement, and the additional layer of costs for high-income individuals due to the Medicare income-related surcharges.

Which means in the end, while health care costs may cumulatively add up to a lot over a multi-decade time horizon, they do so in ways that can be largely planned for in advance, saved for with both retirement savings itself or using Health Savings Accounts (HSAs) as a supplemental retirement savings vehicle, managed by making good Medicare enrollment choices, and adjusted for (typically-known-by-retirement) chronic health conditions. Or simply funded by Social Security payments, which for a married 65-year-old couple earning merely “average” benefits, amounts to a lump sum equivalent of more than $600,000 anyway (for those who prefer to convert ongoing retirement cash flows to lump sum equivalents)!

#FASuccess Ep 094: Crafting Your Optimal Solo Practice By Simply Charging What You’re Worth With James Osborne

October 16, 2018 07:03 am 2 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 94th episode of the Financial Advisor Success podcast!

This week's guest is James Osborne. James is the founder of Bason Asset Management, a solo advisory firm based in the Denver suburbs that oversees more than $225 million of assets under management.

What's unique about James, though, is the unusual way that he structured his advisory business, with a simple flat fee of $4,800 per client regardless of their assets, which has allowed him to build a high-margin solo practice with just 80 clients generating nearly $400,000 of revenue for the firm at the age of just 35 years old.

In this episode, we talk in depth about why James decided to structure his firm using this flat fee approach in lieu of the AUM model. How the design of his business model makes it possible for him to generate a target of his exact income potential as he reaches client capacity, the way he handles situations where his flat fee would be substantially lower than what another advisor's AUM fee might be for prospective clients with a lot of assets and net worth, and the reason that he chose to deliberately build a business model that fits his personal lifestyle and family goals.

We also talk about what it really means to reach personal capacity as a financial advisor. The challenging trade-offs that start to emerge as advisory firms try to grow beyond the individual capacity of the founder, why it is that beyond a certain point, doubling the number of clients and revenue at the practice has almost no impact on the take-home compensation of an advisor, and the reason that so many solo advisory firms will actually generate far more value for their founders by staying small even if the practice is never sold.

And be certain to listen to the end, where James talks about how he's adjusting the way he meets with and takes on prospective clients as he approaches his personal capacity, and what he plans to do to maintain his high-income lifestyle practice once he reaches that threshold.

So, whether you're interested in learning about some of the benefits of a flat-fee structure, how James approaches investment management, or why most advisors are scaling their practices all wrong, then we hope you enjoy this episode of Financial Advisor Success Podcast.

The 16 Best Conferences For Financial Advisors To Choose From In 2019

October 15, 2018 07:05 am 1 Comment CATEGORY: Conferences

The need to engage in continuous learning is a simple reality for anyone in professional services. As a profession’s body of knowledge grows and evolves with ongoing research and discoveries, new products and solutions, and emerging best practices, even the best practitioners have to update their knowledge and skills from time to time. You want your surgeon to be up to speed on the latest surgical techniques that speed recovery time and reduce scarring. You want your lawyer to know the latest laws and regulations that might adversely impact your business to reduce the risk of regulatory or legal hassles. And consumers want their professional financial advisors to be up to date as well.

And the reality is that while you can get a lot of this continuing professional education directly from the comfort of your own office, in a technology-driven world with an ever-growing number of webinars and reading opportunities – including in the Members Section of this blog! – it’s still important at least once a year to take a break from the office and get away from it all. Both to give yourself the opportunity to really immerse in your education without the inevitable drumbeat of distractions in the office. And because mentally, you really can better focus on your education and thinking about steps to improve your business when you get away from it for a few days.

The caveat, however, is that these days, there is an overwhelming number of financial advisor conferences to choose from. Because while the good news is that for most successful advisory firms, it just takes one good takeaway from a conference that can be implemented in the business to make the whole trip worthwhile… the bad news is if you don’t find a conference that’s the right fit for your needs and business, you aren’t likely to find even that one good takeaway. Which makes both the expense of the conference, and the lost time out of the office, very costly indeed.

As someone that has been speaking at nearly 70 conferences a year for almost a decade myself, I’ve seen the good and bad of our various industry events, which are spread across membership associations, broker-dealers and insurance companies and RIA custodians, product manufacturers, trade publications, private events, and more. And as a result, am often asked for my own suggestions of what, really, are the industry’s “Best” conferences to attend.

Yet the reality is that what conference is “best” really depends on what you, personally, are looking for. Some advisors are focused more on broad-based technical educational content, while others want to go deep into a niche. Some advisors want practice management advice as business owners, while others need help with their personal career development as employee advisors instead. Some want to talk about innovating technology, while others want to innovate new business models.

Accordingly, back in 2012 I started to craft my own annual list of “best-in-class” top conferences for financial advisors in various categories (to allow advisors to match the available conference specialties to their own needs), and have updated it every year since in what has become one of our most popular annual articles.

And so now, I’m excited to present my newest list of “Top Financial Advisor Conferences” for the upcoming 2019 year, from practice management to technology to career development and deep-dive educational content, and a special focus on the rise of “niche” financial advisor conferences aiming to serve the growing number of financial advisors who themselves are focusing more and more into niches to differentiate themselves in today’s competitive environment.

So, I hope you find this year’s 2019 conferences list to be helpful as a guide in planning your own conference budget and schedule for next year, and be certain to take advantage of the special discount codes that several conferences have offered to all of you as Nerd’s Eye View readers!

Weekend Reading for Financial Planners (Oct 13-14)

October 12, 2018 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 news that New Jersey is about to launch its own version of a fiduciary rule for advisors, driven not by New Jersey legislators but directly from the New Jersey state regulators, as a state-level fiduciary movement appears poised to surge again in the face of federal regulators failing to address the fiduciary gap.

From there, we have a number of additional articles of notable industry news, including: the SEC's ongoing hiring freeze is threatening to reverse its recent increase in the examination rate, as by 2019 it's projected there will only be 1 SEC staff member for every 20 RIAs the regulator oversees; state securities regulators continue to step up on regulation and enforcement, with actions against unregistered individuals reaching a new record in past year (likely as a result of the surge of fraudulent cryptocurrency offerings); the College for Financial Planning has partnered with US SIF to launch a new sustainable, responsible, and impact investing designation (the Chartered SRI Counselor, or CSRIC); and the CFP Board's Center for Financial Planning is partnering with Wharton on a new course in Client Psychology.

We also have several practice management articles this week, from a look at how hybrid robo-advisors and their salaried employee advisor jobs are providing a new career track alternative for financial advisors, to the importance of getting good at retention of existing advisor employees (given the incredibly high cost of turnover for experienced employees), a deep-dive look at what it really means to "manage" a client relationship, and an exploration of whether financial advisors should be learning more "conflict resolution" skills to help clients (especially couples and families) navigate their money conflicts.

We wrap up with three interesting articles, all around the theme of recognizing that we must sometimes embrace imperfection: the first is a powerful reminder that going beyond about 80% of the way on "surface shine" is rarely about actually improving the outcome and more about just satisfying ourselves; the second discusses how we often look to experts and their habits to figure out an optimal approach to something new when the truth is that we really need to just get started (because the "optimal" is rarely necessary to start!); and the last explores how the key to improving over time is to recognize that failures will happen, and those who improve the most are the ones who are willing to actually talk about them, and avoid the natural tendency to just sweep the embarrassment under the rug and move on before we have a chance to actually learn from the experience.

Enjoy the "light" reading!

Qualifying For The Section 199A Deduction As A Hybrid Insurance Producer

October 11, 2018 02:09 pm 0 Comments CATEGORY: Taxes

Included with the passage of the Tax Cuts and Jobs Act, was a new 20% tax deduction for “Qualified Business Income” (QBI) for pass-through entities, which was intended to give a tax break to small business owners and encourage them to hire more employees. The caveat, however, was that Congress also made sure that the deduction didn’t extend to high-income professionals whose primary source of income was from their own personal labors.

Accordingly, Congress carved out a new group of professionals in certain “Specified Service Trade or Businesses” (SSTB) whose qualification for the QBI deduction would be phased out above certain income levels.

Unfortunately, businesses in the financial services industry were included in the definition of SSTBs, particularly financial services, brokerage services, as well as “any trade or business which involves the performance of services that consist of investing and investment management, trading, or dealing in securities.”

Interestingly, however, Congress seems to have gone out of their way to specifically exclude from that list insurance producers, brokers, and agents, who are treated as being in the business of selling their company’s products, rather than their personal services.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1 PM EST broadcast via Periscope and guest hosted this week by Jeff Levine, we examine questions surrounding the QBI deduction for professionals who sell insurance products and want to retain the benefits of the QBI deduction, but are also involved in brokerage services and/or are RIA owners with SSTB income not eligible, and explore when/whether it’s better to run multiple businesses to preserve the deduction where permitted… and if so, at what cost?

The strategy of separating out QBI-eligible insurance business from non-QBI-eligible brokerage commissions and advisory fees is complicated by the fact that, in recent proposed regulations on the QBI deduction, the IRS declared that single businesses with multiple business lines and total revenues under $25 million, the entire business is considered to be a specified service trade or business if more than 10% of their income results from investment-related activities. Which means, for instance, that for someone with 89% of their income from their insurance-related activities and the rest from investment-related activities, their entire business will be considered an SSTB if they operate it as a single business (which means none of their 89%-of-revenue insurance commissions would be eligible for the deduction)!

Accordingly, the question then becomes: “When/how would it be better to split out the insurance production into a different business line, and effectively run multiple businesses?” Unfortunately, there’s no easy answer, because not only does running multiple businesses create a whole new layer of complexity and expense due to the potential need to keep separate books and records, but it also requires the business owner to allocate how much of their overhead costs apply to both the QBI-eligible insurance revenue and non-QBI-eligible other revenue. Which in turn raises the specter of potential IRS audits, since the business owner might be tempted to attribute as much expense as possible to the (not-QBI-eligible) financial services business income (which is SSTB income), while trying to minimize the expenses (and maximize the income) derived from the non-SSTB (QBI-eligible) insurance business line.

Ultimately, the good news is that it is theoretically possible to separate out and preserve the QBI deduction for insurance commissions, even for advisory firm business owners with a mixture of insurance and non-insurance business. But the aggregation rules of the recent QBI regulations mean that doing so will require a whole new layer of complexity for financial advisors to actually run two bona fide separate businesses, one for their insurance income (and expenses), and a second one for everything else. Which is a challenge because in the process of splitting up the business lines in order to qualify for the QBI deduction, the reality is that, after you factor in all the added expense and work involved, it just may not be worth it in the end unless there is a substantial amount of insurance commissions on the table!

Using Qualified Opportunity (Zone) Funds To Minimize Capital Gains

October 10, 2018 07:09 am 6 Comments CATEGORY: Taxes

Real estate investors have long enjoyed a number of unique tax benefits, from the tax deductibility of depreciation, to the ability to defer capital gains with a like-kind 1031 exchange. And beyond these core tax benefits of real estate investing itself, Congress has, from time to time over the years, provided additional tax incentives for particular types of real estate development opportunities, as a way to further guide where real estate developers may direct their capital. The latest version, created under the recent Tax Cuts and Jobs Act (TCJA) of 2017, is the so-called Qualified Opportunity Fund (QOF), which offers some especially unique tax benefits for those who are willing to invest in certain low-income areas designated as "Qualified Opportunity Zones".

Specifically, investing into a QOF offers the ability to defer tax on capital gains from the sale of existing property that are reinvested within 180 days into a QOF (including not only a rollover of real estate proceeds akin to a 1031 exchange, but even allowing the rollover of capital gains from intangible assets like stocks), subsequent basis increases on deferred capital gains reinvested into a QOF after five years (and again after seven years), and the complete elimination of capital gains tax on growth attributable to gain reinvested in a QOF (if the QOF is held for at least 10 years).

The caveat, however, is that, in order to receive the full array of QOF benefits, the latest date (according to the current tax code) that gains on the sale of assets can be invested into a QOF is December 31, 2019. Past that date, investors will begin to at least partially lose out on basis increases and, thanks to what’s widely assumed to be poor drafting, potentially lose out on other future tax benefits as well. Furthermore, the deferral of the gains on the funds used in the initial investment isn’t perpetual. Gains timely reinvested into a QOF will become taxable (except for any basis increases received after years 5 and 7) at the end of 2026 (or when the QOF is sold, if sooner).

Meanwhile, despite the attractive tax benefits, advisors should exercise caution and perform their normal investment due diligence before jumping in with both feet. Bad investments with good tax attributes are, at the end of the day, still bad investments. Questions such as “What are the management team's qualifications?”, “What are the expenses to investors of the fund?” and “What sort of assets (which, by their very nature, are illiquid) will the fund be targeting?” are all essential to answer. Not to mention the actual merits and growth or income opportunity of the particular real estate investment itself.

Nonetheless, investors who have sold appreciated assets within the past 180 days, or plan to do so in the near future, should evaluate the merits of investing into a QOF. However, the reality is that many investors’ tax planning needs will be better served by using existing strategies, including 1031 exchanges, charitable trusts, and simply holding on to existing assets – all of which may provide tax benefits, including indefinite tax deferral, and the opportunity for a future step-up in basis at death that a QOF does not provide.

#FASuccess Ep 093: Building A High-Income Lifestyle Practice Efficiently By Running It Like A Real Business with Sunit Bhalla

October 9, 2018 07:07 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 93rd episode of the Financial Advisor Success podcast!

This week's guest is Sunit Bhalla. Sunit is the founder of OakTree Financial Planning, a highly efficient solo advisory firm based in Colorado that oversees more than $40 million in assets under management.

What's unique about Sunit though is the way he's been able to build to nearly $300,000 in revenue with a whopping 85% profit margin as a career changer who works with just 17 affluent clients in a hyper-targeted niche of engineers, as a former engineer himself. In this episode we talk in-depth about how Sunit has built his hyper-efficient solo practice with the relentless focus on staying focused: The technology tools he uses to stay efficient in delivering services to clients, his simple fee structure to keep even his billing process simple and efficient, and why he offers all of his prospective clients one and only one comprehensive financial planning and investment management service that they can either take or leave.

We also talk about Sunit's unique financial planning process with clients, the key questions he asks at the beginning of each client relationship to really understand their needs, the six meaning process he uses that starts with a discussion about goals and exploring possibilities, even before gathering all the client's data. And how he ultimately delivers the financial planning results to his sophisticated engineer clients, not by producing and printing out detailed financial projections for them, but using his planning software interactively to model their various what-if scenarios live on the spot.

And be certain to listen to the end, where Sunit talks about how he went about building his unique lifestyle practice the way that he did, the way he very deliberately manages his lifestyle practice as a business, and why he isn't concerned at all that his advisory firm may not necessarily have any salable value at the end.

So whether you're interested in learning about building a lifestyle practice, how to make sure you're only working with your ideal clients, or about maintaining a healthy work-life balance, then we hope you enjoy this episode of the Financial Advisor Success podcast.

Student Loan Planning Software Solutions: Comparing The 8 Leading Tools For Financial Advisors

October 8, 2018 07:03 am 2 Comments CATEGORY: Technology & Advisor FinTech

As a wave of next-generation clients starts to seek out help managing their finances, one of the most common challenges that they face is a high level of student loan debt. Unfortunately, advisors are generally ill-equipped to provide student loan analysis and planning, because, unlike traditional debt, student loans - and federal loans in particular - are subject to a dizzying array of repayment options (each of which can result in significantly different outcomes for borrowers) and forgiveness programs, which in and of themselves, are stunningly difficult to navigate. And, in a world where interest rates are rising quickly, the “easy” solution of refinancing older loans at a lower rate isn’t providing the same bang for the buck it once did, not to mention the fact that refinancing won’t make any sense for borrowers that recently took out loans while rates were at historic lows. Which means that a strong working knowledge of the various options for repaying federal student loans will increasingly be an important tool for advisors in coming years.

Fortunately, there is a growing number of tools to help advisors analyze their clients’ student loans, and in this guest post from Ryan Frailich, founder of Deliberate Finances, (a fee-only financial planning practice that specializes in working with couples in their 30's, as well as educators and nonprofit workers) provides comprehensive reviews and ratings for 8 student loan planning tools, including offerings from CSLA, RightCapital, the VIN Foundation, Loan Buddy, and Pay For ED (among others), and shares his thoughts on everything from features and flexibility, to their ease of use and usefulness of output.

Because the fact is that, often, those clients who come in with the highest level of debt, including doctors and lawyers who are just starting out, also happen to be ideal long-term clients, and having the knowledge and ability to potentially help them save a significant amount of money over the life of their loans is a great way to build long-term loyalty. And even for advisors who work primarily with Baby Boomers, the ability to help their children navigate the student loan landscape can assist in introducing you to your next generation of clients.

While not all the solutions that Ryan examines are targeted specifically at advisors and there’s still plenty of room for improvement with all of them, the good news is that FinTech developers are recognizing the importance of putting tools in advisors’ hands that will help clients with student debt navigate what is often the first (and most challenging!) aspect of their young financial lives. So, whether you have clients with questions about how best to manage and repay their student loans, are looking for ways to gain and develop expertise in this important area, or are simply interested in staying up-to-date on this rapidly evolving area of financial planning and FinTech, then we hope you find this amazingly comprehensive guest post from Ryan to be helpful!