Nerd's Eye View blog

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]!

Weekend Reading for Financial Planners (Jun 3-4)

June 2, 2017 03:02 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the big news that the SEC has issued a new request for public comment on standards of conduct for brokers and investment advisers, raising the question of whether the SEC will finally act on a fiduciary rule, just as the Department of Labor's version takes effect on June 9th... and whether a new SEC fiduciary standard would help level the playing field for investment advice, or risk just watering down the fiduciary standard instead.

From there, we have a series of articles looking in particular at the broker-dealer industry as the DoL fiduciary rule rollout looms in the coming week, from a discussion of UBS's new compensation changes for retirement accounts (eliminating commissions and production payments in lieu of a simpler asset-based compensation system), to a look at how Merrill Lynch's commission ban and step away from wirehouse recruiting makes it look as though the company might be pivoting itself to become a giant national RIA, how Morgan Stanley is developing new technology to make its fiduciary advisors more proactive with clients, an industry survey of broker-dealer presidents finding that concerns about adapting to the DoL fiduciary rule have become all-consuming for most (to the point that they may be neglecting key investments into advisor technology tools), a look at the ongoing plight of the small broker-dealer, and whether the ongoing diminishment of the broker-dealer community may lead to the diminishment of FINRA itself (unless, perhaps, the organization reinvents itself as the new overseer of a uniform fiduciary standard?).

We also have a few more technical articles, including strategies to (legally) delay or minimize the impact of RMDs, the benefits of using a trusteed IRA (as an alternative to the typical custodial IRA arrangement), and how tolerance-band rebalancing strategies can increase returns (by helping to leverage market momentum, though not necessarily as much as just engaging in an actual momentum strategy!).

We wrap up with three interesting articles, all focused around the brain and how we think and learn: the first looks at how our brains actually take in and interpret information, driven primarily by a small section of the brain's left hemisphere whose job is to interpret what is happening around us (but given its limited information, the interpretation isn't always accurate or correct in its assessments!); the second explores the difference between "long-term" and "expiring" knowledge, recognizing that most people spend their time consuming the latter (e.g., news headlines and cable TV), and not enough on the former (obtained through reading books, and perhaps the occasional long-form blog post!); and the last looks at how, if you really want to make progress, the key is not just to set goals for yourself, but to establish systems that you can execute to get there... recognizing that if you're really good at creating effective systems for yourself, you may not even need to set goals in the first place!

Enjoy the "light" reading!

Monte Carlo Investment Assumptions In Your Retirement Planning Projections

June 1, 2017 01:11 pm 19 Comments CATEGORY: Retirement Planning

Monte Carlo analysis is a superior retirement planning approach to the standard "straight-line" retirement projection, because it implicitly considers not only average returns, but a range of potentially volatile returns, allowing the prospective retiree to understand how the retirement plan might fare in various scenarios. However, with the additional capability to illustrate a range of volatile returns - potentially across multiple investments or asset classes - comes a greater burden to craft appropriate investments assumptions for the Monte Carlo analysis. Otherwise, there's a risk that the Monte Carlo analysis could mis-state the risks of various retirement portfolios.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss how Monte Carlo investment assumptions impact retirement planning projections, and particularly how important it is to include an appropriate correlation matrix when including multiple investments or asset classes in a Monte Carlo projections. As failing to include a proper correlation matrix will generally lead to a retirement projection that understates risk and overstates the probability of success!

The key issue is that when selecting investment assumptions for a Monte Carlo analysis, there are three core points of data that are necessary for each investment: expected return, volatility, and correlation. And correlations are much more challenging assumptions, because it's necessarily to make an assumption for the relationship between each investment and every single other investment paired to it! And a rising number of investments necessitates dramatically more correlation pairs - as a result, 3 investments requires 3 correlations, but 5 investments requires 10 correlations, and 10 investments requires assumptions for a whopping 45 correlation relationships!

And the reality is, given the underlying math of a Monte Carlo analysis, even making no correlation assumption is an assumption. It's just an implicit assumption of zero correlation... which is actually a very dangerous assumption, because, in the real world most investments don't have zero correlation. Yet by assuming zero correlation when the correlation is actually higher, the projection ends out overstating the benefits of diversification, and therefore understating the risk to the retiree and overstating their probability of success in retirement!

In the end, this doesn't mean it's bad to have a diversified portfolio, but it's crucial to recognize that adding more investments to a Monte Carlo analysis doesn't necessarily make it more "accurate", and in fact will decrease the accuracy of the projection unless the entire correlation matrix is properly included (with appropriate assumptions). As a result, a better practical approach for many advisors may be to utilize simpler two-asset-class portfolios of stocks and bonds for Monte Carlo purposes... as while this may slightly understate the benefits of having a fully diversified portfolio, at least it won't overstate the benefits, and it is far easier to help a client adjust to a retirement that is going better than expected, than to adapt to one that is going worse!

The Happiness Spending Threshold And What It Really Means To Live Within Your Means

May 31, 2017 07:00 am 18 Comments CATEGORY: General Planning

“Try to ‘live within your means’” is a staple of prudent financial advice – recognizing that not everyone earns the same income (“means”), and therefore not everyone can afford to spend the same. It prescribes that rather than trying to keep up with the Joneses – and their lifestyle spending – you should live within your means, instead.

Yet the challenge is that as income rises, living “within” your means can produce what is, to most other people, an outsized and larger-than-life standard of living. In other words, while it might seem like prudent advice for those who are of struggling means – and therefore, must constrain their spending down to their income means – those who lift their spending up to live within their (much greater) means may be viewed with disdain.

A case-in-point example is a recent article that profiled a high-income young couple with two children living in New York City, who felt that they were living “paycheck to paycheck” on their $500,000/year salary, even as they lived in a $1.5 million home, drove a BMW 5-series and a Toyota Land Cruiser, and took three $6,000/year vacations. Yet relative to their income – in trying to live within their means – the couple was actually spending 40% less on housing that the typical US household, 50% less on food, and 75% less on their cars (high-end though they were). In other words, relative to their means, this affluent couple was arguably doing a better job of “living within their means” than most.

Which raises the question of whether “live within your means” is actually the right advice for anyone – regardless of income – or if the reality is that the strategy breaks down as a prudent spending recommendation at some point. Especially given the research suggesting that there is a “happiness threshold” – beyond about $75,000 of income (and associated spending within its means), more income and spending doesn’t appear to actually improve our emotional well-being.

Of course, some would argue that those who earn might have a “right” to spend more. And that as long as they’re continuing to spend within their means, it remains reasonable and prudent. Nonetheless, the question remains: what does it really mean to “live within your means”, and is there a point where that advice is no longer relevant or prudent?

#FASuccess Ep 022: Serving Gen X Professionals With A Net-Worth-Plus-Income Retainer Fee Model with Jude Boudreaux

May 30, 2017 07:01 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the twenty-second episode of the Financial Advisor Success podcast.

This week’s guest is Jude Boudreaux. Jude is the founder of Upperline Financial, a financial planning firm in New Orleans that works primarily with Gen X professionals in their 30s and 40s.

What’s fascinating about Jude’s practice is not only that he works with a much younger clientele than the typical financial advisor, but his unique pricing model – an annual retainer fee that’s calculated as 1% of the client’s income, plus half a percent of the client’s net worth. Which makes it feasible for him to work with that younger clientele, and deliver holistic financial planning, even if they don’t have any assets to manage. And thanks to his unique model, that's so well aligned to his target clientele, Jude has managed to grow his practice to capacity, at more than 150 clients and $400,000 of annual revenue, in only 6 years.

In this episode, Jude shares not only the details of his unique business model – including how he handles billing when there's no portfolio to bill from – but also his highly structured process for meeting with clients on a rotating basis three times per year, the kinds of financial planning issues he covers in those meetings to validate his fee structure, and what he did to fill in the income gaps while he was still growing to the point that he could replace his prior salary.

Jude also shares the exact marketing strategy he executed to get his 150 clients – by using blogging, Twitter, and media interviews to get him up to the #1 ranking Google result for "fee only financial planner in New Orleans". (Try the search yourself – you’ll see!) And now thanks to his successful local SEO strategy, all of his prospective local clients find their way to him. Even though, ironically, his own staff are all virtual and not in the New Orleans area!

And be certain to listen to the end, where Jude shares why it is that, even though he's successfully built a solo advisory practice to be very profitable, he's now looking to merge his firm into a larger advisory business, by taking a hard look at his personal strengths and where he wants to focus his energy in the future.

So whether you’ve been wondering how to structure a business model that lets you work with younger clients, or want to better systematize your own financial planning meeting process, or have been curious to hear how digital marketing is done by someone who dominated his local business opportunities, I hope you enjoy this latest episode of the Financial Advisor Success podcast!

Summer Reading List of “Best Books” For Financial Advisors – 2017 Edition

May 29, 2017 07:01 am 8 Comments CATEGORY: Personal/Career Development

It's Memorial Day once again, which means we're well past tax season, and the busy spring season of industry conferences is coming to an end... and it's time for the annual summer slowdown for most advisory firms, as clients begin to go on summer vacations and it's harder to schedule them for meetings, and as advisors we have some time for ourselves to relax with family... and catch up on some good books.

As an avid reader myself, I'm always eager to hear suggestions from others of great books to read, whether it's something new that's just come out, or an "old classic" that I should go back and read (again or for the first time!). And so, in the spirit of sharing, a few years ago I launched my list of "Recommended (Book) Reading for Financial Advisors", and it was so well received that in 2013 I also started sharing my annual "Summer Reading List" for financial advisors of the best books I'd read in the preceding year. It quickly became a perennial favorite on Nerd's Eye View, and so I've updated it every year, with a new list of books in 2014, another in 2015, and a fresh round of recommended books for financial planners in 2016.

Continuing the annual series, I'm now excited to share my latest 2017 Summer Reading list for financial advisors, with suggestions on books about everything from how to minimize burnout and more fully (re-)engage with your advisory firm, and how the principles of computer algorithms can help you gain personal efficiency and better productivity in your daily life, to building an "enduring" advisory firm that lasts beyond its founder to the next generation of advisors (and how to serve the next generation of clients that will be necessary to perpetuate the firm), practice management books on everything about how to properly value and/or think about selling your firm and how to actually run your business like a business that is scaling up in size, to why humans will likely remain relevant (including and especially with the rise of computers and robots) and what it will take for financial planning to finally, truly become a profession in the 21st century.

So as we head into the summer season, I hope that you find this suggested summer reading list of books for financial planners to be helpful… and please do share your own suggestions in the comments at the end of the article about the best books you've read over the past year as well!

Weekend Reading for Financial Planners (May 27-28)

May 26, 2017 02:18 pm 3 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the big news that Labor Secretary Acosta will not be delaying the June 9th applicability date for the Department of Labor's fiduciary rule, ending the active debate of the rule's viability that has raged for the past 6 months since President Trump was elected. However, the reality is that even with the rule taking effect on June 9th, most of the key enforcement provisions will not apply until January 1st of 2018, and even as Secretary Acosta notes that there was "no principled legal basis" to change the June 9th date, he also reaffirmed that the DoL is still considering whether the revise the rule, especially after President Trump's Executive Memorandum in February directing the DoL to further study the rule's impact. Which means while repeal is no longer on the table, the DoL fiduciary rule will likely remain a highly contentious issue, with more twists and turns, through the end of the year.

From there, we have a number of articles about pricing your advisory firm services, including two articles providing strategies on how to set your pricing "purposefully" and in a manner that you can maintain (and not succumb to giving discounts if/when clients begin to haggling over pricing), and another on pricing models for working with younger clients in particular (based on a recent SEI study finding that Millennials are interested in paying for financial advice, but do not want to pay via commissions!).

We also have several practice management articles about how to train, develop, or become a successful younger advisor, including: the need to craft deeper and more fully-fleshed out career tracks for young advisors; the rise of call-center-based financial planning jobs, as large firms increasingly roll out digital advice platforms that necessitate a base of centralized associate planners; how firm owners should evaluate young talent to identify a good prospective financial planner amongst their job applicants; how to develop more confidence as a financial advisor (a critical key to success); and the kinds of fears that all financial advisors succumb to, and that must be faced (and overcome) to advance your own career.

We wrap up with three interesting articles, all around the issues and concerns of ultra-wealthy clients: the first is a look at the deep concerns and challenges that the ultra-wealthy have in even talking about money and prospective inheritances with their children (despite the fact that it rarely turns out any better to skip the conversation, and have heirs find out about their inherited wealth from a trustee or estate attorney!); the second is a look at the rising popularity of "extreme" emergency preparedness, from glitzy bunkers to high-end evacuation services, that the ultra-wealthy are buying as a form of "insurance" against extreme risks (from terrorism to cyber warfare to natural weather disasters); and the last reviews a recent research study finding that one of the best ways to get the wealthy to give more to charity, given that the wealthy often focus on their individuality as a key to their success, is to emphasize the individuality of their charitable giving and the role that they, personally, can play, rather than simply emphasizing the common good.

Enjoy the "light" reading!