Nerd's Eye View blog

Weekend Reading for Financial Planners (Jun 17-18)

June 16, 2017 02:57 pm 4 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with several stories on the initial aftermath of the DoL fiduciary rule becoming applicable on June 9th, including the growing number of annuity agents who are opting in to using the Best Interests Contract Exemption (instead of PTE 84-24), state insurance regulators considering whether to change the annuity suitability rules to a more fiduciary-like standard, and a look at the latest Schwab Independent Advisor survey that finds as DoL fiduciary shifts more advisors towards the AUM model and increases competition, that more advisors are feeling compelled to offer more services and spend more time with clients to justify their advisory fees (but without being able to charge more for the extra effort and offerings).

From there, we have a few technical articles this week, from Ed Slott discussing how HSAs can be used not just for ongoing health costs but as a supplemental tax-preferenced savings account for future retiree health care costs, the rise of 81-100 group trusts as a lower cost alternative for small business employer retirement plans (in a world where it's still difficult to offer a Multiple Employer Plan [MEP]), and a discussion of what Private Placement Life Insurance (PPLI) is and where it fits for certain ultra-high-net-worth clientele.

We also have several practice management articles, focusing on hiring and building our your advisory team, including: a roadmap on how to hire top talent (by first determining core values and core competencies, and using those to screen out candidates first); why it's better to look for "cultural add" than just "cultural fit" to improve diversity (and how hard that really is, given our tendencies to hire people like ourselves); and guidance from Julie Littlechild on how to establish a mentoring program to aid in the personal development of your team.

We wrap up with three interesting articles, all focused around homeownership, housing policy, and the country's growing challenges with affordable housing: the first looks at how the trend of Millennials to live in the urban core of cities (instead of the suburbs) is exacerbating the housing crisis, as there simply isn't as much room to build housing in already-densely-populated urban areas (and the high cost of land in urban centers tends to lead developers to build more expensive housing to generate a return on their own real estate investment, which just makes the problem worse); the second explores how the shift of the economy from manufacturing to knowledge workers is leading to a growing concentration of workers in urban areas (where "smart people" can meet and gather and form businesses together), which suggests the housing challenges created by urban concentration will just get worse (even as it provides an unexpected windfall for existing homeowners in major cities); and the last explores how the emerging affordable housing crisis is bringing newfound scrutiny on the popular mortgage interest deduction, which over the years has shifted to disproportionately become a tax subsidy for upper-income individuals (who can actually afford houses, and have mortgages that charge enough interest to exceed the standard deduction, and benefit the most from the deduction at their higher tax rates), and whether it's time to reform the program into at least an alternative 15% mortgage interest credit (which would reduce the benefit for upper-income individuals, and make it more accessible for lower-income individuals, even and including those who don't itemize their deductions at all).

Enjoy the "light" reading!

Why Actively Managed Mutual Fund Performance Is About To Improve

June 15, 2017 01:24 pm 1 Comment CATEGORY: Investments

This week is the first that financial advisors must operate under the Department of Labor's fiduciary rule, subject to Impartial Conduct Standards which require that they must give best interests advice, for reasonable compensation, and make no misleading statements. While much has been said about the impact this will have for advisors and their clients, there's also a not-well-discussed secondary shift that will be triggered by the DoL fiduciary rule, which will impact actively managed mutual funds and their performance in the coming years - in a "surprisingly" positive way.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss how the DoL fiduciary rule will likely end out causing an improvement in the return performance of actively managed mutual funds, thanks to the rise of clean shares and a shift in how brokers are compensated for recommending such funds!

Most predictions about the likely impact of the Department of Labor’s fiduciary rule is that it will lead to a (continued) decline in the use of actively managed mutual funds, and support the ongoing rise of passive ETFs, thanks to the fiduciary rule’s focus on low cost. But the truth is, that there actually is no requirement in the DoL fiduciary rule that financial advisors eschew actively managed funds and switch to lower cost passive funds. The only real requirement is that if an advisor is going to use an actively managed fund, that there needs to be a clear reason and justification for paying that active manager’s fee. And if you can make the case for the active manager, there’s nothing wrong with using the actively managed fund.

There is, however, a requirement to use the lowest cost share class if multiple share classes of the same fund are available. This is why we've seen the launch of T shares and clean shares – which either pay a uniform 2.5% upfront commission and 0.25% trails, or eliminate commissions entirely with the broker-dealer then wrapping a levelized commission around the whole fund or account. And this matters, because mutual funds currently have to report their performance net of commissions and broker compensation. But as broker-dealers shift to being compensated by levelized commissions outside of the funds (even if the consumer still pays a 1% fee via the broker-dealer equivalent to the 1% trail in a C share), the mutual fund itself will no longer have to count the broker's compensation against their own performance!

And this is important because a lot of mutual fund managers have not been underperforming by the amount of the manager's fee, but instead, they've been underperforming because of the drag of the broker's commission compensation. Which means, "suddenly", we're going to start seeing the average actively managed mutual fund begin to improve on its performance... starting this week, with the rollout of the DoL fiduciary rule (and the rapidly rising adoption of clean shares in particular). Not because mutual fund managers are necessarily managing any differently or better, but simply because they’re no longer paying broker compensation out of their own performance track records! Ironically, this may even handicap RIA performance reporting relative to brokers, given that brokers typically point to mutual fund performance (which will not include the broker-dealer's level commission payout) instead of account performance, whereas advisors in an RIA that want to market GIPS-compliant performance track records will still have to follow specific rules requiring a full accounting for fees.

In the end, this shift may still result in a roughly-similar total cost to consumers - whether it's a 1% AUM fee, a 1% commission, or a 1% broker-dealer payout wrapped around clean shares - but the net result nonetheless is that with a shift to clean shares, reported performance for actively managed mutual funds is going to start looking better. Which means in a few years, we may suddenly be talking about how much better actively managed mutual funds are doing again. But it won't be because "the pendulum swinging from passive to active"... or because that's when the Fed started accelerating their rate increases... or whatever else happens economically from here. It will be because DoL fiduciary reconfigured how brokers get paid, reducing the need for 12b-1 fees, reducing the expense ratio of actively managed mutual funds, and improving the reported performance of the mutual fund itself!

Maximizing Tax Deductions For Long-Term Care (LTC) Insurance

June 14, 2017 07:00 am 25 Comments CATEGORY: Taxes

With the 1996 introduction of “tax-qualified” long-term care insurance under the Health Insurance Portability and Accountability Act and IRC Section 7702B, Congress affirmed that long-term care insurance benefits are tax-free, and began to offer tax benefits for purchased LTC insurance coverage.

However, over the years the evolving landscape of both individual tax deductions in general, and long-term care insurance tax preferences in particular, have created a confusing myriad of options to purchase LTCI and receive favorable tax treatment.

In this article, we explore the full range of options, from the most favorable (purchasing on behalf of employees, or for employee-owners of a C corporation or who are less-than-2% shareholders of an S corporation), to the slightly less favorable (purchasing for owner-employees of partnerships and LLCs, more-than-2% owners of S corporations, and sole proprietors), to the least favorable (paying for LTC insurance premiums directly, subject to age-based limitations, medical expense AGI thresholds, and itemized deduction limitations). And there are also the less-common-but-also-sometimes-appealing alternatives, like using the money in a Health Savings Account (HSA) to purchase LTC insurance, or funding it via a partial 1035 exchange into a standalone LTC insurance or hybrid LTC policy.

Ultimately, the reality is that some people won’t actually have many choices about how to pay for coverage – the choice will simply be whether to purchase or not, and write a check for the premiums as the only means eligible. Nonetheless, it’s important to understand the full breadth of options for how to pay premiums on LTC insurance, especially given the nuanced but substantial difference in tax treatment across the different choices!

#FASuccess Ep 024: How Mindset Drives Success And The 7 Freedoms Of Limitless Advisers with Stephanie Bogan

June 13, 2017 07:01 am 15 Comments CATEGORY: Financial Advisor Success Podcast

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

This week’s guest is Stephanie Bogan. Stephanie is a practice management consultant for financial advisors, who founded her own very successful consulting firm, Quantivus, at the age of just 24, and ultimately sold it a decade later for 7 figures to Genworth Financial, back in 2008.

What's fascinating about Stephanie, though, is the consulting work she's been doing since then. Because - as with many entrepreneurs who have successfully built and sold a business, Stephanie soon realized that what she'd built and sold hadn't really brought her the life satisfaction that she had hoped. And that in turn led her into a journey into the neuroscience of success, life satisfaction, and what helps us find purpose and meaning in our own businesses.

In this episode, Stephanie talks about the journey she went through in building her consulting practice - as a young 24-year-old woman trying to give practice management advice to advisors with multi-million-dollar firms that were more than twice her age, the mindset she had to create for herself to stay optimistic through the challenges, and key practice management areas that she consulting on with advisors, including Business Strategy and Planning, Human Capital, Operations, and Marketing & Growth.

We also talk at length about how our mindset as a financial advisor and business owner can both drive our success, and often limit it without even realizing there's a problem, leading to problems like the "Stress of Success", why most time management problems are really an "inability to say 'no'" problem, and what Stephanie calls the "7 freedoms of being a limitless adviser", to free yourself from a mindset of limiting beliefs that may be holding you back.

And be certain to listen to the end, where Stephanie talks about how she helped one advisory firm overcome the all-too-common problem of saying "yes" to too many accommodation clients, and not being able to draw the line between "investment-only" clients and full financial planning clients, but creating a simple one-page visual that broke the firm's services into 3 categories, set prices for each, and let the CLIENTS choose which tier they wanted.

So whether you’re simply looking for practice management advice and ideas from one of the industry’s leading experts, or perhaps need some help getting over a mental mindset of limiting beliefs that may be limiting your own success (without even realizing it, until now!?), I hope you enjoy this latest episode of the Financial Advisor Success podcast!

Nerd’s Eye View 2017 Reader Survey – Your Input Is Requested!

June 12, 2017 07:01 am 15 Comments CATEGORY: Nerd's Eye View

Here at Kitces.com, the goal is always to make the Nerd's Eye View blog and the Members Section an ever-more-valuable resource for all of you, the readers. Which means we want to hear from you about what we can do to make this website even better for you.

Over the years, reader feedback has shaped everything from the visual design of the blog (from its original dense small font!) and the Disqus comment system we use, to the expansion of our Members section to offer CFP and then IMCA CE credit (and soon, CPE for accountants as well!) for Nerd's Eye View blog posts, the launch of the Financial Advisor Success podcast, and more.

And while I'm happy with the progress we've been making, I'm sure there's still more than we could do differently to serve you better. Accordingly, every year we conduct a feedback survey to all of you who read this blog, to get your thoughts and feedback about the features we're offering, some new ideas we're considering, and whatever other input you're willing to share about what we could do to make this a more valuable site (and a better user experience) for you.

So regardless of what kind of reader you are: an advisor, an individual consumer who reads this blog for your own benefit, a related professional that works with financial advisors, or you're associated with a vendor who serves advisors... I hope you'll participate in this year's survey. It's only 10 questions, should take no more than a few minutes, and will remain open until the end of next week (June 24th).

Thanks in advance for taking a few minutes to click through on the "Read More" link below to access our reader survey, and share your feedback! 🙂

Weekend Reading for Financial Planners (Jun 10-11)

June 9, 2017 02:56 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the implementation of the Department of Labor's fiduciary rule, with the previously-delayed Impartial Conduct Standards taking effect today, June 9th... even as the DoL begins the public comment process of modifying the rule, and Congress proposes further legislation to potentially kill it, suggesting that the fiduciary battle is far from over, especially given that full enforcement is still not scheduled to take effect until 2018 (allowing room for further debate and at least modifications to the rule and its requirements).

From there, we have several articles around marketing and business development, including some very practical ideas on how to improve your client onboarding process to improve trust (and generate referrals), marketing ideas on how financial advisors can build the business (hint: it's more about persistency of the marketing strategy than a super-creative idea to do something completely new!), and a look at the latest research on how we determine who to trust in the first place (in the context of both employees trusting company leadership, and prospective clients trusting a new advisor).

We also have a few technology-related articles this week, from suggestions on what financial advisor websites need to do to actually generate real prospects, to the new technology solutions coming forth (from financial planning software enhances to online risk tolerance assessment tools) to help aid in advisor digital marketing, a new kind of risk tolerance solution that uses facial recognition to detect when clients become financially stressed, a new digital 401(k) solution for financial advisors, and a look at the proliferating number of "client portals" that financial advisors can offer (none of which really do everything that a financial advisor actually needs!).

We wrap up with three interesting articles, all focused around crafting and improving the financial advisor value proposition: the first is a fascinating look at "The Elements Of Value" from a recent study published in the Harvard Business Review, finding that the key components of value break down into a series of 30 categories, organized around four categories of Functional, Emotional, Life-Changing, and Social Impact (where businesses don't need to offer all 30, but can excel but thinking about how to be especially good at 5-10 of them); the second looks at the way one financial advisor describes his value proposition to clients, emphasizing that while most people can do it themselves with available technology tools today, few have the time, knowledge, inclination, and behavioral focus to do it well (whereas the value of the financial advisor is knowing and ensuring that it will be done right!); and the last is a look at how the rise of a fiduciary duty, coupled with the rise of technology, is leading financial advisors around the world to struggle in articulating their value proposition going forward, and suggesting that ultimately the way forward will be a shift from helping clients with the "hows" (which they can just look up online), and instead work with them on their financial "whys" instead.

Enjoy the "light" reading!

Investment Wholesaling And Segmenting The Four Types Of Financial Advisors

June 8, 2017 01:16 pm 6 Comments CATEGORY: Investments

Historically, different financial advisors operated different business models depending on their industry channel - RIAs managed investment portfolios, while wirehouses sold proprietary products and securities from their inventory, and independent broker-dealers sold third-party investment products. Accordingly, asset managers and product manufacturers aligned their investment wholesalers to those channels, with one for wirehouses, another for independent broker-dealers, and a third for the independent RIA community. The challenge, though, is that as the advisor value proposition evolves, along with industry business models, and the regulatory environment, the "traditional" industry channels are breaking down as a way to segment financial advisors!

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss, from the investment wholesaler perspective, the four different types of financial advisors that have emerged, how they differ based on client approach and value proposition, and how wholesalers can best add value to these different types of advisors!

The key issue is to recognize that financial advisors tend to have fundamentally different ways in which we frame our own value proposition, and approach client situations, that are no longer necessarily defined by industry channel. And this matters, because when companies with their own wholesalers are trying to reach advisors, the ways in which an advisor approaches their clients and define their own value proposition heavily impacts what that advisor will and will not see as valuable from their wholesalers!

For instance, some advisors taking a very financial planning-centric approach to clients, while others are more investment-centric. And when it comes to delivering value to clients, some are more advice-centric, and others are more product-centric. Thee various combinations result in four categories of financial advisors: (1) fee-for-service financial planners; (2) investment managers; (3) needs-based sellers; and, (4) asset gatherers.

From the perspective of the wholesaler, it is crucial to recognize that each of these segments receives different value from a wholesaler, and demands different types of products and services. Because if an advisor is an asset gatherer, they are going to want to see a product that can easily help them gather assets... but if they are needs-based sellers, they will want planning strategies and sales ideas... and if they are an investment manager, they will want products that they can manage to demonstrate their own expertise (without outsourcing to other active managers!)... and if an advisor is a fee-for-service financial planner, they will want solutions that help them simplify investment management to free up time to service clients and focus on planning. Thus, investment managers (which might be an RIA or a Rep-As-PM at a broker-dealer) tend to use stocks, bonds, and ETFs, but asset gatherers (which might be RIA or at a broker-dealer) are more likely to use multiple TAMPs and SMA, and fee-for-service financial planners (usually RIAs) will typically just use one TAMP for all of their assets and be uninterested in individual investment products at all!

The bottom line, though, is simply to recognize that the whole advisory industry is in the midst of reorienting itself, and trying to segment financial advisors by wirehouse, broker-dealer, and RIA industry channel no longer works. Advisors are reinventing their value propositions and where they focus, while DoL fiduciary further forces firms to re-draw their lines and tech innovation accelerates these trends. Which means, if wholesalers want to reach financial advisors and add value to them, wholesalers need to pay attention to the four different types of financial advisors!

Dynamic Retirement Spending Adjustments: Small-But-Permanent Vs Large-But-Temporary

June 7, 2017 07:01 am 9 Comments CATEGORY: Retirement Planning

The origin of the "safe withdrawal rate" approach was simply to set retirement spending low enough to survive the worst historical sequence of returns we've ever seen; if a future scenario was comparably bad, the retirement portfolio would make it to the end, and if market returns turn out better, the retiree simply has to decide what to do with their "extra" money.

The caveat, however, is that for at least some retirees, the approach of "be conservative upfront, and increase your spending later if returns permit" is not very appealing. Instead, it's more desirable to spend more in the early years, and simply engage in spending cuts if returns end out being less favorable. Except remarkably little research has ever delved into what the best approach is to cutting spending, if it actually does become necessary to make adjustments in order to stay on track!

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 – analyzes safe withdrawal rates based on various dynamic spending adjustments retirees could choose to adopt, finding that small-but-permanent strategies are generally both more effective, and realistically implementable, than large-but-temporary spending adjustments.

Notably, this is different than how many retirees often react when a substantial market decline occurs, where the instinctive response is often to engage in substantial spending cuts for a "temporary" period of time, until the market recovers. For instance, if there's a precipitous market crash of at least 20%, the retiree might trim spending by 20% as well for the next 3 years, until the portfolio recovers. Even if engaging in such spending cuts present serious strains to the retiree's current lifestyle.

Except as it turns out, engaging in a more rapid series of smaller - but permanent - spending cuts can be even more effective. For example, rather than cutting spending by 20% for 3 years after a market decline of more than 20%, if the retiree simply commits to trimming real spending by 3% (permanently) in any year that market returns are negative - approximately the equivalent of forgoing an inflation adjustment during the down year, and a fairly trivial spending adjustment for most retirees - the safe withdrawal rate rises by almost 0.5% (to more than 4.5%). With the large-but-temporary cut, the safe withdrawal rate only rises by 0.1%, instead.

Ironically, it may feel to retirees that engaging in "small" cuts aren't enough to ameliorate the consequences of a significant market decline early in retirement. Yet the reality is that the cumulative effect of small cuts really does add up - more than engaging in large-but-temporary cuts - in a manner that not only helps keep retirement on track if there's an unfavorable sequence of return, but arguably better aligns to how most retirees spend as well, where real inflation-adjusted spending typically declines in the later years anyway. And of course, if market returns are actually favorable, the retiree not only avoids substantial spending cuts, but enjoys the benefit of starting their retirement spending from a higher level in the first place!

#FASuccess Ep 023: Delivering Workplace Financial Wellness With A Salaried CFP Career Path with Liz Davidson

June 6, 2017 07:01 am 2 Comments CATEGORY: Financial Advisor Success Podcast

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

My guest this week is Liz Davidson. Liz is the founder of Financial Finesse, the largest independent provider of workplace financial wellness programs, that leverages CFP professionals to provide financial education and financial coaching to employees in the workplace.

What's fascinating about Liz's firm is that in a world where most financial services providers aim to deliver financial wellness and education as a lead-in to selling a product, or an avenue to build lucrative advisory relationships with the executives and key employees, Financial Finesse is truly dedicated to simply helping employees improve their financial wellness, and is solely paid on a flat-fee basis from employers to provide their services.

In this episode, Liz shares the way that Financial Finesse justifies and demonstrates to employers how paying to improve the financial wellness of employees really does lead to a Return On Investment for the employer by reducing employer costs on everything from employee absenteeism to health care claims, how they reach employees through a combination of an online platform, one-to-many workshops, and one-to-one coaching, and the ways they tried - and failed - to approach the challenge of financial wellness in a direct-to-consumer approach before pivoting to work through employers.

You'll also hear about the incredible business opportunity that Financial Finesse is creating for CFP certificants, who have the chance to earn an $80,000 base salary, plus bonuses that can take them to a six-figure income, simply by providing financial education and coaching to clients, without any obligations for sales, production, or business development - an entirely new channel and career path for expanding the reach of financial planning.

So whether you’ve been curious about the opportunities to deliver your own version of a financial wellness program in the employer channel, or are a CFP looking for ideas on a new career path, or simply want some fresh perspective on new ways that financial planning is being delivered, I hope you enjoy this latest episode of the Financial Advisor Success podcast!

The Latest In Financial Advisor #FinTech (June 2017)

June 5, 2017 07:01 am 0 Comments CATEGORY: Technology & Advisor FinTech

Welcome to the June issue of the Latest News in Financial Advisor #FinTech – where we look at the big news, announcements, and underlying trends and developments that are emerging in the world of technology solutions for financial advisors and wealth management!

This month's edition kicks off with the not-so-surprising news that “robo-advisors” are increasingly pivoting towards offering human advisors and pursuing a more affluent (i.e., not-necessarily-Millennial) clientele, and the somewhat-more-surprising news that one new robo platform – BrightPlan – has decided to enter the marketplace by raising $25M of capital and using it to buy an existing $3.6B life-planning-oriented (and human-advisor-based) independent RIA, raising the question of whether advisor tech companies could become an entirely new buyer category in the world of advisor M&A and whether existing RIAs may actually be a superior way to distribute new technology (rather than trying to compete with them!).

From there, the latest highlights also include:

Envestnet is beginning to reveal how it intends to leverage its Yodlee acquisition, by building out client-facing PFM (Personal Financial Management) solutions that help clients track not only their long-term financial plans, but their shorter-term cash flow and spending as well.
Apex Clearing appears to be making a move into the independent RIA community to compete against Schwab, Fidelity, and TD Ameritrade, leveraging “robo-advisor-for-advisor” software solutions like RobustWealth and AdvisorEngine to reach financial advisors, even as Wealthfront pivots away from building on Apex.
Morningstar appears to be working on its own financial planning software tools, though it’s not yet clear if they’ll be for financial advisors, or it “self-directed” consumer tools offered to retirement plan sponsors.
Following on the heels of popular Social Security software for advisors, a number of providers are now building Medicare planning software solutions for advisors who want to further differentiate their expertise with retirees and justify their value proposition beyond the portfolio alone.

You can view analysis of these announcements and more trends in advisor technology in this month's column, including a fascinating look at why, exactly, performance reporting software for advisors is so expensive (the answer: a lack of quality data and poor data standards in the data feeds from custodians), whether Amazon Alexa may become a new communication channel for financial advisors to reach their clients, and the news that XY Planning Network is running its second annual FinTech competition for advisor technology startups (deadline for those who wish to enter: June 15th).

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]!