Nerd's Eye View blog

Weekend Reading for Financial Planners (Aug 12-13)

August 11, 2017 02:57 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the Department of Labor's announcement that it is working on a new delay proposal for the full implementation of the fiduciary rule, that could extend the current transition period by as much as 18 months to July of 2019... though it remains unclear what legal basis the DoL has for postponing full implementation so much further, and whether OMB will actually approve its proposal.

In the meantime, DALBAR's Lou Harvey has proposed a new "Seller's Exemption" that would make it easier for salespeople to avoid the fiduciary rule - on the condition that they do not provide any actual advice, nor hold out to the public as "advisors" - and given that the delay would still just delay full implementation (but not repeal the fiduciary rule itself), we also feature coverage on what procrastinating advisors should do to get caught up on their upcoming DoL fiduciary compliance obligations.

From there, we have several practice management and personal productivity articles, including: how to achieve a state of "Flow" and peak productivity; the ways that we as financial advisors sometimes sabotage our own growth as we try to change our businesses to better fit our own lives; what to focus on if you're a "reluctant manager" who just wanted to serve clients but now increasingly find yourself in a managerial role with your advisory team; common conversational traps that advisors fall into with clients; why it's crucial to understand your financial planning "weaknesses" and limitations on your technical knowledge (and don't say you're "comprehensive" when you're really not!); and a reminder that financial planning can take an emotional toll on us as advisors, which means it's especially important to have strategies to manage your own stress!

We wrap up with three interesting articles, all looking at emerging trends in the advisory landscape: the first looks at whether advisory firms need to stop focusing on increasingly commoditized investment (and even comprehensive financial planning) advice, and instead try to figure out how to expand their services to also include solutions their clients more proactively seek out; the second examines the aftermath of the "new" fiduciary rules (and outright commission bans) that rolled out in the UK and Australia in the past 5 years, which ultimately did not disrupt financial advisors (but did force them to shift their business models); and the last is an interesting look at whether the new term for advice-centric advisors to differentiate themselves is to not just be "fee-only" but to be an "advice-only" fee-for-service advisor, where by definition the only thing the client pays for is the advice itself (and nothing else)!

Enjoy the "light" reading!

Why Broker-Dealers Launching Robo-Advisors Are Missing The #FinTech Point

August 10, 2017 02:04 pm 6 Comments CATEGORY: Technology & Advisor FinTech

Broker-dealers launching their own "robo-advisor-for-advisors" solutions for their reps has been a growing and accelerating trend. From prior announcements like the LPL deal with FutureAdvisor after Blackrock bought them, to Voya stating that they are looking to acquire a robo-advisor solution, and this week Kestra Financial announcing that it is working on a robo solution in the coming year as well. Yet the irony is that even as broker-dealers increasingly hop onto the "robo tools" bandwagon, they may actually be the worst positioned to capitalize on the trend, especially if their goal is to increase their volume of next-generation Millennial clients for their reps!

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss why broker-dealers are missing the point by launching "robo" solutions, how broker-dealers will struggle to gain any traction with Millennials - even with a robo-advisor - because of their digital marketing woes, and why broker-dealers should really be framing "robo solutions" as simply an upgrade to their entire technology stack instead!

Given the popular notion that "robo-advisors" are an effective means to grow a Millennial client base, it's certainly understandable that broker-dealers want to pursue "robo" solutions. After all, the reality is that while the average advisor may simply be able to keep working with affluent retirees until the advisor themselves retires, broker-dealers are going-concern businesses that must focus on the long run - and recognize that eventually, the coming shift in generational wealth (as Baby Boomers pass away and bequeath assets to their Millennial children) means that they must find a way to grow their Millennial client base. And for the average broker-dealer rep who struggles to efficiently serve small accounts, who wouldn't want a "robo" solutions where clients can come to the broker's website and sign up and onboard themselves?

Yet the truth is that robo-advisor tools don't actually attract Millennial clients. At best, they're a highly efficient means to onboard and manage a Millennial client's account, but the firm must still figure out how to market and attract Millennial clients in the first place. Which has been a challenge even for the most established robo-advisors, as companies like Betterment and Wealthfront have only averaged $1B to $2B per year in net new asset flows (and even then at "just" a 25bps price point!), and even the more eye-popping growth of Schwab Intelligent and Vanguard Personal Advisor Services has been driven primarily by clients who already had their assets with those brands, and simply moved them to their new "robo" offerings. And in point of fact, Vanguard's solution wasn't even the rollout of a robo-advisor, but the addition of human financial planners to clients who already worked with Vanguard digitally - a "cyborg" (tech-augmented human CFP professional) solution that is taking over the industry, with Personal Capital, Schwab, and even Betterment now offering tech-augmented human CFP advisors (and not just a robo solution alone).

In fact, when it comes to marketing to Millennials, even the robo-advisors have struggled with client acquisition costs, and they have entire companies (or at least entire divisions) with dedicated direct-to-consumer marketing, and the ability to leverage substantial existing brands (in the case of Schwab and Vanguard). By contrast, most broker-dealers have little brand recognition with consumers, a decentralized marketing process (where every rep is responsible for their own marketing and business development), and a cumbersome compliance process that makes it almost impossible to rapidly iterate the broker's digital marketing efforts to attract Millennials online. Which means broker-dealers that launch "robo" initiatives are unlikely to see much of any asset flows whatsoever.

All this point said, it doesn't mean that the "robo" tools themselves are bad for a broker-dealer to adopt. To the contrary, there are tremendous operational efficiencies to be gained with “robo” technology that expedites the process of onboarding clients and efficiently managing (model) portfolios. But again, that's because robo tools are all about operational efficiencies... not marketing and business development! Which means broker-dealers announcing they are going to roll out "robo" tools will at best underdeliver on its promise of bringing in new young clients without needing to do any work – because it’s not a marketing solution for Millennials, it’s an operational solution after you do the marketing to Millennials yourself (which, most advisors don’t do well in the first place)! And at worst, brokers themselves just won’t adopt the tools, because they feel threatened by "robo" tools that imply the broker can be replaced (even if real advisors aren't at risk of being replaced by robos). Instead, what broker-dealers should do is simply say “we’re upgrading our technology to make you more operationally efficient in opening and managing investment accounts.” Because that's what it’s really about. And that’s the outcome that really matters!

Why The Trusteed IRA May Be A Riskier Alternative To A Trust As IRA Beneficiary

August 9, 2017 07:01 am 10 Comments CATEGORY: Retirement Planning

Historically, most individual retirement accounts are structured as a “custodial” account, but the Internal Revenue Code permits IRAs to be structured as trust accounts as well.

The benefit of using a “trusteed IRA” is that the account is literally controlled by a trust document, which both ensures continuity in the form of a trustee that manages the account, and can restrict beneficiaries’ future access to the money after the original IRA owner dies (either to protect them from themselves, or to protect their IRA inheritance from potential creditors).

The caveat, however, is that a trusteed IRA really doesn’t provide any benefits that can’t already be accomplished with a (separate) trust as beneficiary. And in fact, having a standalone trust drafted to be the beneficiary of a retirement account can provide even more flexibility, or more robust spendthrift and asset protection for future beneficiaries.

Nonetheless, the ranks of trusteed IRA providers have been growing in recent years, in part because the trusteed IRA is highly appealing from the perspective of the IRA provider – because, as the trustee of the IRA itself, it’s very difficult for future beneficiaries to ever fire the trustee or transfer the account to another provider, allowing the trusteed IRA provider a greater likelihood of retaining the assets than a traditional custodial IRA provider. In addition, it’s notable that while drafting a separate trust as beneficiary of a retirement account has a non-trivial one-time upfront cost, it may still be less than paying ongoing fees for the trustee to manage and administer the trust for what could be decades into the future.

The trusteed IRA may still be appealing in situations where the IRA owner wants to outsource investment management for beneficiaries, is comfortable with the “risk” that beneficiaries may have trouble changing providers anyway, and simply cannot find a competent attorney who can draft a proper conduit or accumulation trust to serve as the IRA beneficiary instead. Yet ultimately, for those who do have access to competent legal counsel as part of the estate planning process, a well-drafted trust as IRA beneficiary can accomplish everything a trusteed IRA provides, and potentially more estate planning strategies as well!

#FASuccess Ep 032: Building A Personal Brand Advisory Business Of Financial Planning And Online Money Management Courses with Brittney Castro

August 8, 2017 07:01 am 7 Comments CATEGORY: Financial Advisor Success Podcast

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

My guest on today's podcast is Brittney Castro. Brittney is the founder of Financially Wise Women, an independent RIA in the Los Angeles area that specializes in providing fee-only financial planning for professional women in their 30s and 40s.

What's unique about Brittney's advisory business, though, is not just that she's generating more than $100,000 in standalone financial planning fees, but that by building an entire personal brand business around herself, she's been able to diversify her revenue streams as a financial advisor to include offering online courses, paid speaking, and even corporate partnerships where she is paid to be a brand ambassador for financial literacy!

In this episode, Brittney talks in depth about the digital marketing strategies she uses to attract young professional women who are ready and willing to pay her $2,500 to $5,500 financial planning fees, the 5-meeting process she uses over 6 months to deliver financial planning advice and earn her fees, how she structures her ongoing retainer fee for clients, and what she does for them on an ongoing basis (when there's no portfolio to manage). In addition, we also look at how Brittney built her highly scalable online Money Class course on personal finance, and how she's been able to generate nearly $100,000 of additional revenue over the past several years by selling her course for $497 per person... despite spending less than $10,000 and 40-50 hours of her time to make it... which means her investment into building that online course has generated about a whopping $2,000 an hour for her time!

We also talk about how Brittney gets paid for professional speaking, the world of "influencer marketing", and why a financial institution would pay her a substantial amount of money just to have Brittney - the financial advisor - be affiliated with their brand.

And be certain to listen to the end, when Brittney talks about how the key to her success is all about focusing on one area of her business at a time, working on improving it, and then moving on to the next area, while maintaining a large number of independent outsources who each help her in specialized aspects of her business.

And so whether you’ve been wondering how to position fee-for-service financial planning to younger clients who can pay planning fees but have no assets to manage, or want perspective on how a successful personal brand as a financial advisor can open up new business lines, or have simply been curious about what it takes to create an online course to reach new clients, I hope you enjoy this episode of the Financial Advisor success podcast!

The Latest In Financial Advisor #FinTech (August 2017)

August 7, 2017 07:01 am 1 Comment CATEGORY: Technology & Advisor FinTech

Welcome to the August 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 a look at Morgan Stanley’s rapid pace of reinvention as a tech-savvy wirehouse since hiring away Schwab’s Naureen Hassan to become the firm’s Chief Digital Officer in early 2016. Since then, the company seems to be rapidly overcoming the traditional “Not Invented Here” mentality of wirehouses, forging partnerships with a number of outside providers, even as they build a fascinating vision of a robust tech-augmented human advisor platform, where the software continuously monitors and analyzes the situation for all clients and nudges the advisor with “Next Best Action” ideas that the advisor can take to the client (queued up with pre-written communication templates that the advisor can easily modify and adapt to individual client circumstances).

From there, the latest highlights also include a slew of companies announcing new “platform” initiatives, including:

FinFolio launches Wealthlab.io, a standalone REST API back-end platform for account openings, trading and rebalancing, and data feeds, that should provide an expedited foundation for new robo startups (or even large advisory firms that want their own custom-created wealth management solution).
FinMason launches a new FinTech accelerator program, allowing startups to build on their FinRiver data analytics to create and rapidly deploy solutions to advisors (or consumers).
Pershing continues to try to expand its open API platform to compete with TD Ameritrade’s VEO open architecture (and provide new advisor FinTech startups an alternative to building for “just” TD Ameritrade alone).
Apex Clearing strikes yet another deal with a “robo” middleware solution to help it gain distribution to the independent RIA marketplace and compete against the likes of Schwab, Fidelity, TD Ameritrade, and Pershing Advisor Solutions.

You can view analysis of these announcements and more trends in advisor technology in this month's column, including “robo”-401(k) provider Vestwell partnering with Fiserv, Advisor Software launching a new “Behavioral IQ” solution that aims to go beyond just risk tolerance and risk capacity, RobustWealth partners with Roofstock to allow advisors and their clients to invest directly into rental real estate and have the results aggregated with the rest of the portfolio, Morningstar acquiring a 40% stake in Sustainalytics as it doubles down on its commitment to its Morningstar Sustainability Globes, AdvisorHub launches a platform called “AssetLink” to re-define how advisors engage with wholesalers, and more!

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 (Aug 5-6)

August 4, 2017 02:59 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with several recent industry tracking studies, including one showing that RIA assets continue to grow (but those serving individual investors continue to be dominated by a large volume of "small" advisory firms with less than $1B of AUM and fewer than 10 non-clerical employees), and another examining fund flows data and finding that advisors are not eschewing actively managed funds altogether, just high-cost funds - as both ETFs, and low-cost active funds (with expense ratios under 20bps) are experiencing positive inflows!

From there, we have a few technical articles, including: strategies to plan around the Medicare Part B and Part D surcharges for those with high income; how the growth rate of college tuition has actually been in steady decline for a decade (and last year was actually in-line with the general level of inflation); ways to use trusts to shelter (and tax-manage, and asset-protect) investment real estate; and a primer on how annuity mortality credits really work.

We also feature several practice management articles this week, from a look at how to develop the "other" career track in advisory firms (for administrative and operational employees), to why it's crucial to develop career tracks and provide promotions based on performance and skill attainment (and not just based on tenure), and why businesses (both advisory firms and in other industries) often start to "break" as they cross 25 employees, and have to adjust to the dynamics of being a larger business.

We wrap up with three interesting articles, all looking at mindset issues in what it takes to be financially successful: the first looks at a recent Journal of Financial Planning study, which finds that more affluent households tend to take more financial risks, but only because they also tend to better understand those risks (and take them prudently) in the first place; the second discusses some of the "habits" of the affluent that appear to bolster their wealth accumulation and financial success; and the last examines Warren Buffett's recent statement that his future successor must not only be smart, but have a "money mind", and explores what it really means to have a money mind.

Enjoy the "light" reading!

Finding Confidence To Differentiate On Advisor Value Instead Of Price

August 3, 2017 10:14 am 9 Comments CATEGORY: Practice Management

Financial advisors charge a wide range of advisory fees, which can vary based on everything from the depth and breadth of the advisor's services, to his/her skills and expertise. Yet in recent years, there has been a growing level of criticism directed towards advisors who charge "above-average" fees, implying that doing so is a potential breach of their fiduciary duty to clients... with no regard to the fact that the advisor might simply have a more specialized level of expertise that merits those higher fees.

In fact, on a recent episode of the Financial Advisor Success podcast, we had Dana Anspach, who has a niche financial planning business with an incredibly well-defined process for serving retirees, that has grown from $30M to $130M of AUM in just the past 5 years. Yet rather than celebrating her success, many in the advisory community have taken to criticizing Anspach's fee structure of 1.25% AUM plus an upfront planning fee of $6,900, on the grounds that it is too high for a fiduciary to charge when 'everyone knows' the typical advisory fee is just 1%.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss whether advisors who charge more than the average advisory fee should be criticized for not charging less, or admired for their ability to craft a clearly defined value proposition that is so compelling that clients are willing to pay those fees for the value they perceive!

First and foremost, though, it's crucial to point out that the fiduciary rule does not require an advisor to be the 'lowest cost" provider or charge no more than the average advisory fee in the first place. Instead, it simply requires financial advisors to charge fees commensurate with their services, that are "not excessive" relative to the going rate for similar services. Which means there's nothing wrong with charging an above-average fee to deliver an above-average solution, as Anspach's firm does with their unique, differentiated, specialized service for retirees.

In fact, the only ones who seem to be complaining about Anspach's fee structure are not her clients (who appear to be finding good value in what her firm provides), but other financial advisors – who imply, or in one case outright said to me, “Why would someone work with Dana at 1.25%, when I offer retirement planning to my clients and only charge a ‘more reasonable’ 1%?”

The irony of the advisor making this statement is striking, given that as advisors we routinely urge our clients not to just shop based on price alone. We tell them to shop based on value. Not just the cost, but what you get for the cost. But shopping based on value means that reasonable fees could go in either direction – with advisors charging less, or more, based on the value they provide. Not to mention that from an advisor's perspective, competing on price alone eventually becomes a serious problem for most advisory firms. In part, it is because competing on price alone attracts price sensitive fee-conscious clients, but the real problem is that when you compete just on price, you're not competing on actual value and there's always going to be someone who can figure out how to charge less than you.

Yet in recent years, more and more advisors are competing on price, either by focusing on how their fees are lower than the fees of other advisors, and/or trying to offer differ advisory fee models - for instance, annual retainers in lieu of AUM fees - as a means of differentiating based on price. Which suggests to me that the real problem is that advisors are continuing to struggle in figuring out how to effectively differentiate, and lack confidence in their own value proposition (and therefore feel compelling to compete by cheapening their pricing, instead).

And this is actually borne out in some of the recent research on how advisors set their fees, with Bob Veres' recent study finding more experienced advisors charge higher all-in costs than those in their first 1-5 years, and our first XY Planning Network benchmarking study which found that 100% of financial advisors surveyed were raising their fees after their first three years of business – suggesting that as advisors gain confidence in what they do, they actually tend to raise their fees, even as they move upmarket and work with larger clients.

Ultimately, though, the fundamental point here is that when I see a growing number of advisors who snipe at the fees of other advisors, what it suggests to me is that there are a lot of advisors who still aren't really confident in their own value. Instead of asking how they can focus, specialize, and build a niche that commands higher fees the way that firms like Anspach have been able to do, they ask why her clients wouldn't just work with them instead since their fees are lower. But that entirely misses the point. Dana's specialized niche adds more value to her target clientele, and can command a higher fee.

Which means in the end, if advisors want to bolster their pricing and value proposition to better attract new clients and grow their advisory businesses, they should be looking to emulate successful advisors, rather than criticizing their business success!

The Impact Of Early Retirement On Projected Social Security Benefits

August 2, 2017 07:01 am 28 Comments CATEGORY: Retirement Planning

Social Security operates as an income replacement formula, with higher benefits for those who work for more years. As a result, benefits are very limited for those who don’t work for very many years, and are much higher for those with a full working career.

To avoid confusing those who haven’t worked very many years yet – but plan to – the standard Social Security benefits statement projects out anticipated future Social Security benefits based on the assumption that the individual will continue working until retirement. Which allows the individual to understand what Social Security benefit they are “on track for” as they continue to work until full retirement age. Except, of course, that not everyone actually plans to work until full retirement age!

For those who intend to retire early, the end result is that the Social Security Administration’s projected benefits calculation may turn out to be substantially higher than what someone will actually receive if they retire early, and never actually work as many years as anticipated. The lower someone’s lifetime earnings overall, and the earlier he/she retires, the more dramatic the impact can be, commonly reducing benefits by 5% to 10% when retiring early, and potentially far more for “extreme” early retirement. Although the impact is also substantially affected by whether recent earnings were higher or lower than their long-term average… and whether they’ve already paid into the Social Security system for at least 35 working years (or not).

Ultimately, the reality is that Social Security benefits aren’t actually reduced for those who retire early – they simply stop accruing additional benefits when they stop working. But given that Social Security projects the assumption of work until full retirement age, it’s crucial to recognize that actual benefits may be lower for those who retire early – even if they wait until full retirement age to actually receive those benefits. In the end, that may not stop a prospective early retiree from making the decision to stop working – and notably, continuing to “work” even after retirement can continue to increase benefits as well – but at a minimum, it’s crucial to take a moment and look at the individual’s inflation-adjusted historical earnings, to understand whether or how much of an impact not working to full retirement age may actually have on projected benefits!

#FASuccess Ep 031: How To Properly Vet New Financial Advisors By Hiring For Attitude And Not Skills with Caleb Brown

August 1, 2017 07:01 am 0 Comments CATEGORY: Financial Advisor Success Podcast

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

My guest on today's podcast is Caleb Brown. Caleb is the founder of New Planner Recruiting, a recruiting firm that, as the name implies, focuses specifically on hiring newer associate-level financial planners.

What's unique about Caleb's recruiting process, though, is the way that he vets prospective financial planners to determine whether they're likely to be successful in the advisory business in the future, with a strong focus not just on their technical skills, but the initiative and effort that they put into the process of trying to get hired through his recruiting business in the first place. Because the reality is that you can provide education on the book knowledge of financial planning, and train a lot of financial planning skills, but it's almost impossible to teach someone to have that go-getter kind of attitude that it really takes to succeed as a financial advisor.

In this episode, Caleb talks at length about what issues you should consider in the hiring process for a prospective new advisor, the role of using various types of personal and other assessment tools to evaluate potential hires, what you should - and shouldn't - expect your new hire to do and bring to the table to make your advisory business more successful, and what the going rate salary is that you have to pay as an advisory firm to get quality talent.

And be certain to listen to the end, where Caleb talks about his tips on how to work through the inevitable difficult times that arise as an entrepreneur, and how an executive coach has helped him to keep his focus.

So whether you’ve been struggling with finding good financial planning talent for your firm and are looking for ideas on how to better identify and screen potential hires, or you’re a prospective financial planner looking for insight about what it takes to get your foot in the door with a good financial planning firm, I hope you enjoy this latest episode of the Financial Advisor Success podcast!

Financial Advisor Fees Comparison – All-In Costs For The Typical Financial Advisor?

July 31, 2017 07:01 am 21 Comments CATEGORY: Practice Management

While the standard rule-of-thumb is that financial advisors charge 1% AUM fees, the reality is that as with most of the investment management industry, financial advisor fee schedules have graduated rates and breakpoints that reduce AUM fees for larger account sizes, such that the median advisory fee for high-net-worth clients is actually closer to 0.50% than 1%.

Yet at the same time, the total all-in cost to manage a portfolio is typically more than “just” the advisor’s AUM fee, given the underlying product costs of ETFs and mutual funds that most financial advisors still use, not to mention transaction costs, and various platform fees. Accordingly, a recent financial advisor fee study from Bob Veres’ Inside Information reveals that the true all-in cost for financial advisors averages about 1.65%, not “just” 1%!

On the other hand, with growing competitive pressures, financial advisors are increasingly compelled to do more to justify their fees than just assemble and oversee a diversified asset allocated portfolio. Instead, the standard investment management fee is increasingly a financial planning fee as well, and the typical advisor allocates nearly half of their bundled AUM fee to financial planning services (or otherwise charges separately for financial planning).

The end result is that comparing the cost of financial advice requires looking at more than “just” a single advisory fee. Instead, costs vary by the size of the client’s accounts, the nature of the advisor’s services, and the way portfolios are implemented, such that advisory fees must really be broken into their component parts: investment management fees, financial planning fees, product fees, and platform fee.

From this perspective, the reality is that the portion of a financial advisor’s fees allocable to investment management is actually not that different from robo-advisors now, suggesting there may not be much investment management fee compression on the horizon. At the same time, though, financial advisors themselves appear to be trying to defend their own fees by driving down their all-in costs, putting pressure on product manufacturers and platforms to reduce their own costs. Yet throughout it all, the Veres research concerningly suggests that even as financial advisors increasingly shift more of their advisory fee value proposition to financial planning and wealth management services, advisors are still struggling to demonstrate why financial planning services should command a pricing premium in the marketplace.