Nerd's Eye View blog

Weekend Reading for Financial Planners (July 1-2)

June 30, 2017 02:54 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the news that, as predicted previously on this blog, the DoL fiduciary debate is open once again, as the Department of Labor has issued a new Request For Information (RFI) about potential modifications to the DoL fiduciary rule (including whether full applicability and enforcement should be delayed even further past January 1st of 2018, and whether a new streamlined exemption should be added for the use of clean shares). Also in the news this week were several notable industry studies, including one from PriceMetrix showing the rapid growth of fee-based accounts in brokerage firms (which in the near term are generating lower fees and less revenue as firms switch from upfront commissions to ongoing AUM fees), and a Fidelity white paper showing how tech-savvy "eAdvisors" continue to outpace all other advisors in everything from AUM to success getting HNW clients, and even take-home profits and job satisfaction!

From there, we have a few technical articles on retirement strategies, including Wade Pfau on what he calls the "Four Ls" of retirement planning goals (Longevity, Lifestyle, Legacy, and Liquidity), a look at how the HEART Act of 2008 allows widow(ers) of military servicemembers to roll over up to $500,000 of SGLI and related death benefits into a Roth IRA (but with a limited 1-year time window), and how managing retirement liquidations from a blend of traditional and Roth IRA accounts is superior to the "traditional" approach of simply liquidating all pre-tax retirement accounts first and the Roth accounts last.

We also feature several articles specifically on wirehouse trends this week, from a look at what wirehouse advisors should consider when thinking about whether to break away, the intense flurry of phone calls (150 client calls in 48 hours!) it takes to successfully break away, and how wirehouses are now reinvesting into new-advisor training programs as wirehouse-to-wirehouse recruiting continues to slow.

We wrap up with three interesting articles, all focused around personal productivity and business success: the first examines the concept of a "Mastermind Group", what it takes to form one, and best practices for running one; the second explores the research on what it takes to have moments of inspiration and creativity (either artistic, or for your business), and that the key is finding time to relax and step away; and the last looks at the growing base of personal productivity research finding that the best way to increase your results is to say "no" more often... recognizing that whenever you say "yes", you're just closer to running out of time and being forced to say "no" to something else later anyway, so you may as well be more proactive about saying "no" so that you still have the room to say "yes" to the right and best opportunities when they come along!

Enjoy the "light" reading!

How Some RIAs Sell Life Insurance Through A BGA Without A B/D

June 29, 2017 12:51 pm 6 Comments CATEGORY: Practice Management

One of the primary blocking points for those at a broker-dealer who want to transition to an RIA is how to handle insurance once they make the switch. Investment portfolios can be shifted from commission-based products with 12b-1 fees to institutional shares with an advisory fee... but there are still virtually no "no-load" insurance products (and few fee-based annuity products) available to RIAs. However, the reality is, RIAs actually can sell - and get paid for - many types of insurance and annuity products, without a broker-dealer relationship!

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss how RIAs can leverage a relationship with a Brokerage General Agency (BGA) to get paid for implementing most insurance and annuity products, without a broker-dealer relationship!

The key is to understand the different types of investment and insurance licenses that exist. The Series 7 exam (to become a "General Securities Representative") is actually only necessary to get paid a commission to sell "securities" - stocks and bonds, along with mutual funds, ETFs, and variable annuities and insurance. In turn, those with a Series 7 (or a Series 6) must have an affiliation to a broker-dealer, as technically it's the broker-dealer that sells the product and collects a Gross Dealer Concession (GDC) commission, a portion of which is then remitted to the selling broker.

By contrast, in order to sell insurance products, it's only necessary to have a life (and health) insurance license from the state, and to get appointed by the insurance company to sell their products. In some cases, there's an overlap - given that products like variable annuities are both an annuity and a securities product. However, for those who just want to implement term life insurance, whole life insurance, or universal life insurance that is not variable, then the advisor simply needs a life insurance license... but not a Series 6 or 7, and thus the advisor does not need a broker-dealer, either!

Of course, this still raises the question of how an RIA gets appointed by a company to sell insurance in the first place, and manages product selection across a wide range of companies. If the goal is to sell fixed products, the solution is for an RIA to work with a Brokerage General Agency (BGA). Conceptually, a BGA is similar to a broker-dealer, except they only work in the realm of (fixed) insurance products. Fortunately, there are a lot of BGAs out there to choose from (some work nationally, many work regionally, and some simply operate locally), of which many will work with RIAs - for which the primary differentiators are the BGA's service, breadth of products, and commission payouts (though notably because insurance commissions are standardized with the state insurance department, the products themselves will generally still be the same price to the client, regardless of the BGA).

But the bottom line is that if an RIA wants to sell fixed insurance products, then a broker-dealer relationship isn't necessary, as the RIA can work through a BGA relationship instead. Though it's important to remember that a BGA relationship must still be disclosed on Form ADV Part 2, and that CFP professionals at the RIA cannot call themselves "fee-only" if there are insurance commissions involved (even if paid to a separate-but-related entity)!

IRS Extends Portability Deadline (Retroactively) Under Rev. Proc. 2017-34

June 28, 2017 07:01 am 4 Comments CATEGORY: Estate Planning

Since 2011, when one member of a married couple passes away, the surviving spouse is eligible to carry over any unused portion of the deceased spouse’s estate tax exemption amount. This rule, allowing “portability” of the deceased spouse’s unused exemption (DSUE) amount, provides a substantial reduction in estate tax exposure for couples whose combined net worth is more than $5 million (or is expected to grow above that amount in the future), and reduces or eliminates the need for many couples to utilize a bypass trust in their estate plan.

However, the caveat to portability of the estate tax exemption at the death of the first spouse is that it only applies if a Form 706 estate tax return is filed in a timely manner to claim portability – even, or especially, if the estate under the filing threshold and otherwise wouldn’t even need to file an estate tax return.

Unfortunately, though, many executors don’t even realize that there is a requirement to file an estate tax return for those who are not subject to an estate tax, and the oversight often isn’t discovered until the surviving spouse subsequently passes way. And by that time, it’s too late to go back and file for portability. At least, not without submitting a potentially costly request to the IRS for a private letter ruling to be granted an extension.

To help ameliorate this common oversight of executors – and the high volume of PLRs the IRS was receiving – in 2014 the IRS granted executors the opportunity to retroactively claim portability by filing an estate tax return for anyone who had passed away since 2011, under Rev. Proc. 2014-18. Yet since those rules lapsed (at the end of 2014), it has once again become increasingly common for executors to submit PLR requests to the IRS to receive an extension for an accidentally missed Federal estate tax return deadline.

Thus, the IRS has now issued Rev. Proc. 2017-34, which grants a permanent automatic extension for the time to file an estate tax return just to claim portability, beyond the original 9 months requirement. In order to utilize the extension, the executor merely needs to file a not-otherwise-required-to-be-filed Form 706 estate tax return within 2 years of the decedent’s date of death, and note on the return that it is being filed as a permissible extension under Rev. Proc. 2017-34.

In addition, the IRS has granted prior estates yet another opportunity for retroactive portability as well. For any member of a married couple who died after 2010, there is once again an opportunity to file a (now very late) Form 706 estate tax return to claim portability, with a deadline of January 2^nd of 2018. Which allows surviving spouses (including same-sex married couples) to claim a carryover of the DSUE amount for any spouse who passed away in 2011 or later. And in situations where the then-surviving spouse also passed away and owed an estate tax, there’s even an opportunity to retroactively claim portability, and then file an amended estate tax return, and receive an estate tax refund of up to $2 million!

For most, though, the new rules simply provide an extended time window for executors to realize the need to file a Form 706 estate tax return to claim portability in the first place. Nonetheless, in situations where at least one member of a married couple passed away in 2011 or later, there is a limited time window to claim retroactive portability through the end of the year as well!

#FASuccess Ep 026: Stop Asking For Referrals And Improve Your Referrability Index Instead with Steve Wershing

June 27, 2017 07:01 am 3 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the twenty-sixth episode of the Financial Advisor Success podcast!

This weeks’ podcast guest is Steve Wershing. Steve is a practice management and marketing consultant for financial advisors, with a particular focus on how to generate more referrals to grow your business.

But what's unique about Steve, though, is his approach to referral marketing, which starts with a simple statement: Stop. Asking. For. Referrals. And instead of asking for referrals, focus on how to make yourself more referraBLE in the first place - by having a clear niche. Because as Steve puts it, "a Niche is simply a need", and if you can fulfill a clear need, then people with that need will be referred to you... without even asking for it. Or viewed another way, Steve finds that the best way to get more referrals is not to hunt for them one at a time, but to plant the seeds for a large number of them, and then harvest them over time.

In this episode, Steve talks about the 6 different types of niches that financial advisors can form - including technical, educational, experiential, psychosocial, affinity, and values niches - with great examples of each. And based on his own experience as a financial advisor and former broker-dealer executive, Steve talks about how advisory firms can interview their clients and leverage a client advisory board to better understand what they're most valued for and then formulate a niche around that value over time. Because the reality is that, while it's not required, it's still usually easiest to build into a niche where you already have some initial connections or solution.

And be certain to listen to the end, where Steve talks about how to manage a niche practice over time, and why it's OK that your clients may eventually move on from or outgrow your niche - because even if they came and picked you in the first place for your niche, once they're working with you, they'll stay for the service and the relationship they have with you as their financial advisor.

So whether you’re struggling to figure out what niche you should go for, are looking for ideas on how to create a greater focus on your niche, or are simply looking to better understand how to get more referrals (without just asking for them more often), I hope you enjoy this latest episode of the Financial Advisor Success podcast!

CFP Board Commission On Standards Expands CFP Fiduciary Duties… But Can It Enforce Them?

June 26, 2017 07:01 am 10 Comments CATEGORY: Regulation & Compliance

After a nearly 18-month process of working to update its Standards of Professional Conduct, the CFP Board’s Commission on Standards has released newly proposed Conduct Standards for CFP professionals, expanding the breadth of when CFP professionals will be subject to a fiduciary duty, and the depth of the disclosures that must be provided to prospects and clients.

In fact, the new CFP Board Standards of Conduct would require all CFP professionals to provide a written “Introductory Information” document to prospects before becoming clients, and a more in-depth Terms of Engagement written agreement upon becoming a client. In addition, the new rules also refine the compensation definitions for CFP professionals to more clearly define fee-only, limit the use of the term fee-based, and updates the 6-step “EGADIM” financial planning process to a new 7-step process instead.

Overall, the new Standards of Conduct appear to be a positive step to advance financial planning as a profession, more clearly recognizing the importance of a fiduciary duty, the need to manage conflicts of interest, and formalizing how CFP professionals define their scope of engagement with the client.

Ironically, though, the CFP Board’s greatest challenge in issuing its new Standards of Conduct is that the organization still only has limited means to actually enforce them, as the CFP Board can only make public admonishments or choose to suspend or revoke the CFP marks, but cannot actually fine practitioners or limit their ability to practice. And because the CFP Board is not a government-sanctioned regulator, it is still limited in its ability to even gather information to investigate complaints in the first place, especially in instances where the complaint is not from a client but instead comes from a third party (e.g., a fellow CFP professional who identifies an instance of wrong-doing).

In addition, the CFP Board’s new Standards of Conduct rely heavily on evaluating whether the CFP professional’s actions were “reasonable” compared to common practices of other CFP certificants… which is an appropriate peer-based standard for professional conduct, but difficult to assess when the CFP Board’s disciplinary proceedings themselves are private, which means CFP professionals lack access to “case law” and disciplinary precedents that can help guide what is and is not recognized as “acceptable” behavior of professionals. At least until/unless the CFP Board greatly expands the depth and accessibility/indexing of its Anonymous Case Histories database.

Nonetheless, for those who want to see financial planning continue to advance towards becoming a recognized profession, the CFP Board’s refinement of its Standards of Conduct do appear to be a positive step forward. And fortunately, the organization is engaging in a public comment process to gather feedback from CFP certificants to help further refine the proposed rules before becoming final… which means there’s still time, through August 21^st, to submit your own public comments for feedback!

Weekend Reading for Financial Planners (Jun 24-25)

June 23, 2017 12:12 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the release of the CFP Board's newly proposed Code of Ethics and Standards of Conduct for CFP professionals, which would further expand their scope of fiduciary duty to virtually all forms of financial advice.

Also in the regulatory news this week was an interesting public comment letter from the CFA Institute about the SEC's potential consideration of fiduciary rulemaking, suggesting that the starting point would simply be to regain control of advisor titles and labels (and require anyone who even holds out as a financial advisor to be subject to the Investment Advisers Act of 1940). And in the meantime, the state of Nevada just passed a "surprise" piece of legislation that, in just over a week, will suddenly require all financial advisors in Nevada - including those at RIAs and broker-dealers - to be subject to a fiduciary duty when working with clients, regardless of whether it's a retirement account or not.

From there, we have a few practice management articles this week, including: how developing "Core Values" for your firm can help you figure out how to filter out who are the right clients, the right employees, and the right opportunities for the business to pursue; why it's so crucial to have a personal support network as a financial advisor that can keep you positive and motivated when the inevitable business challenges come; and why it's crucial for advisory firm owners and the entire leadership team to establish a clear and consistent vision for where the business is going (and then work to keep aligned on that vision).

We also cover a few articles about the intersection of financial planning and cash flow/spending behavior, from why it's important to not just analyze a client's household cash flow but examine the underlying financial habits they represent (e.g., how the client makes decisions about large purchases, and whether they save intermittently or automatically), to the reason why behavioral biases mean in practice consumers tend to fare better contributing to a Roth 401(k) than a traditional 401(k), and how the tendency for one member of a couple to be a "spender" can trigger marital strife (though notably, being married to a "tightwad" does not typically trigger marital conflict!).

We wrap up with three interesting articles, all focused around broader industry trends: the first looks at how the rise of no-load funds and increased transparency were associated with an explosion in the adoption of mutual funds (and ETFs), while the still-commission-based and still-transparent insurance industry has seen its sales drop by almost 50% in the past 30 years, and whether a new company called Assurance (which aims to be the Morningstar of life insurance policies) can help to change the trend; the second examines how, despite an incredible 8-year bull market, most of the financial services industry is not very exuberant, or is outright gloomy, which appears to be a result of the fact that almost all the gains of the bull market have gone to just Vanguard, while the rest of the asset management industry has failed to participate in the rally; and the last is an investigative report from Reuters, which finds that FINRA is struggling to rein in a subset of broker-dealers who continue to actively hire brokers with problematic disciplinary records, raising the question of whether FINRA is even capable of fully executing on its investor-protection mandate, and whether state securities regulators may try to expand their oversight of broker-dealers to fill the void.

Enjoy the "light" reading!

Navigating Compliance Oversight When Blogging As A Financial Advisor

June 22, 2017 08:07 am 7 Comments CATEGORY: Practice Management

As digital marketing for financial advisors slowly gains momentum, there is growing interest amongst financial advisors to launch their own blog as a means to showcase their expertise. Yet the challenge, for advisors at both broker-dealers and RIAs, is that any prospective advertising content to the public must first be reviewed by compliance, and the compliance oversight process can make financial advisor blogging difficult - especially for those in a large broker-dealer environment.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss blogging as a financial advisor, the compliance rules that apply to financial advisor blogging, and the issues to consider when navigating compliance oversight, both for RIAs and those operating in the broker-dealer channel!

Because in practice blogging is more popular at this point amongst RIAs than broker-dealers, a common question is whether the compliance requirements are different between the two channels. However, the reality is that whether you’re an RIA or a broker-dealer, anything you do that advertises to prospective clients or solicits prospective clients for your business is deemed “advertising”, and is subject to compliance (pre-)review. Technically broker-dealers are covered by FINRA Rule 2210, and RIAs are covered by Rule 206(4)-1, but in the end, both have requirements that compliance should review blog content before it goes out to the public, ensure blog content isn't misleading, and record and archive blog content for later review. Which means, the key difference between channels is not really the regulatory compliance requirements.

Instead, the key difference is actually firm size. Most RIAs are small (at least by broker-dealer standards), and operate as either solo advisors, or with just a dozen or few advisors as a large RIA. By contrast, mid-to-large-sized broker-dealers may have hundreds or even thousands or brokers. And it's this size difference that drives major compliance differences for financial advisor blogging between channels. Because in a small (or even "large") RIA, an advisor is either themselves the chief compliance officer, or likely knows the compliance officer very well. Which means it is easy to get buy-in from the compliance officer to take the time to review the content of a blog. By contrast, a compliance officer in a broker-dealer rarely knows the brokers who many want to blog, and the sheer magnitude of trying to oversee advertising for such a large number of brokers leads to compliance officers to adopt very strict and very limited rules that force brokers to stay inside a small box of activities!

Fortunately, there are some more progressive broker-dealers that have begun to find solutions to allow advisors to blog. But unfortunately, many of those programs have been slow to roll out. For advisors who do want to start a blog, regardless of what channel you are in, there are some things you can do to increase your odds of solving the compliance issues. First, try to work proactively with your compliance department. Explain to them what you want to write about, and, if it's not related to products, investments, or performance, tell them, because that will make their job easier. Second, write some content well in advance, and send it to them for review. After they've seen your content for a while and realize it is not a compliance risk, you may find they ease up a bit.

In the end, the challenges of overseeing such a large number of advisors in the broker-dealer environment have unfortunately squelched the ability of a lot of brokers to engage in blogging, but it's not because they can't, or that FINRA won't allow it. Rather, it's because broker-dealer compliance departments are struggling to oversee a huge number of brokers that they don’t necessarily know, while the more limited span of oversight at RIAs makes it easier to expedite the process!

How Financial Counseling Laboratories Will Change Financial Planning

June 21, 2017 07:01 am 2 Comments CATEGORY: Planning Profession

It is widely acknowledged that there is both an ‘art’ and a ‘science’ to financial planning. Technical knowledge – the “science” – is crucial to delivering the technically accurate advice to clients. But the best advice in the world is meaningless if the financial advisor can’t master the “art” of delivering it in a skillful manner – leading a client to actually take action and improve their financial well-being. Yet despite its label as "art", the reality is that how best to deliver financial advice advice can itself be subjected to scientific scrutiny. Which is beginning to happen, with the emergence of several "financial counseling laboratories" in educational institutions across the country.

In this guest post, Derek Tharp – our new Research Associate at Kitces.com, and a Ph.D. candidate in the financial planning program at Kansas State University – examines what a financial counseling laboratory is, and how researchers are using financial counseling laboratories to subject the 'art' of financial planning to scientific investigation.

A financial counseling laboratory is an environment in which financial planning, counseling, or therapy research can be conducted. The space itself is akin to the kind of office with tables and chairs that financial advisors might use to meet with their clients. However, the key feature of a financial counseling lab is that it contains some unobtrusive means of observation, such as one-way mirrors or cameras, allowing the interactions between a financial advisor and their client to be scientifically measured and tested (and sometimes also monitored by students who may be gaining practical observational training, or even engage in the supervised practice of their financial planning skills).

The existence of financial counseling laboratories is important given how conducive they are to conducting highly relevant research for practitioners about how to actually be better financial planners, and get clients to engage their financial advice. In fact, some of this research is already beginning to emerge, delving into topics such as how the physical office environment influences client stress, how coaching techniques can help clients save more, and how measurements of brain activity suggest receiving counseling from an advisor with a CFP designation (relative to a non-credentialed advisor) may actually reduce stress during market declines! In essence, laboratory research – in a financial setting, examining questions relevant to advisors – may soon begin to shape the future of how financial planners interact with their clients!

Advisors who are interested in supporting or assistance with the research process have several options, from getting involved with organizations like the Financial Therapy Association (where many of the Financial Counseling laboratory researchers are engaged), collaborating with researchers themselves on future projects, contributing financially to organizations such as the CFP Board's Center for Financial Planning, or contributing directly to the handful of universities which already have permanent on-campus financial counseling laboratories.

But the bottom line is that, for the first time ever, the "art" of financial planning itself is beginning to be subjected to scientific scrutiny, with the potential to yield important insights into the practice of financial planning, and how advisors can better get clients to actually adopt their advice!

#FASuccess Ep 025: Leveraging A TAMP To Roll Out Wealth Management Services In A CPA Firm with Tim Delaney

June 20, 2017 07:01 am 6 Comments CATEGORY: Financial Advisor Success Podcast

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

My guest for this week’s podcast is Tim Delaney. Tim is the co-founder of JDH Wealth Management, an independent RIA in northern California that oversees nearly $200 million of assets for 120 affluent clients.

What’s unique about Tim is that, unlike most financial advisors who started out selling life insurance or mutual funds, Tim began his career as a CPA, and it wasn't until after 20 years of experience doing accounting and tax preparation that he decided for the first time to launch a wealth management firm, from within the existing accounting business, with a goal of leveraging the firm's existing relationships with its tax clients to expand into wealth management.

In this episode, Tim talks about the transition from tax preparation into wealth management, why he decided from day 1 to build his wealth management business on a TAMP platform - despite the fact that it would take a material chunk of his long-term revenue - how he structured the wealth management firm as a separate entity from the tax practice, and why he ultimately decided to buy out the wealth management division and part ways from the accounting firm after more than a decade... which, as it turned out, just accelerated the growth of his wealth management firm even further!

We also talk at length about the opportunity that CPAs have in offering wealth management services to clients, how the typical accounting firm can likely generate an additional 25% of gross revenue by offering investment management services to existing clients, and why most accounting firms still fail to capitalize on the business opportunity. Which provides some interesting insights into the opportunity – and challenges – for financial advisors seeking to generate wealth management referrals from CPAs, too.

And be certain to listen to the end, where Tim talks about how he's executing an internal succession plan, with his son who has now taken over as the managing partner, and how he structured the arrangement not to gift shares but to have his son buy into the practice over time... in large part because that's what was necessary to balance the value of the business against what his other two children, who aren't involved in the business, will also someday inherit.

So whether you’re a CPA considering whether to go into wealth management, an advisor trying to better understand the mindset of CPAs who offer (or may be considering) wealth management services, or are looking for perspective on why a TAMP can make a lot of sense when launching a planning-centric advisory firm, I hope you enjoy this latest episode of the Financial Advisor Success podcast!

The Passive Investing Mirage And The Disintermediation Of Active Mutual Fund Managers

June 19, 2017 07:01 am 13 Comments CATEGORY: Investments

As financial advisors increasingly adopt ETFs, the wholesale shift from actively managed mutual funds to passive investment vehicles is driving more inflows to ETF providers like Vanguard and Blackrock and State Street and than all other mutual fund families combined… and leading mutual fund companies into a mad scramble to figure out what they have to do to once again appeal to financial advisors.

Yet the reality is that, with the rise of the internet, the fundamental role of the financial advisor themselves is changing. In a world where consumers can purchase virtually any publicly traded investment online themselves, financial advisors are compelled to add value above and beyond “just” bringing third-party mutual fund managers to the table. In fact, an increasing number of financial advisors appear to be “coping” by eliminating third-party managers, and instead becoming the investment portfolio managers themselves.

In this context, the rise of ETFs is not so much about a shift from active to passive, but simply a recognition that when financial advisors build investment portfolios, we prefer to do it using ETFs as our “building blocks”, rather than individual stocks and bonds. Although in point of fact, a recent FPA Trends in Investing Survey revealed that advisors are increasingly building portfolios with ETFs, and stocks, and bonds, and even private equity funds – anything except third-party mutual funds. Which just helps to show how the shift from active to passive is really just a mirage; what’s really occurring is a process where financial advisors are remaining active, but disintermediating mutual fund managers and going hands-on to actively build the portfolio themselves, whether as an independent RIA, or under a Rep-As-PM arrangement in a broker-dealer.

Of course, the caveat is that just as many mutual fund managers have struggled in an increasingly competitive market for alpha to outperform their benchmarks, there’s no indication that individual financial advisors are any better at the process. Which means ultimately, the financial-advisor-as-investment-manager shift itself may be short-lived, as advisors further shift to providing financial planning value outside of the portfolio altogether. But until financial advisors get to the point that the majority of us truly view our value-add as going beyond the investment portfolio – where a bona fide shift to passive investing may gain further traction – the ongoing rise of ETFs will remain less about a shift to passive itself, and more about how financial advisors are defending their own fees by squeezing out the costs of the investment products they use for client portfolios!