Nerd's Eye View blog

Weekend Reading for Financial Planners (June 9-10)

June 8, 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 a look at why, nearly 3 months after its surprising decision to vacate the DoL fiduciary rule, the clerk's office of the 5th Circuit Court of Appeals still has not actually issued its official mandate to vacate the rule, raising the question of whether there may actually still be some other last-ditch effort afoot to save the rule... or if the clerk's office is simply backed up on paperwork, such that the final issuance will be coming soon.

Also in the news this week is a brief recap of the Financial Planning Association's Advocacy Day in Washington DC, where 85 FPA members spoke with Congressional lawmakers and their staff about raising the standard for financial advice (and advocating that "financial planner" should also be a protected term, along with financial advisor), and the launch of "Equita Financial Network" for women-led advisory firm owners who are seeking more infrastructure and support to launch and run their own independent advisory firms.

From there, we have a number of articles on the ongoing shifts in the broker-dealer industry, as May is the month that several industry publications issue their annual "top broker-dealer" lists and interview broker-dealer executives. Highlights include: the annual Financial Planning magazine survey, that highlights how the largest broker-dealers are adapting to the changing landscape as this year marks the first ever that fee-based revenue at the top-50 independent broker-dealers exceeds commission-based revenue; the annual ThinkAdvisor broker-dealer Presidents poll showing that in the near-term, most broker-dealers are struggling the most with technology and regulation, even as their advisors are struggling to attract new clients in an increasingly competitive environment; how the likely roll-back of the DoL fiduciary rule (and the non-fiduciary SEC advice rule) is giving a new wind to small broker-dealers, even as more and more large broker-dealers appear intent on rolling them up (which might not be a bad deal for those smaller broker-dealers in the end); how the burden of FINRA regulation is so cumbersome that not only are many advisors leaving broker-dealers to start their own RIAs, but now some hybrid broker-dealers are themselves considering whether to spin off their entire "legacy" broker-dealer and instead just focus on becoming mega-RIAs in the future; how Cambridge Investment Research embodies this trend by choosing to start eschewing broker-dealer terms like "OSJ" and "branch" as the majority of its advisors, and its revenue, now come from the fee-based side of the business; and how the increasing mobility of brokers is leading them to take a hard look at not just the costs of the broker-dealer that are subtracted from their payout grids, but all the additional ways that broker-dealers mark up their various investment solutions by 10bps - 25bps (or more in some cases).

We wrap up with three interesting articles, all around the theme of how the "politicization of everything" is making more and more of us have to deal with criticism and negative feedback, and the best way to handle it: the first is a Harvard Business Review examination of how various CEOs are handling the growing pressure of businesses to take public positions on controversial issues; the second looks at how, whether it's political criticism or simply personal criticism, there are better and worse ways for us to take in criticism to actually learn from it; and the third is a good reminder that, no matter what we do, someone will likely criticize it, so often the best approach is simply to try take it all in, figure out if there is a grain of truth that merits an adjustment, and then simply move on and focus on making whatever choice is right for you (may as well, if you're going to be criticized no matter what!).

Enjoy the "light" reading!

What Do You Say When You Witness Sexual Harassment At A Financial Advisor Conference?

June 7, 2018 11:44 am 1 Comment CATEGORY: Practice Management

The number of female CFP professionals has remained stubbornly pegged at 23% for nearly 15 years, despite an ever-growing effort of the industry to attract more women. Because unfortunately, even as the profession seeks to build awareness and draw more women into financial planning, the positive impact is limited by the amount of sexual harassment and demeaning and belittling comments still directed at women by “fellow” advisors at the typical advisory industry conference.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, I share recent and unfortunate case-in-point examples of inappropriate and belittling comments that are still being made towards female advisors at industry conferences today, and explore what needs to be said to curtail problematic behavior.

For instance, at the recent FPA NorCal conference, a conversation that I was having with a group of female colleagues – including fellow advisors and several industry-leading consultants – was interrupted by another advisor who proclaimed the semi-circle of women I was speaking with looked like a “harem”. As though it’s ever appropriate to compare professional female colleagues to concubines!?

Similarly, it’s still all too common for women at advisory industry conferences to receive comments like “Whose assistant are you?” or “What do you actually do at your advisory firm?” with the implication that it couldn’t possibly be working as a financial advisor… even for a woman who prominently displays her CFP certification and a firm that’s named after her!

Yet I’ll confess that even as someone who has witnessed these kinds of disparaging comments, and am incredibly frustrated by them as well… I still struggle to figure out what, exactly, to say in order to break the cycle. As unfortunately, calling out offenders and trying to publicly humiliate them for their offensive comments is more likely to just make them defensive and run from the situation, instead of gaining some empathetic perspective and actually acknowledging and recognizing how their comments may be so demeaning to their female colleagues.

The bottom line, though, is that as someone who has witnessed this behavior, and often said nothing - out of a sheer lack of knowing what to say - I regret not taking a more active role in trying to stop it and saying something when I see or hear inappropriate behavior at advisory industry conferences. And it’s something I intend to address more proactively going forward. But I hope you’ll share your comments at the end of this article with your own perspective, on how best to have this conversation in the first place? What do you say when you witness sexual harassment at a financial advisor conference?

Should A Financial Plan Really Be Boiled Down To An Index Card Of Advice?

June 6, 2018 07:01 am 3 Comments CATEGORY: Client Trust & Communication

Historically, getting paid for financial planning – not just to implement the recommendations, but for "The Plan" itself – meant producing a voluminous physical financial plan for which the advisor would be paid. The Plan was the tangible, physical deliverable, full of in-depth analyses and culminating in the advisor’s recommendations, that substantiates the financial planning fee. The one major caveat: few clients ever actually open The Plan again after it is first presented, focusing only on the subsequent recommendations and action items… and raising the question of whether financial planning might be done far more efficiently by eschewing The Plan and just delivering a One Page Financial Plan (of core recommendations and action items) instead.

Yet the reality is that even if The Plan is never revisited by the client after the day it’s presented, that doesn’t mean it was useless to have created it in the first place. Because from the client’s perspective, The Plan is what helps to validate that the subsequent recommendations are right and to be trusted in the first place; in other words, the client may in the end focus on just the recommendations and not The Plan, but that doesn’t mean they would have trusted and acted on those recommendations in the absence of the supporting comprehensive financial plan analyses and output.

Similarly, the real challenge for many clients is not figuring out the appropriate recommendations for them to achieve the goals in their financial plan, but to identify what their goals should be – or can be, or are even possible – in the first place. Which means producing The Plan, and subsequent What-If scenarios for the plan, are an essential element of the planning process in the first place. And again something that cannot be eschewed by just focusing on the One Page Financial Plan of recommendations at the end.

Notably, this doesn’t necessarily mean that financial advisors should or need to continue producing comprehensive financial plans exactly as they have in the past. The more the advisor can establish their trust and credibility – whether through showing empathy to create rapport with the client, demonstrating good communication skills, or simply their years of experience – the less the client may rely on the advisor’s analytical plan output. And to the extent planning software can be used more interactively and collaboratively with the client, the less it’s necessary to print out the voluminous plan in the first place.

Nonetheless, the challenge remains that even if the goal of the financial advisor is not just to get paid for The Plan, but for the advisor’s own financial planning knowledge and wisdom… it’s still necessary to go through the financial planning process in crafting recommendations for clients, if only because that’s what it takes for the client to have the buy-in and trust necessary to actually follow through and implement them!

#FASuccess Ep 075: Walking Away From RIA Partnership To Scratch Your Own Entrepreneurial Itch with Kathy Longo

June 5, 2018 07:01 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome, everyone! Welcome to the 75th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Kathy Longo. Kathy is the President and Founder of Flourish Wealth Management, a wealth management firm in the Minneapolis area that oversees nearly $130M of assets under management for 61 affluent clients.

What's unique about Kathy, though, is that she had already successfully climbed the partnership track ladder at a billion dollar independent RIA, to become one of their "next generation" successor owners, yet ultimately decided to sell her shares and walk away from that business to start a new one in order to scratch her entrepreneurial itch.

In this episode, we talk in depth about how Kathy has structured and built the staffing of her firm, launching initially by using a third-party TAMP provider, then transitioning to do the investment management internally as the firm grew by having her husband take over as the Director of Investments, the "culture snapshot" document she created to screen potential new employees to ensure they're likely a good fit, and why it's so crucial as a small business owner to embrace the philosophy of "slow to hire, fast to fire" with new employees.

We also talk about the value of having a study or mastermind group, why Kathy decided to join two different study groups - one that is comprised of all women financial planners in the industry from the Minneapolis area, and the other that is comprised of all women business owners outside the industry through the Women's Presidents Organization or WPO, and why having a study group of peers and colleagues you can commiserate with and get advice from is so essential to running your advisory business... especially when you're launching a firm and hit the inevitable challenges and emotional rollercoaster that comes with building your business from scratch.

And be certain to listen to the end, where Kathy talks about why she decided to write a book to further propel the growth of her advisory firm, and why and how she decided to invest in hiring an outside firm to help with the writing and book creation process.

So whether you are interested in figuring out how to structure the investment management component of a financial planning firm, how to create a strong culture for growing your team, or are wondering about the benefits of participating in a study group, I hope you enjoy this episode of the Financial Advisor Success podcast!

The Latest In Financial Advisor #FinTech (June 2018)

June 4, 2018 09:11 am 0 Comments CATEGORY: Technology & Advisor FinTech

Welcome to the June 2018 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 buzz from the Envestnet Advisor Summit… that Envestnet is shifting from a focus on investment management, financial planning, and wealth management, towards a new category it calls “Financial Wellness”. Which is not meant to be the employer-delivered-financial-education version of a Financial Wellness program, but a more holistic advisor technology platform aiming to cover all of the relevant areas of a client’s financial health, including not only planning, investments, and insurance (protection), but also credit/debt, and budgeting/cash flow as well. Which leaves Envestnet incredibly well positioned for the ongoing shift of financial advisors from products to advice, and makes its 2015 acquisition of Yodlee look increasingly savvy as holistic financial wellness requires holistic account aggregation to power it!

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

Principal Financial acquires RobustWealth as yet another old-line insurer aims to get more digitally savvy
Private equity firm Aquiline acquires a majority stake in RIAInABox as compliance software becomes an advisor tech category of its own
LearnVest shuts down its financial planning offering but may still be a success for Northwestern Mutual as its financial planning and PFM technology is integrated into the Northwestern core
AdvicePay announces the first ever “advisor crowdfunding” initiative, in an effort to raise $2M of new capital without taking on the conflicts of Venture Capital firms

Read the analysis about these announcements, and a discussion of more trends in advisor technology, in this month's column, including Vestwell partnering with payroll processor Namely to expand distribution of its small-business 401(k) offering, Vestmark launches a new Model Trading Service as the shift to centrally managed portfolios in RIAs and IBDs is leading to a new desire to outsource the implementation, and Fidelity showcases the prototype of a new “Cora” virtual reality assistant for clients as Schwab launches two new Digital Accelerator Hubs. In addition, we highlight the rise of another new category of advisor software: Student Loan Analysis and Modeling tools, as the shift to pursue Gen X and Gen Y clients leads to a demand for new types of software to service them.

And be certain to read to the end, where we have provided an update to our popular new “Financial Advisor FinTech Solutions Map”, including a number of new companies and categories!

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 2-3)

June 1, 2018 02:56 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 financial advisor and fiduciary advocates are now calling for a delay in the public comment period for the SEC's new "Regulation Best Interest" for brokers, suggesting there's not enough time with the original August 7th deadline to properly test the effectiveness of newly proposed Form CRS disclosures. Also in the news this week is continued hubbub about the FPA and its beleaguered New York chapter, as the national organization not only terminates the prior chapter's affiliation agreement but is now also taking over its remaining assets, raising questions of just how much control the national organization should have over its nominally independent chapters.

From there, we have several marketing and business development articles, including a fascinating look at new research about what makes a client actually leave and find another advisor (hint: it's not about bad service, but a change in the client's life that leads them to lose faith that their existing advisor can handle their new financial situation), a study that finds younger clients are less satisfied and loyal to their existing advisors but are still more likely to refer (albeit through sharing content or advisor events, and not just providing a name/introduction), and a review of various platforms/solutions that advisors can use to outsource parts of their marketing.

We also have a few articles about money and financial behaviors, from a study finding that the odds of dying rise significantly when someone has a catastrophic financial loss (i.e., losing >75% of their assets in 2 years), to another study finding that there's so much pressure to "keep up with the Joneses" that when someone wins the lottery even their neighbors are more likely to declare bankruptcy (as they spend more conspicuously, and invest more aggressively, in an attempt to catch up), and the rising trend of marriage couples keeping separate bank accounts and not merging their finances (and instead simply showing their marital commitment with an agreement to split all expenses to their separate accounts instead).

This week includes a round-up of a few extra practice management articles too, including: how to properly pay yourself a salary (or not) depending on the type of business entity you use as a financial advisor; the "three pillars" for growing an advisory practice into a full-fledged business (organizational structure, entity structure, and [proper] compensation models); and how more and more advisory firms are hitting the crossroads where they must decide whether to hunker down and stay small, or aim to grow much larger, with all the trade-offs and changes that go along with a commitment to do so.

We wrap up with three interesting articles, all around the theme of the changing role of the advisor and money in our lives: the first looks at how technology is reshaping the role of doctors, in the near term by making them unfortunately more "clerically" oriented just to enter all the relevant patient data into their computers, but with the hopes that the technology will eventually free the doctors to focus more on their patients; the second explores why it's so hard to talk about money, and powerful questions to ask to better understand someone's finances and financial views (whether it's a family member, or a client); and the last is a fascinating perspective of how the nature of wealth and work has transformed over the past millenium, and how the rise of wealth and decrease of costs in common goods has led us to the point that we now struggle with how to manage and define our relationship with this thing we call "money".

Enjoy the "light" reading!

Why “Endowment-Style” Donor-Advised Funds Should Be Allocated More Aggressively

May 30, 2018 07:01 am 2 Comments CATEGORY: Investments

Donor-advised funds (DAFs) are flexible tools which can be used for a number of charitable giving purposes. One increasingly popular use is to use an "endowment-style" DAF in lieu of a private foundation for those with charitable intentions of leaving a legacy that will continue to have an impact on the world many years into the future, given that DAFs are cheaper to operate, more tax efficient, more flexible, and eligible for higher limits on tax deductibility of contributions. However, while much attention has been given to how individuals should allocate a portfolio throughout their own lifespan, considerably less attention has been given to the question of how to best allocate a portfolio if one's time horizon is "forever". Especially when it has flexibility with respect to its distributions.

In this guest post, Dr. Derek Tharp – a Kitces.com Researcher, and a recent Ph.D. graduate from the financial planning program at Kansas State University – analyzes considerations when coordinating investment and spending policies of an endowment-style DAF, finding that for donors who have the willingness and ability to be flexible in their distribution policy, investment allocations can be much more aggressive than those commonly adopted by endowments, generating far more income for charitable beneficiaries and build a larger endowment value to sustain giving well into the future.

The traditional approach to investment an endowment is still a well-diversified conservative or moderate growth portfolio - e.g., a 60/40 portfolio - owing in large part to the fact that most endowments have a high need for distribution stability (e.g., university endowment funds that need to fund ongoing operating costs that universities have become highly dependent on). However, in the context of an endowment-style DAF, the reality is that individual donors often have far more flexibility about when and how much they donate. Which is important, especially with the possibility of 100+ year time horizons that allow for immense (and intuitively-difficult-to-grasp) compounding.

In fact, a Monte Carlo analysis (based on historical market returns) of an ultra-long-term endowment-style DAF with a flexible (e.g., percentage-of-assets) distribution policy finds that shifting a fairly modest $100k endowment-style DAF from a balanced portfolio allocation (50/50) to an aggressive allocation (100/0) would result in an extra $13.6 million in inflation-adjusted median endowment account value after 100 years, while also generating an additional $5.6 million in distributions to charitable institutions along the way (albeit with some volatility in annual distributions from year to year)! Further, adopting a simple dynamic spending/distribution strategy (e.g., forego a distribution in years with less than a 2.5% real return), results in an additional $6.1 million boost in real residual value and $1.2 million more in cumulative charitable distributions (as distributions are skipped in some years but made up over time)!

Ultimately, the key point is to acknowledge that willingness to accept some spending instability, coupled with ultra-long-term time horizons to compound, makes it feasible to have a far more aggressive portfolio that still result in substantially more assets going to the charitable institutions that donors care about. Of course, donors must be willing to stay the course, avoid projecting their personal risk tolerance onto the endowment, and be comfortable adopting an allocation that is much more aggressive than the "norm" among prominent endowments... but donors should be cognizant of the tremendous potential of investing more aggressively (and the impact of long-term compounding) if they are willing and able to be flexible!

#FASuccess Ep 074: Why Solo Financial Advisor Success Is All About Self-Confidence In Your Own Value with Diane MacPhee

May 29, 2018 07:01 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome, everyone! Welcome to the 74th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Diane MacPhee. Diane is the founder of DMAC Consulting, a financial advisor coaching and practice management consulting firm that specializes in solo and emerging ensemble advisory firms.

What's unique about Diane, though, is that before she was a coach for financial advisors, she was a fee-only financial planner herself for 16 years, and as a result brings a unique perspective with both the experience of a financial advisor and the training of being a professional certified coach.

In this episode, we talk in depth about the challenges of being a successful solo financial advisor, the self-limiting beliefs we sometimes inflict on ourselves that prevents us from growing and being as successful as we could be, why it's so hard to set the "right" fee for clients (and especially to raise fees when we should), and why the #1 element to success as an advisor is to really find and get control of your own self-confidence, so you can confidently articulate your value to clients and prospects.

We also talk about strategies to break through when you hit "The Wall" in your practice – that point where you're at capacity with the number of clients you serve, and you can start to feel tired, or overwhelmed, or outright drowning in your own practice – and why eventually, the key to continued success is not about figuring out how to hire more staff or use technology more efficiently or new marketing ideas to grow and add more clients, but how to transition to the right clients for you... even if that means it's time for an "amicable termination" from some of your existing clients.

And be certain to listen to the end, where we talk about the key transition to make if you do want to grow into an ensemble practice beyond yourself... which is all about hiring people you can trust, and learning to let go and not be the bottleneck in your own advisory firm. Which, unfortunately, is much easier said than done.

So whether you are interested in learning more about the challenges of being a successful solo financial advisor, are interested in how to identify the right clients for you, or are wondering how you can build a true ensemble firm that extends beyond yourself, I hope you enjoy this episode of the Financial Advisor Success podcast!

Raising AdvicePay Capital And How Misaligned VC Incentives Strangle Advisor FinTech Innovation

May 28, 2018 07:01 am 0 Comments CATEGORY: Technology & Advisor FinTech

Starting a business from scratch is a risky endeavor, in which often those who put money into the business never even see a return of their money, much less a return on their investment. Which can be especially damaging for a founder who sinks their life savings into a business idea that doesn’t work out… or worse, doesn’t have enough money to put in to get a good idea for a company off the ground in the first place.

Fortunately, though, venture capital firms exist to help fund these high-risk entrepreneurial endeavors. Because for a VC fund, it’s not necessary for every company to succeed; the venture fund can be profitable in the aggregate and generate an appealing return on capital by diversifying across multiple startups, leveraging the power of diversification and the fact that the high risk also generates a very high return potential… such that 80% of the returns may be driven by only 20% of the companies, or in the extreme almost all the returns may come from just 1-2 “home run” investment opportunities that become huge.

Yet the challenge of this kind of ultra-high-risk-and-high-return investing is that VC funds will often shy away from viable business opportunities that are not deemed to be “big enough” to be the home runs necessary to make up for all the potential losses of the companies that don’t work out. Or alternatively, may invest into companies but push the founders to take more risk than they actually wanted to… as while a “Go Big Or Go Bust” approach may work for a diversified VC fund, it can be ruinous to the founder that has only their one company to be a part of!

The end result of this dynamic, particularly in a limited-size “niche” industry like financial advisors, is that few venture capital firms – even those focused on FinTech – actually have any interest in investing in advisor technology, where most of the “successful” companies may eventually sold for $10s of millions… but not the $100s of millions, or billions, that most VC firms are shooting for. Thus why investing in B2C robo-advisors – with their potential for 100+ million consumer households – was more compelling to most venture firms than funding the equivalent next-generation onboarding-and-rebalancing-software solutions for financial advisors.

In turn, this has driven the overwhelming majority of advisor technology innovation to be limited to what companies can be created for advisors, by advisors, and often funded by advisors as well – in a world where the potential to earn “bad” 15% - 20% returns for a VC fund are still “great” returns for an individual advisor-as-investor (whose primary alternative is the stock market). From Junxure to Redtail, to Orion and Tamarac, iRebal and TradeWarrior and Red/Black, RiskPro and Tolerisk… most advisor technology innovation is advisor funded.

Accordingly, we’re excited to announce that our own AdvicePay payment processing solution for financial advisors is opening an extension to its prior Seed round, raising up to $2M of capital directly from the financial advisor community (at least, those who are eligible Accredited Investors!). Because in the end, it seems the only way that technology will improve for financial advisors is to invest in making it happen ourselves!

Weekend Reading for Financial Planners (May 26-27)

May 25, 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 the 5th Circuit Appeals Court has denied what appears to be the last and final appeal of the states to intervene and defend the Department of Labor's fiduciary rule, in what will probably prove to have been the final effort to revive it (although the court itself still hasn't actually issued their final mandate to vacate the rule after their March 15th decision). On a happier note in the news this week, Focus Financial began the paperwork process to file for an IPO, in what would be the first ever initial public offering of an independent RIA providing wealth management (or at least, a holding company that has aggregated dozens of them together).

From there, we have several tax-related articles this week, including a look at savings strategies for high-income individuals who want to save more above-and-beyond maxing out their 401(k) plans and IRAs, workarounds for families that have (unwittingly?) saved money in grandparent-owned 529 plans and now realize the adverse financial aid consequences of the arrangement, and tips and strategies for estate tax (and broader estate) planning when working with ultra-HNW clients (where it's not just about the technical strategies themselves, but ensuring they are properly implemented to avoid IRS scrutiny, and appropriately communicated to the family to avoid future disputes).

We also have a few practice management articles on attracting and retaining employees, including: new research that what employees want isn't just a progression of Maslow's hierarchy but a combination of 3 core areas (career, community, and cause); why it's a good idea to try customizing job descriptions to individual employees (essentially fitting the job description to the employee, instead of the traditional approach of trying to find an employee who fits the job description); tips for handling underperforming employees; and why some advisory firms are exploring new employee benefits like month-long sabbaticals to attract and retain top talent.

We wrap up with three interesting articles, all around the theme of the advisor's role in not just providing advice and recommendations to clients, but helping them actually implement the advice: the first looks at how coaches often command much higher fees than advisors (because people will pay 'something' for good advice and expertise, but even more for someone that helps ensure they actually get it done!); the second looks at how the research on trust in professionals (including advisors) isn't just about demonstrating the advisor's competency and expertise, but his/her "warmth" and caring (because client's won't implement the advice if they don't believe it's really in their best interests); and the last draws on Dr. Moira Somers' new book "Advice That Sticks" and the research from the medical industry on what leads to patients actually adhering to the advice and prescriptions their doctors provide... and what advisors can learn from it about how to make our own advice "stick", too!

Enjoy the "light" reading!