Nerd's Eye View blog

Weekend Reading for Financial Planners (Sep 2-3)

September 1, 2017 02:56 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with a slew of big news, including that the Department of Labor has received OMB approval to issue a formal proposal to delay the full enforcement date of the fiduciary rule by another 18 months until mid-2019 (but will still have to collect and consider public comments before making it final), the IRS is loosening rules on hardship distributions and employer retirement plan loans for those impacted by Hurricane Harvey, a Federal judge has struck down the Obama administration's overtime pay rules (which could have impacted a wide range of financial advisor trainees and paraplanners), HUD has announced new rules that will increase costs and reduce borrowing limits for HECM reverse mortgages, and this weekend Wall Street will be finalizing the switchover to shift most trade settlements from T+3 to T+2 instead.

From there, we have a number of articles on marketing for financial advisors, including: new research on how the financial services industry is using social media (and that even though LinkedIn is the most adopted platform, Twitter is actually the one with the most advisor activity!); the rise of text messaging as a way of communicating with clients; a guide on Facebook marketing and advertising for financial advisors; guidance on the key information that must be on your advisor website to communicate both your costs and your value; and a look at how and why most financial prospects slip through the cracks (and what advisors should do about it).

We wrap up with three interesting articles: the first explores the concept of "nonlinear" thinking, why it's so much better to improve a car's fuel efficiency from 10 Miles Per Gallon to 20MPG (instead of improving from 20MPG to 50MPG), and how such nonlinear concepts translate to other parts of the business world; the second explores the critical thinking concept of "inversion", where instead of focusing on your goals and what it takes to succeed, you focus on what could ruin the outcome (and identify that as something concrete to avoid!); and the last takes a fascinating look at the true difference between an "amateur" and a true "professional", which is all about the mindset of how you approach problems and try to create solutions.

Enjoy the "light" reading!

New SEC Custody Rule Requirements For Advisors With Third-Party SLOA Authority

August 30, 2017 07:01 am 5 Comments CATEGORY: Practice Management

In an effort to provide premium service to clients, it’s common for financial advisors to be granted a standing letter of authorization – or “SLOA” – to enact money movements in and out of a client’s account. The use of SLOAs and other disbursement authorizations effectively allows advisors to act based on a client’s verbal requests, without “troubling” them for additional paperwork and signatures every time.

Yet the caveat is that while providing such conveniences is appealing from a client service perspective, from a regulatory perspective, the ability of an advisor to transfer money out of a client’s account – especially to a third party that isn’t the client – creates the risk that the advisor could abuse their authority. Accordingly, in this “age of Madoff”, the SEC has decided it’s necessary to issue additional compliance rules to protect consumers when it comes to advisors with standing letters of authorization (SLOAs) to make client disbursements.

In this guest post, Chris Stanley, a compliance consultant and the founding principal of Beach Street Legal, shares his perspective on the recent issuance of an SEC No-Action Letter, and supporting FAQ and IM Guidance Update 2017-01, which deems that advisors who have SLOA authority will be treated as having custody of client assets. Which means not only will those assets and accounts need to be reported for custody purposes on Form ADV, but those investment advisers who don’t comply with certain new safe harbor provisions will also be subjected to the requirement for an annual surprise exam under the custody rule as well!

Fortunately, the SEC will allow RIAs to continue to use SLOAs to support clients in limited (but still useful) circumstances, and provide additional guidance on how RIAs can avoid the custody rule if their only standing authorizations are for “first-party” transfers (i.e., moving money amongst accounts that are all the client’s, with the same account registration). Nonetheless, the reality is that most advisors will at least need to work with their RIA custodian to update account agreements and/or some of their SLOA paperwork with clients to remain compliant and avoid surprise exams under the custody rule!

#FASuccess Ep 035: Investing In Your CRM And Your Team To Systematically Grow Your Advisory Business with Cheryl Holland

August 29, 2017 07:01 am 3 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the thirty-fifth episode of the Financial Advisor Success podcast!

My guest on today's podcast is Cheryl Holland. Cheryl is the founder of Abacus Planning Group, a private wealth management firm located in Columbia, South Carolina, that manages more than $1B of assets under management for just over 200 affluent clients.

What's fascinating about Cheryl's firm, though, is the way that she has systematized the processes of the firm - in a way that actually helps them be even more high touch and customized for their clients. From automating workflows, tasks, and reminders of client needs, to building a templated meeting agenda for every client meeting that covers check-ins, celebrations, investment, financial planning, and administrative tasks, to refining an investment process around model portfolios with DFA funds, Cheryl's firm has invested heavily in systematizing the business... and invested heavily into customizing Salesforce as their CRM to facilitate the process.

In this episode, Cheryl shares how her firm structures its blended AUM-plus-planning fee structure, why Abacus sets a minimum fee - rather than an asset minimum - in deciding which new clients to work with, why the firm decided to make a shift towards focusing on a niche of closely-held family businesses after already growing successfully for nearly 20 years, and how the firm markets with a combination of COI referrals, national board volunteerism, and client referrals, to drive its growth.

In addition, we talk about Abacus' approach to reinvesting into its team – because as Cheryl puts it, "you can't grow your firm if your people aren't growing" - with everything from sending employees out to conferences, bringing in psychologists to teach active listening and empathy skills, management training classes for emerging leaders (including Cheryl herself!), and how every the Operations and Administrative team members at Abacus have a chance to take the Registered Paraplanner course and advance themselves in the firm.

And be certain to listen to the end, where Cheryl shares the two key advisory business books that she re-reads every year to advance the firm, how she decides when it's time to make a change and evolve the firm and her role, and her advice to young women who are trying to grow their own advisory careers and manage the competing demands of work, home, and family.

So whether you're curious about how to balance the dynamic between systematizing your firm's processes and procedures without losing the sense of high-touch customization, or simply want some ideas of what, exactly, you might standardize, or are looking for ideas on how to deepen the training and education of the advisors (and emerging leaders) in your firm, I hope you enjoy this episode of the Financial Advisor Success podcast!

How (New) Advisors Should Dress And The Dangers Of Countersignaling

August 28, 2017 07:01 am 19 Comments CATEGORY: Personal/Career Development

A topic of increasing discussion amongst financial advisors is whether it’s truly necessary to dress up in order to attract and retain clients, and whether it might instead be better to adopt more casual attire – either because such attire makes it easier to connect with clients, or because some very experienced and successful advisors have adopted such wardrobes, seemingly with no negative impact on their success. But the reality is, just because a more casual style may work for seasoned and successful advisors, does not mean that it will work for all advisors.

In this guest post, Derek Tharp – our Research Associate at Kitces.com, and a Ph.D. candidate in the financial planning program at Kansas State University – explores the concept of “countersignaling” and what the research shows are the implications it may have for the decision to dress down – particularly amongst younger and newer advisors.

In economics, signaling refers to the ways in which we try to convey information to another party under conditions in which credible communication is difficult. For instance, when meeting with a prospective client, financial advisors may need to engage in certain forms of signaling in order to demonstrate their competency (e.g., becoming a CFP professional), since all advisors trying to win over a prospect would have an incentive to claim they are competent, regardless of their true level of knowledge. By contrast, countersignaling is a strategy which refers to ways in which we may try and demonstrate an even higher level of status by not signaling (e.g., a mid-level student may eagerly attempt to answer an easy question in class, while a high-level student may not, as a signal that their knowledge surpasses the point at which they would take pride in answering such a question).

In an attempt to explain such countersignaling behavior, prior research has used game theory to demonstrate why signaling can be an effective strategy for mid-level individuals with regard to some characteristic (to demonstrate they are not low-level, and to hopefully be perceived as high-level), while countersignaling may actually be more effective for high-level individuals (as they are unlikely to be mistaken as low-level, and signaling could actually give the perception they are mid-level). And this dynamic may have direct implications for the decision to dress down as a financial advisor, as it could be the case that dressing down actually increases the status of an experienced and successful advisor, while dressing down might decrease the perceived status of a young and inexperienced advisor.

Of course, this doesn’t mean that it isn’t still wise to consider other factors, such as a particular client niche (and their typical dress/attire), when deciding whether or not to dress down. But given that many people prefer to not dress up, advisors – and particularly those who are young and inexperienced – should be careful not to skip out on opportunities to signal credibility to prospective clients, and be especially cognizant of the fact that just because seasoned advisors can dress down successfully, does not mean that young and inexperienced advisors can, too!

Weekend Reading for Financial Planners (Aug 26-27)

August 25, 2017 02:56 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with an interesting new advisor survey on the Department of Labor's fiduciary rule, which finds that despite the claims of Wall Street lobbying firms that "small investors" will be abandoned if the fiduciary rule fully takes effect, only 3% of financial advisors themselves actually agree with the statement that they'll stop providing advice on qualified retirement accounts in a fiduciary world!

From there, we have a number of articles on the topic of health insurance and health care planning this week, including a look at the rise of "direct primary care" providers who simply charge an ongoing monthly fee (and accept no insurance) for a primary physician with easier access and shorter wait times for an appointment, the rise of "concierge medicine" and private doctors that work directly to provide holistic medical advice for a wealthy family, a new platform for advisors called "HealthStyles.net" that can be provided to clients to help them get more educated on health care issues, and another new software solution called "Whealthcare" for advisors who want to get even more involved in supporting and better analyzing the intersection of a client's financial planning and health care needs (a substantial opportunity to add value as investment management becomes commoditized).

We also have several investment-related articles, including a look at the increasingly controversial practice of order routing rebates from market exchanges to broker-dealers, a potential pilot program from the SEC to shift away from the current "maker-taker" structure of setting markets, the opportunity (and underutilization) of securities-based lending revenue to offset most or all of the expense ratio of ETFs, and the prospective rise of performance-based fees in mutual funds as a way for fund managers to differentiate their pricing and better align their compensation with the interests of their mutual fund shareholders (though it remains to be seen whether investment managers will actually be willing to adopt the practice!).

We wrap up with three articles focused on the evolving role of the financial advisor itself: the first reviews a recent Boston Consulting Group study that suggests as technology continues to expedite the administrative tasks of financial advisors, that we'll be increasingly forced to deliver more sophisticated advice, and need more in-depth formal education to substantiate our value; the second is a look at the rise of financial coaching, and the emergence of training programs for those who want to be financial coaches and financial therapists (and whether financial planners should be engaging in such training programs themselves); and the last is a look at how the generational shift in financial planners themselves, from the "founding" Baby Boomer generation of advisors to the Millennials, is creating a significant shift in the vision of what it means to be a financial planner in the first place, and is driving a growing number of young financial planners to strike out on their own to create new firms that disrupt the incumbents... exactly as the prior generation of Baby Boomer financial planners did 20-30 years ago!

Enjoy the "light" reading!

How the Fiduciary Movement Became a Global Phenomenon

August 24, 2017 08:38 am 4 Comments CATEGORY: Planning Profession

While the fiduciary debate has become heated in the US in recent years, from the Department of Labor's fiduciary rule, to the potential that the SEC will take up its own fiduciary rule, and the latest proposed revisions to the CFP Board's fiduciary Standards of Conduct, the reality is that the recent fiduciary proposals are not an isolated case. In fact, the movement to applying a fiduciary standard to financial advisors is a global phenomenon over the past decade, for which the fiduciary proposals in the US have actually been mild by comparison to many other countries that have outright banned commissions altogether!

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss the major fiduciary movement that is occurring globally, how fiduciary proposals have rolled out in other countries (including the U.K., Australia, India, and the Netherlands), as well as the industry shifts that commonly happen after a new fiduciary rule is implemented, and the role that technology has played in fueling this global movement.

First and foremost, though, it is important to acknowledge that the movement to apply a fiduciary duty to financial advisors is truly is a global movement. India was one of the first countries to take action, banning upfront commissions on open-ended mutual funds all the way back in 2009. Australia followed with their Future Of Financial Advice (FOFA) reforms in 2012, which ultimately led to a ban on investment commissions as well. Similarly, the United Kingdom in 2013 implemented their Retail Distribution Review (RDR), which similarly led to a ban on investment commissions in the U.K., and the Dutch implemented a commission-ban that year as well. And in most countries, regulators gave the financial services industry only 12-18 months to prepare for the reforms. Which makes the recent DoL fiduciary proposal in the US, and its extended transition period, seem "mild" by comparison!

The fact that fiduciary rules have been implemented in other countries also gives us the opportunity to see the likely fallout that occurs when financial advisor regulation changes. The common trend in most countries has been that, after adopting new fiduciary rules, the headcount of "financial advisors" appears to decline between 10% and 30%. Notably, though, the individuals who leave appear primarily to be not bona fide financial advisors, but simply those who wrote "Financial Advisor" on their business card, but acted solely as a salesperson... and simply decide they don't want to actually be responsible for giving financial advice, once the investment commissions are no longer available! Which ironically just leaves even more opportunity for the actual financial advisors who remain behind!

With the fiduciary trend occurring on a global basis simultaneously, one might wonder what it is that has led so many countries to implement fiduciary rules in quick succession. The answer, in a world, appears to be: technology. Because around the world, the rise of the internet has made it easier and easier for consumers to access the financial products they want and need directly, without a financial advisor to sell it to them (and earn a commission)... which makes consumers begin to ask "why am I paying a financial advisor for a product I could buy online anyway?" And forcing advisors to actually begin to give bona fide advice, and not just the "advice" necessary to sell a product. In turn, the rise of financial advisors actually focusing on giving advice makes the fiduciary rulemaking a natural outcome. Because when the majority of advisors actually focus on advice, what standard could possibly apply to advice besides one that requires the advice to be in the best interests of the consumer receiving the advice!?

Ultimately, though, the key point is simply to recognize that as technology commoditizes financial products and increasingly forces advisors to focus on truly giving advice, fiduciary rules to hold that advice accountable to an appropriate standard are inevitable... and thus, the fiduciary movement has quickly become a global phenomenon. Which means our battle over the DoL fiduciary rule is not merely some esoteric isolated debate going on here in the U.S... as the fiduciary movement is impacting consumers and advisors worldwide!

Why Paying Yourself 5% Interest On A 401(k) Loan Is A Bad Investment Deal

August 23, 2017 07:01 am 41 Comments CATEGORY: Retirement Planning

Borrowing money has a cost, in the form of loan interest, which is paid to the lender for the right and opportunity to use the borrowed funds. As a result, the whole point of saving and investing is to avoid the need to borrow, and instead actually have the money that’s needed to fund future goals.

A unique feature of a 401(k) loan, though, is that unlike other types of borrowing from a lender, the employee literally borrows their own money out of their own account, such that the borrower’s 401(k) loan repayments of principal and interest really do get paid right back to themselves (into their own 401(k) plan). In other words, even though the stated 401(k) loan interest rate might be 5%, the borrower pays the 5% to themselves, for a net cost of zero! Which means as long as someone can afford the cash flows to make the ongoing 401(k) loan payments without defaulting, a 401(k) loan is effectively a form of “interest-free” loan.

In fact, since the borrower really just pays interest to themselves, some investors have even considered taking out a 401(k) loan as a way to increase their investment returns, by “paying 401(k) loan interest to themselves” at 5% instead of just owning a bond fund that might only have a net yield of 2% or 3% in today’s environment.

The caveat, though, is that paying yourself 5% loan interest doesn’t actually generate a 5% return, because the borrower that receives the loan interest is also the one paying the loan interest. Which means paying 401(k) loan interest to yourself is really nothing more than a way to transfer money into your 401(k) plan. Except unlike a traditional 401(k) contribution, it’s not even tax deductible! And as long as the loan is in place, the borrower loses the ability to actually invest and grow the money… which means borrowing from a 401(k) plan to pay yourself interest really just results in losing out on any growth whatsoever!

The end result is that while borrowing from a 401(k) plan may be an appealing option for those who need to borrow – where the effective borrowing cost is not the 401(k) loan interest rate but the “opportunity cost” or growth rate of the money inside the account – it’s still not an effective means to actually increase your returns, even if the 401(k) loan interest rate is higher than the returns of the investment account. Instead, for those who have “loan interest” to pay to themselves, the best strategy is simply to contribute the extra money to the 401(k) plan directly, where it can both be invested, and receive the 401(k) tax deduction (and potential employer matching!) on the contribution itself!

#FASuccess Ep 034: Becoming An Advisor #FinTech Software Entrepreneur While Running Your Own Advisory Firm with Sheryl Rowling

August 22, 2017 07:01 am 1 Comment CATEGORY: Financial Advisor Success Podcast

Welcome back to the thirty-fourth episode of the Financial Advisor Success podcast!

My guest on today's podcast is Sheryl Rowling. Sheryl is the founder of Rowling and Associates, an independent advisory firm in southern California that manages more than $300 million of assets under management, and provides a combination of investment management, financial planning, and tax preparation services for clients.

What's unique about Sheryl, though, is not simply that she's built a successful advisory firm with a team of 12, but that in an effort to try and make her firm's investment management process more efficient, she decided to create her own rebalancing software... and then sell it to other financial advisors as the software solution we now know to be Total Rebalance Expert, or TRX, which was subsequently acquired just a few years ago by Morningstar.

In this episode, Sheryl talks about what it was like building a technology firm (while running her advisory firm as well!), how building an advisor technology firm differs from building a traditional advisory firm, the challenging demands of needing to iterate rapidly in a competitive software landscape, and the personal toll that it takes in trying to simultaneously run both an advisory firm and an advisor technology firm at the same time.

In addition, we talk in depth about the structure of Sheryl's CPA financial planning firm, why they decided to offer - and charge separately - for tax preparation services in addition to financial planning, the core technology stack of MoneyGuidePro, Junxure CRM, and PortfolioCenter (bundled, of course, to TRX for rebalancing) that she uses to operate the firm, and how she positions her comprehensive financial planning offering to her clients as "we answer every financial question you have, and the ones you don't even know to ask!"

And be certain to listen to the end, where Sheryl discusses her "As If" rule to decide what to focus on and how to build her ideal practice, and the newest solution she's launching for fellow financial advisors, to purchase her investment team's model portfolios and due diligence research for a flat annual fee - which, you can then implement in your own rebalancing software, but without the AUM fees of a full-blown TAMP provider.

And so whether you’re looking for fresh perspective on a comprehensive financial planning firm with a strong tax focus, or have ever wondering specifically what it takes to launch an advisor technology solution “on the side”, I hope you enjoy this episode of the Financial Advisor Success podcast!

Comment Letter To CFP Board On Its Proposed Fiduciary Standards Of Conduct

August 21, 2017 07:01 am 33 Comments CATEGORY: Regulation & Compliance

In December of 2015, the CFP Board announced that it was beginning a process to update its Standards of Professional Conduct for all CFP certificants, the first such update since the last set of changes took effect in the middle of 2008. And on this past June 20^th, the CFP Board published proposed changes (including an expanded fiduciary duty) to its Standards of Conduct, with a public comment period that would last until August 21^st.

And so as the CFP Board’s Public Comment period closes today, I have published here in full my own comment letter to the CFP Board. And as you will see in the Comment Letter, I am overall very supportive of the CFP Board advancing the fiduciary standard of care for CFP professionals, and view this as a positive step forward for the financial planning profession.

However, the CFP Board’s proposed changes do introduce numerous new questions and concerns, from key definitions that (in my humble opinion) still need to be clarified further, to new wrinkles in what does and does not constitute a fee-only advice relationship (and whether and to what extent certain types of compensation must be disclosed), to uncertainties about how CFP professionals are expected to navigate important conflicts of interest, and how CFP professionals should interpret the 29(!) instances where the CFP Board’s new standards are based on “reasonableness”… with no explanation of how “reasonable” is determined, and a non-public CFP Board Disciplinary and Ethics Commission that doesn’t even allow CFP professionals to rely on prior case histories for precedence.

Ultimately, I am hopeful that the CFP Board will end up moving forward with its proposed changes to expand the scope of fiduciary duty for CFP certificants, but only after publishing another round of the proposal for a second comment period, given the substantive nature of both the changes themselves, and the concerns that remain.

In the meantime, I hope you find this public comment letter helpful food for thought. And if you haven’t yet, remember that you too can submit your own Public Comment letter to the CFP Board by emailing [email protected] – but today (August 21^st) is the last day to submit!

Weekend Reading for Financial Planners (Aug 19-20)

August 18, 2017 02:01 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with a slew of announcements about major broker-dealer mergers and acquisitions, including LPL acquiring National Planning Holdings (and its four subsidiary broker-dealers) from Jackson National, Kestra acquiring H. Beck from Securian and Minnesota Life, and Cetera folding in Girard Securities from being an independent subsidiary broker-dealer into a regional super-OSJ instead... a sign that as DoL fiduciary implementation looms large, broker-dealers are feeling the pressure to merge for economies of scale, and insurers are simplifying their distribution by eliminating their captive broker-dealers altogether!

We also have several compliance-related news and articles this week, including the SEC's latest Risk Alert regarding the results of its Cybersecurity initiative for broker-dealers and RIAs, a separate announcement from the SEC that RIAs can delay some of the new Form ADV updates if they have any intra-year amendments to make after October 1st (though all RIAs will still need to comply when annual ADV season rolls around next spring!), and a look at what RIAs need to remember when hiring a new (experienced) advisor and going through the registration and compliance process of onboarding.

There are also a few advisor technology articles, including a look at the new technology initiatives rolling out from the leading RIA custodians as "advisor FinTech" becomes the primary differentiator for custodians, a look at the latest updates of the Capitect client portal (and increasingly, performance reporting and rebalancing) software, and a review of the Folio Connexion (AcX) platform that advisors can use to create their own white-labeled "robo-advisor-for-advisors" solution.

And given the summer vacation season, we wrap up with three articles all focused on how to better maximize your own vacation enjoyment: the first looks at whether a mandatory scheduled vacation policy is better than a flexible or open vacation policy when it comes to actually boosting employee creativity, productivity, and happiness; the second looks at why a 2-week vacation isn't actually any better than a 1-week vacation when it comes to boosting happiness; and the last provides some (research-backed) tips and tactics about how to actually maximize the happiness of your vacation experience... for those who still have a little summer vacation left, or perhaps are already beginning to look forward to their winter holiday vacations instead!

Enjoy the "light" reading!