Nerd's Eye View blog

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!

Despite No More Delay, DoL Fiduciary Still Not A Done Deal Yet!

May 25, 2017 01:47 pm 5 Comments CATEGORY: Regulation & Compliance

The big news this week was an Op-Ed published by Labor Secretary Acosta in the Wall Street Journal that declared, in no uncertain terms, that there will not be any further delay in the Department of Labor's fiduciary rule beyond June 9th. Despite all the industry protests, that have continued for more than a year, and various attempts at (further) delays, financial advisors who provide investment advice to retirement investors will be required to adhere to the "Impartial Conduct Standards" after June 9th, requiring that they give Best Interests advice, for Reasonable Compensation, and make No Misleading Statements... as any fiduciary should. However, the permanence of the rule on June 9th still doesn't mean the fighting over DoL fiduciary is done yet!

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss the coming fiduciary obligation for advisors serving retirement investors after June 9th, why the implementation of the DoL fiduciary rule was not delayed again, and why the DoL fiduciary rule still isn't a done deal yet, despite (and in fact, because of) what Secretary Acosta announced this week.

As regular followers of this blog know, the fact that the DoL fiduciary rule will not be delayed further shouldn't be news. As has been discussed here repeatedly in the past, and now fully confirmed by Secretary Acosta, the requirements of the Administrative Procedures Act simply left "no principled legal basis" to further change or delay the June 9th applicability date. However, it's crucial to recognize that the full DoL fiduciary rule is still not going into effect come June 9th, because part of the prior delay also delayed enforcement for most of the rule until January 1st of 2018. As a result, there is no actual Best Interests Contract... annuity agents will not have to honor the Best Interests Contract Exemption between now and the end of the year (and can rely on the less stringent PTE 84-24 when selling annuities into an IRA instead)... new disclosure requirements won't apply... and firms can still sell proprietary products while brokers receive conflicted compensation!

What does apply, though, is the requirement to adhere to the Impartial Conducts Standards, which is the core of what it takes to be a fiduciary under the rule: providing best interests advice, for reasonable compensation, and make no misleading statements. However, there will be no requirement to actually sign a Best Interests Contract, which means there won't necessarily be a full fiduciary contract in place, and in turn means it's not really clear how enforceable the fiduciary rules will really be through the end of the year. Especially since the Department of Labor itself said, in a follow-up 11-page 15-question FAQ, that it will be focused on "compliance assistance" in the coming months (and not necessarily focusing on citing violations and doling out penalties).

But the real reason it matters that full DoL fiduciary enforcement won't be coming until the end of the year, is that it provides another 6 months for fiduciary opponents to lobby for modifying the rule. In other words, DoL fiduciary may not be getting repealed and the June 9th date is final, but that doesn't mean this is the final rule. President Trump's Executive Memorandum back in February, which directed the DoL to re-evaluate the rule and consider amending it, is still in effect, and a proposal may be coming. In fact, Secretary Acosta's Op-Ed emphasized that while the rule is final, the Department of Labor is still considering revisions to the fiduciary rule, but that "the process requires patience", and that there may even be another enforcement delay (further into 2018) while the DoL considers new exemptions or other potential revisions as it issues a new Request for Information and new Public Comment periods.

In the end, this means that while a new fiduciary rule may soon be the law of the land for all retirement accounts, what, exactly, will be required to comply with that fiduciary rule in the long run, is still wide open and uncertain. The Impartial Conduct Standards requiring best interests advice, for reasonable compensation, with no misleading statements, will take effect soon. But the true obligations of Financial Institutions to monitor and oversee that activity, and the nature of enforcement and accountability for the fiduciary duty, is still not yet fixed and permenant... so get ready for a whole lot more DoL fiduciary debate over the next 6 months!

Safe Savings Rates With Real-World Wage Increases Over Time

May 24, 2017 07:01 am 2 Comments CATEGORY: Retirement Planning

When financial planners run retirement projections for clients, the most common assumption is to assume some type of constant inflation adjusted earnings growth (i.e., annual cost-of-living adjustments [COLAs]). This may seem reasonable enough, as future earnings are highly variable, and many employers do try and offer cost-of-living adjustments to their employees. So why not just assume that will continue throughout one’s career, at least as a baseline?

However, as it turns out, income growth typically follows some predictable paths that don’t necessarily just align with steady (inflation-adjusted) earnings growth; instead, these paths vary significantly based on the general income profile of an individual. For most, income growth throughout their career will actually exceed mere cost-of-living adjustments, which can add up to a lot of additional income (and savings capabilities) over a multi-decade working career! Further, while real income growth is often experienced, real earnings typically peak at least a decade prior to retirement, which is then followed by a subsequent decline in real earnings for the last 10-20 years of one’s career. Which can actually have a substantial impact on the trajectory of retirement savings itself.

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 savings rates assuming more realistic earnings growth throughout one’s career, finding that traditional assumptions tend to overstate safe savings rates for low earners and understate safe savings rates for higher earners.

For instance, once we account for more realistic “earnings curves” of workers, it becomes clear that the decline in real earnings over the last 10-20 years of one’s career may actually reduce the retirement need – at least if we assume individuals prefer a smooth transition from pre-retirement to post-retirement spending. As a result, conventional assumptions may actually overstate the required savings rates for all but the top 20% of income earners, while understating the need for top earners (who advisors are most likely to be working with!). Additionally, given that most real earnings growth happens in the first decade or two of one’s career, conventional methods may overstate savings need even further for clients in their 40s or 50s (whose lifestyles aren’t likely actually rising at that point).

Another interesting finding is that once Social Security is incorporated with respect to different earnings curves, it’s possible that low savings rates for many Americans may not be as irrational as is often assumed. In fact, for individuals at the 20^th percentile and below (i.e., 1-in-5 Americans), historical safe savings rates may have been as low as 0.3%! And even the median earner would actually “only” need a savings rate of about 6.1%, and earners as high as the 80^th percentile would still have a safe savings rate below 10%! Highlighting not only the importance of Social Security to many Americans, but challenging the notion that low savings rates are an indicator of impending retirement doom for many Americans. In other words, this safe savings rate analysis suggests that, when real-world earnings growth is considered, most retirees really will be on track with relatively “modest” savings rates of 10% or less, when supplementing Social Security benefits.

The bottom line is that it’s crucial to recognize that for most workers, simply assuming steady inflation-adjusted earnings growth throughout the working years is not an accurate reflection of reality for most. And earnings curves do matter, because it impacts both the ability to save, when people can afford to save, and the likely level of their pre-retirement lifestyle costs (which in turn will likely impact the cost of the retirement lifestyle they wish to maintain) Of course, there are a lot of contingencies and unknowns when trying to predict earnings curves for any individual, but the fact remains that assuming constant real inflation-adjusted earnings is actually a very problematic default assumption for accumulators saving towards retirement!

#FASuccess Ep 021: Pivoting An Existing Advisory Firm To A Niche Serving Women In Transition with Evelyn Zohlen

May 23, 2017 07:01 am 2 Comments CATEGORY: Financial Advisor Success Podcast

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

My guest on today’s podcast is Evelyn Zohlen. Evelyn is the founder of Inspired Financial, an independent RIA in southern California that provides holistic financial planning and asset management services for 110 families, and manages nearly $140M in assets under management.

What’s fascinating about Evelyn’s firm is that her business is focused entirely on a niche – working with “women in transition”, most commonly recent divorcees or widows. And by focusing in on a niche, she’s been successful in working with affluent women, charging an assets under management fee with a minimum retainer of at least $10,000 per year, and driving almost $1.2M of gross revenue with a team of 4 advisors – including herself – and 2 support staff.

In this episode, Evelyn shares not only the details of her niche advisory practice, but how she selected this niche in particular from the never-ending list of possibilities, and how she communicated to her existing clientele the transition to her niche – given that she didn’t adopt a niche focus until after she had run her advisory firm for 5 years, and had already acquired another practice! Evelyn also shares some of the training she sought out to improve both her technical and relational capabilities in her niche, and how she leverages her niche to drive 85% of her new business development as inbound referrals from centers of influence.

And be certain to listen to the end, where Evelyn also shares the multi-advisor staff structure of her firm, how she allocates clients amongst herself and the other advisors within the firm, and the weekly meeting process that she uses to keep her team on track and well coordinated while serving all the firm’s clientele as an ensemble practice.

So whether you’ve been wondering what it’s like to pivot an existing advisory firm into a niche, what it takes to pick a particular niche and really go after it, or simply how to run an effective multi-advisor team and coordinate amongst multiple team members who all interact with the clients, I hope you enjoy this latest episode of the Financial Advisor Success podcast!

Advisor’s Guide To The Best Online Meeting Scheduling Tools

May 22, 2017 07:01 am 25 Comments CATEGORY: Technology & Advisor FinTech

Playing phone tag and e-mailing back and forth to find the best meeting time for you and your existing or prospective clients eats into otherwise productive time, and can be frustrating for both parties. By implementing a meeting scheduling software solution in your practice, you can reduce some of the headache by automatically giving the client a list of available times drawn from your calendar, and allowing them to pick (and immediately book) a time that works best for both of you!

In this guest post, Dan Kellermeyer, President of New Heights Solutions, LLC, a practice management and technology consulting firm for financial advisors, provides an overview of the leading online scheduling tools for financial advisors, including Calendly, ScheduleOnce, Acuity Scheduling, TimeTrade, Bookafy, and YouCanBook.Me.

Along with highlighting the features of each of the tools, Dan shares his insight on the relevant factors to consider when looking for the right solution for your individual practice – from unique features and available integrations, to ease-of-use for the client, the company’s customer support, and of course, pricing.

And so, whether you’re looking to add a little more efficiency to your practice by cutting down on the hassle of back-and-forth meeting scheduling, improving your “digital experience” for clients, or are already using online scheduling software but looking to switch to an alternative, then hopefully you’ll find this guest post helpful!