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Why The Latest DoL Fiduciary Delay Is Likely The Last

April 13, 2017 09:42 am 0 Comments CATEGORY: Regulation & Compliance

This past Tuesday, April 10th, the Department of Labor's new fiduciary rule and its requirement for advisors to engage in a Best Interests Contract with their clients, didn't happen. And it didn't happen because last week the Department of Labor finalized a new regulation which enacted a 60-day delay to the applicability of the rule, which means the final DoL fiduciary rule is now scheduled to take effect June 9th, instead. Yet while many commentators have been suggesting that we'll see further delays until opponents of the DoL fiduciary rule ultimately kill it, I wouldn't be so sure of that, and particularly when you delve into the details of what this delay actually said.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we delve into the fine print details of the recent DoL fiduciary 60-day delay, why it was actually more like an 8-month delay for many key provisions, and why that actually reduces the likelihood of more DoL fiduciary delays!

First and foremost, the new regulation that enacted a 60-day delay (shifting the applicability date for the Department of Labor's fiduciary rule out until June 9th), was actually a 63-page regulation with a number of key changes, and even a few surprises. First, while the new definition of "fiduciary" is delayed until June 9th, the requirement to actually fully implement the Best Interests Contract Exemption (the crux of the new fiduciary rule) was delayed until the end of the year. Which means that the Impartial Conduct Standards (that advisors must give best interests advice, for reasonable compensation, and make no misleading statements) will go into effect on June 9th, but the remainder of the new disclosure rules, policies and procedures requirements, and enforcement mechanisms – such as the ability to bring a class action lawsuit against Financial Institutions for fiduciary breach – will not go into effect until 2018.

This delay is important to acknowledge because, contrary to much speculation, it ultimately reduces the likelihood of further delays! Segments of the industry have been fighting hard against DoL fiduciary – lobbying the DoL, suing the DoL for overreach and hastiness, lobbying Congressional Republicans to block it, and ultimately lobbying the current administration for a delay. But as I noted immediately following the election, the rule is still a done deal, finalized and formally adopted last year. Which is ultimately why President Trump didn't unwind the rule, but instead, only issued a proposal to consider whether to delay another 60 days. And based on the prior lawsuits over the "hastiness" of the rule (which was originally developed over five and a half years!), it's hard for opponents to now come back and say the rule should be killed or substantially changed in as little as 60 days! Especially when 90% of the 193,000(!) public comment letters received by the DoL were against even the 60-day delay! It's getting harder and harder to substantiate further delays to the rule now.

In fact, it seems that the only real path currently open for significant delay would be if a new regulatory impact analysis can shed new light on why the fiduciary rule would be somehow harmful after all, and undermine the prior cost/benefit analyses that have been conducted. Yet it's not clear how the industry would make that case, particularly given so many studies out there about the financial services industry's conflicts of interest, and how consumers are being harmed by those conflicts. And with the 45-day comment period to conduct a "Regulatory Impact Analysis" closing next week on April 17th, it's not clear how the DoL would possibly have enough time to substantively review the comments, propose a new rule, subject that rule to another comment period, take that feedback, complete a final rule, and submit that rule to the OMB for review and approval, and publish that new fiduciary rule in the Federal Register, all by June 9th.

In other words, the 60-day delay may have literally delayed the rule, but it's just not long enough of a delay to actually stop the rule. And when the industry's own lawsuits have claimed that the 5-and-a-half-year process of creating the rule was "too hasty", it's hard to make the case for substantively changing it in 60 days anyway. Even a re-delay will actually be challenging now, as with so many of the Best Interests Contract Exemption requirements pushed out to 2018, arguably the industry already has gotten an additional 8 months to adjust to the rule - which means advocates can emphasize that there's no reason to delay the applicability past June 9th anymore.

Notably, this doesn't mean that the rule won't be changed at all - modifications are still a definite maybe, perhaps around certain aspects of the policies and procedures requirements, disclosure obligations, or even the class action lawsuit provision. But the bottom line is that for all of the talk about the DoL fiduciary rule dying or going away, it really doesn't appear to be happening. So, if you haven't finished your preparations for the DoL fiduciary rule, I'd really encourage you to start doing so now!

The Taxation Of Reverse Mortgage Loan Proceeds And Interest Payments

April 12, 2017 07:01 am 24 Comments CATEGORY: Taxes

A reverse mortgage allows homeowners to borrow against their primary residence, without making any ongoing payments; instead, interest simply accrues on top of the principal, and most commonly is not repaid until the homeowner either moves and sells the home, or when it is sold by heirs after the original owner passes away.

The caveat, however, is that if reverse mortgage interest accrues annually instead of being paid, it cannot be deducted each year under the “normal” rules for deducting mortgage interest. And a similar caveat applies to mortgage insurance premiums, which might be deducted (at least, if Congress reinstates and extends the rules that lapsed at the end of 2017), but only if they’re actually paid – which, again, typically isn’t the case with a no-payment reverse mortgage.

Of course, the reality is that when the loan is ultimately repaid in full – even if all at once – the accrued mortgage interest and mortgage insurance premiums do become deductible at that time when actually paid. The problem, though, is that if compounded for enough years, the size of the deduction may be too large to use… or at least, the liquidating homeowner (or heir) may need to plan to create income in the year the reverse mortgage is paid off, just to ensure there’s enough income to be offset by the deductions.

Furthermore, reverse mortgages can also complicate the tax deductibility of real estate taxes. To the extent real estate taxes are paid directly – even as a cash payment with proceeds from a reverse mortgage – they remain deductible. However, with the HECM reverse mortgage’s new Life Expectancy Set Aside (LESA) rules, it’s not entirely clear whether real estate taxes paid directly from the set aside are fully deductible in the same manner, or whether they might have to be accrued and claimed at liquidation, similar to the reverse mortgage interest deduction and mortgage insurance premium deduction!

#FASuccess Ep 015: Why Life Planning Is Simply Financial Planning Done Right With George Kinder

April 11, 2017 07:01 am 6 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the fifteenth episode of the Financial Advisor Success podcast!

This week’s guest is George Kinder, who is known to most as the “father” of the life planning – a way of holistically delivering financial planning that focuses on delving into clients’ real goals, beyond just their financial concerns, in an effort to help them use their money to deliver freedom into their lives.

What’s fascinating about George, though, is that he didn’t start out trying to create a movement towards life planning. George was actually a math major at Harvard, who then became a CPA (and earned the Bronze Medal for the third highest score in his entire state on the CPA exam!), and only began to explore the intersections between financial planning and psychology after forming a niche financial advisory practice delivering advanced tax strategies for self-employed psychologists and therapists!

In this episode, George talks about his early career and the inception of life planning itself, how he ultimately transitioned away from and sold his financial planning firm to teach life planning full time, his now-famous three questions that he asks of new clients to get to know them and begin the life planning process, and the five pursuits that most clients articulate in the life planning process… which rarely have anything to do with “traditional” financial planning goals like retirement! Though notably, George doesn’t view life planning as an alternative to financial planning, but simply as “financial planning done right”.

So whether you’ve been curious to learn more about life planning in particular, or are just looking for ideas about a whole new way to approach financial planning (and differentiate yourself in a crowded financial advisor marketplace!), I hope you enjoy this latest episode of the Financial Advisor Success podcast!

Finding Absolute Engagement To Get Unstuck In Your Advisory Firm

April 10, 2017 07:00 am 12 Comments CATEGORY: Practice Management

One of the greatest strengths of providing ongoing financial planning and investment management for an AUM fee is also the model’s greatest challenges: because the revenue is recurring, and industry retention is so high, as long as advisors can survive long enough, they can eventually accrue enough clients to build a sizable business. Thus, one of the greatest predictors of an advisor’s income, and the size of his/her business, is simply the number of years the advisor has been in practice.

However, the fact that advisory firms steadily accrue (and rarely lose) any clients means that eventually, the growth of the business will necessitate hiring. And then more hiring. And at some point, there are so many clients, and so many employees serving them, that the advisor ends up spending more and more time doing tasks in the business that aren’t enjoyable, and less and less time working with the clients he/she once enjoyed.

In a new book entitled “The Pursuit of Absolute Engagement”, industry consultant Julie Littlechild studies how financial advisors and their firms can unwittingly veer off course, and what it takes for the advisor to become re-engaged in the business again. Because the reality is that failing to do so can eventually lead to a point of burnout, where the advisor loses control of the business – and instead it feels like the business controls you!

Ultimately, the path to finding meaningful engagement with the business again is all about (re-)creating its future with a specific intent – to identify the kind of clients that you enjoy working with, the kind of work you enjoy doing for them, and the role in the business that is the most personally engaging and fulfilling for you. For most advisors, the idea of finding a focus – to the exclusion of clients and tasks that don’t fit the mold – is terrifying, both for the change it entails, and the risk to the business. But as Littlechild points out, the truth is that for many advisors, the best path forward for future growth is all about focusing in on the right clients, the right work, and the right role, that helps the advisor find “Absolute Engagement” – because when you’re truly engaged in the business, your newfound energy is likely to do more to propel the business forward than any other business strategy could have accomplished anyway!

Weekend Reading for Financial Planners (Apr 8-9)

April 7, 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 big news that the DoL fiduciary rule was in fact delayed this week, not only with a 60-day delay to the applicability date itself, but also including a further delay until the end of the year for complying with the full-BIC, the need to acknowledge fiduciary duty to clients, and the application of the Best Interests Contract Exemption to annuities... though the debate is on as to whether this is still the beginning of the end of the DoL fiduciary rule, or if the extended delays for key provisions will actually make it harder to eliminate the rule now that the industry has been granted more time to accommodate! Also in the news this week is the launch of the CFP Board's new "I'm A CFP Pro" campaign to encourage more people to become CFP professionals (particularly amongst Millennials, women, and people of color, who are all currently under-represented amongst financial advisors), and a 'heads-up' from the SEC that it is increasingly scrutinizing RIAs who have 'independent' investment adviser representatives affiliating with them as 1099 contractors.

From there, we have a few articles about industry trends, including: a look at how regardless of the DoL fiduciary rule and its prospective delay, the biggest broker-dealers are in the process of reinventing themselves for a fiduciary-advice future; how advisors who are considering changing broker-dealers in this environment should scrutinize how the payouts really work, as some broker-dealers who offer 90%+ payouts also have higher costs (from trading charges to custody fees to compliance and technology fees) that may mean the advisor actually finishes with less on the bottom line; and a look at how a new "breakaway" trend is starting to emerge, not amongst the brokers who are breaking away to form RIAs, but amongst independent RIAs themselves, where advisor teams are breaking away to form their own new independent RIA firms.

We also have several more technical articles this week, from a new study by David Blanchett on the interplay between the amount of a retiree's guaranteed income and their ability to sustain a higher "safe" withdrawal rate from the portfolio that complements that guaranteed income (especially for retirees who have at least a little income flexibility), to discussion of another study that finds mutual funds holding ETFs tend to have inferior performance to those that hold stocks and bonds directly (whether due to bad market timing, or adding a layer of ETF fees while acting as a closet indexer), and an explanation of how conservation easements work and why they can be an appealing tax planning strategy for high-net-worth clients that have substantial positions in (undeveloped) land.

We wrap up with three interesting articles about personal development and learning: the first is an overview of the latest research on how we actually learn, and what we should do as adults to try to learn better; the second is a fascinating series of short interviews with prolific readers about how they read, and what strategies they engage in to get the most out of their reading material (hint: it's ok and normal to read for a while, then skim, then lose interest before getting to the end and picking up another book instead); and the last is a fascinating look at how the Pareto Principle, also known as the 80/20 rule, comes about naturally, and why it is that you don't have to be twice as good to get twice the results... it's only necessary to be 1% better, and do so persistently over an extended period of time.

Enjoy the "light" reading!

Key Questions To Ask In A Financial Planning Job Interview

April 6, 2017 08:10 am 7 Comments CATEGORY: Personal/Career Development

When interviewing for a financial planning job opportunity, it can be easy to get caught up in the process. Especially if it's your first job interview. You want to answer the questions "right"... You want to put your best foot forward... And you want to make a good impression. But the reality is, a job interview should be a two-way street. The firm interviews the candidate, but the candidate is also interviewing the firm! Unfortunately, though, few prospective financial planners really interview the firm they're applying to work at. And as a result, too many new financial planners wind up in bad first jobs – whether it is a sales job, an admin job, or something else that involves little real financial planning – all by failing to ask good questions of the firm during their interview process!

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, I discuss the 10 best questions that you, the financial planning job seeker, should be asking the prospective firm before you take the job, and what answers you should be looking for in response! And why just looking for a fee-only RIA is not actually the best way to find a good financial planning job opportunity!

First and foremost, though, if you want to find a good financial planning job, you will need to do due diligence on the firm yourself. To start out, there are three particularly valuable sources of information. First, check out the firm's website. Realize that some great firms may not necessarily have a great website, but see what you can learn about them online. Who are they? How do they work with clients? What can you learn about the founder and the firm's leadership? Second, look up their regulatory information, via BrokerCheck or IAPD. Do they have any infractions? If they are an RIA, look up their Form ADV Part 2 and see what you can learn about them from this document. Finally, get a copy of the actual job description itself, and really read through it. It stuns me the number of times I hear new advisors unhappy in their jobs, but then I see a copy of the job description, and it says they were going to do exactly what they're doing now (but they didn't really read it themselves before saying 'yes'!)!

The next step is the interview itself. If you've done your due diligence well, not only will you be prepared to ask great questions, but the prospective firm will likely be impressed you took the time to look up information about them. When the opportunity comes in the interview, be ready to speak up and ask your questions. A few important questions to ask include asking about the software the firm uses, how often they update financial plans for clients, whether they're growing and where their new clients come from, what a typical week looks like (for someone in the position you're applying for), and whether they think it's important to get the CFP marks?

Notably, it's not necessarily about whether the firm is a fee-only RIA, but whether they really put a focus on financial planning, regardless of their business model. In fact, the value of these questions isn't just the exact answers that the firm provides, but what the answers reveal about the overall attitudes and culture of the firm (regardless of whether it's under a broker-dealer or at an RIA), whether they're really serious about financial planning, and whether the job you're applying for is really a good way to get CFP experience, or if it's just an admin or sales job instead!

In the end, the reality is that there are no perfect answers to all of these questions. Most advisory firms are small businesses, and the truth is that this may be a new scary process for them, too. But, ultimately, the sense you should get from the interview is that the position is really about financial planning and it's not simply a sales job. And if it's a growing firm, and they take planning seriously, it may be a great first job, even if it's not the perfect job! So, if you find yourself interviewing for a new financial planning job, hopefully you'll find these questions helpful, because ultimately a successful interview is not just about the questions you answer, but also the questions you ask!

Financial Planning Research Highlights From The 2017 CFP Board Academic Research Colloquium

April 5, 2017 07:01 am 10 Comments CATEGORY: Planning Profession

From February 7^th through February 9^th, the CFP Board’s new Center for Financial Planning hosted their inaugural Academic Research Colloquium (ARC) in Washington D.C. The event brought together 215 academics from 130 colleges and universities to share and discuss research relevant to the financial planning profession, as a part of the CFP Board Center's longer-term goal of establishing itself as the “academic home” for the financial planning profession (and the research that supports it).

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 – provides a recap of the 2017 CFP Academic Research Colloquium, and highlights a few of the latest research studies with particularly relevant takeaways for financial planning practitioners.

The 2017 CFP Academic Research Colloquium had a strong showing from some core financial planning academic programs, with scholars from Texas Tech, Kansas State, Georgia, and The American College serving as lead authors for nearly 50% of all research presentations and poster sessions. Additionally, the colloquium was successful in drawing in scholars from outside of the core financial planning programs, featuring lead authors from 27 other academic institutions, including Wharton School of Business, Harvard Medical School, and Yale.

The colloquium featured a wide range of topics. Some particularly relevant themes for financial planning practitioners ranged from diversity issues within financial planning (including an analysis of the experiences that increase female likelihood of pursuing a career in financial planning, as well as an examination of the predisposition of women to use the services of a financial planner), to client trust and communication (including the use of solution-focused financial therapy techniques to help clients set financial goals, and an investigation of how different types and frequencies of communication are associated with client satisfaction, trust, and commitment), and the always important topic of retirement planning (including a detailed examination of the use of QLACs in retirement income planning).

Overall, the inaugural CFP Academic Research Colloquium was an objective success. Attendance was strong from a wide range of educational institutions (including many not traditionally known for financial planning), research submissions were higher than expected, and the Center for Financial Planning was successful in recruiting a diverse group of academics and practitioners, above and beyond even what the FPA has been able to achieve in recent years with its partnership with the Academy of Financial Services. In the coming years, we will see whether the Center for Financial Planning is successful in their pursuit to become the academic home of financial planning research, but so far it's off to a very strong start.

#FASuccess Ep 014: Validating Your Advisor Value Proposition And Overcoming Imposter Syndrome With Carl Richards

April 4, 2017 07:01 am 11 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back for the fourteenth episode of the Financial Advisor Success podcast!

This week’s guest is Carl Richards, a financial advisor who has successfully grown and sold his own advisory firm, but to most financial advisors is best known as the creator the famous “Behavior Gap” sketch (of the difference between investment and investor returns), and an industry writer and speaker on how to better communicate with clients about complex financial issues.

Carl has a career that many people would be envious of. He’s worked for top-notch financial planning firms, built his own RIA, written two books, publishes a column for The New York Times, and travels internationally to speak to financial advisors around the world about financial planning. Yet ultimately, like so many of us, Carl still faces his own self-doubts about whether the value he provides is really worth what he charges (despite all evidence to the contrary!), a phenomenon known as the “imposter syndrome” that can threaten anyone’s success.

In this episode, Carl shares his story, from accidentally falling into the securities industry, to building an advisory firm, starting his Behavior Gap platform and getting a regular column in the New York Times, how his speaking career built to the point that he’s now paid $10s of thousands of dollar to give a speech, and what he’s learned about the imposter syndrome, and why many great financial advisors constantly question whether or not they’re providing enough value for their clients given what they pay (despite the fact that our client retention rates suggests the overwhelming majority of clients are happy with what we deliver to them!).

And be certain to listen to the end, where Carl talks about how he sees the future of financial planning changing, to a world where technical competency is just the minimum tables stakes to be a financial advisor, why communication skills will be the real key to success going forward, and his number one tip on what any advisor can/should do to get better at this themselves.

So whether you’re struggling to achieve success because you doubt your own value to clients, or if you’re already successful but still nervous that you may not be providing enough value to keep your clients in the long run… or you’ve simply been curious to hear the story of Carl Richards himself, I hope you enjoy this latest episode of the Financial Advisor Success podcast!

The Latest In Financial Advisor #FinTech (April 2017)

April 3, 2017 07:01 am 0 Comments CATEGORY: Technology & Advisor FinTech

Welcome to the April 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 announcement that Schwab has fully rolled out its "Un-Robo" Schwab Intelligent Advisory solution, pairing investment technology with human CFP certificants providing personal financial planning advice in time to capture market share opportunities with the looming applicability date of the DoL fiduciary rule... ironically pivoting away from its pure Schwab Intelligent Portfolios robo solution, just as Merrill Lynch, Wells Fargo, and T. Rowe Price have all announced the launch of their own pure robo-advisors, and raising the question of whether the others will ultimately follow suit by un-robo'ing their robo-advisors into tech-augmented human solutions as well. And, in the meantime, pure "robo" advice itself may also be undergoing a pivot, as a major new pilot program between IBM Watson and H&R Block aims to shift "robo" solutions from investments to tax preparation and tax planning instead.

From there, the latest highlights also include:

A slew of advisor FinTech platforms shutting down, including NerdWallet (ending its Ask An Advisor service), AdviceIQ (acquired by FMeX), WealthMinder (acquired by AdvisorEngine), and PrairieSmarts (acquired by Covisum).
Trizic aims to reboot its robo-advisor-for-advisors platform with a $3.3M VC round, and its first major enterprise deal (with John Hancock)
Blooom raises $9M of capital for its B2C "robo" solution in the 401(k) channel, one of the few bright spots of robo tools that are still growing
Oranj rolls out a major new release of its client portal solution
PocketRisk rolls out its 2.0 version of risk tolerance solution, expanding into a two-dimensional risk tolerance assessment process

You can view analysis of these announcements and more trends in advisor technology in this month's column, including whether advisors have missed the boat on PFM (Personal Financial Management) solutions that are now being adopted and rolled out directly by banks instead, how Quovo is trying to position itself as the glue that holds together the future of account aggregation with a new Authentication API, and the latest in estate planning software solutions such as Wishlife, another tool that aims not to facilitate estate tax planning strategies, but the transition of the estate itself and the stories, wishes, and guidance that the decedent wishes to leave behind to his/her heirs.

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 (Apr 1-2)

March 31, 2017 02:54 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the latest news that the Department of Labor has submitted its official 60-day fiduciary rule delay, and sent it along to OMB for final approval... although fiduciary supporters are already raising the question of whether the delay might face a legal challenge, as it's not clear whether the DoL could have realistically read and thoroughly considered in just two weeks the over-1,100 comment letters that were submitted. Also in the news this week is a new FINRA Rule 2165, that would obligate financial firms (and their advisors) to make "reasonable efforts" to get contact information for a trusted third party (or even to stop disbursements from an account) if there is suspicion that a senior client may be getting financial exploited, while also providing a safe harbor against privacy breach or other legal consequences for endeavoring to do so.

From there, we have a few practice management articles, including a look at "what's next" in the world of financial advisor marketing (as we continue the evolution from cold-calling to seminar marketing to client appreciation events and now digital marketing), an important reminder that as financial advisors we use too much industry jargon (often without realizing it), and an interesting way to think about how the client relationship evolves over time from being "just" a customer, to a true client, to a friend, and finally to an advocate (which is food for thought about what you might do to evolve your own clients along that continuum!).

We also have several more technical articles this week, from a discussion by Wade Pfau of "time segmentation" (i.e., bucketing) strategies in retirement (as differentiated from systematic withdrawals from total return portfolios, or various essential-vs-discretionary income approaches), common estate planning mistakes that financial advisors can help their clients avoid, and a look at the recent Tax Court case of Ozimkoski, which provides several valuable reminders of what not to do when handling an inherited IRA!

Towards the end, we have three interesting articles on the theme of retirement, and whether it's all that it's cracked up to be, from a look at the global research on happiness and wellbeing that finds being employed is consistently associated with greater life satisfaction than being unemployed (with white-collar jobs consistently scoring better than blue-collar jobs as well), a look at the real-world challenges that early retirees face in transitioning to retirement when all of their peers are still working, and the results of a fascinating survey from the Wall Street Journal that asked new/recent retirees what they found to be most surprising in retirement, to which they said... almost everything.

We wrap up with the sad news that this week, financial planning visionary Dick Wagner passed away unexpectedly. Wagner has long been recognized as a thought leader in the profession (since long before the term was popular), and was both a former practitioner, former volunteer leader at the chapter and national level in various FPA-predecessor organizations, co-founder of the Nazrudin Project (from which much of the life planning movement emerged), and a tireless advocate of advancing financial planning into a true profession around a broader garden of knowledge that he dubbed the study of "finology". Fortunately, Wagner was able to publish his book, "Financial Planning 3.0", just a few months before he passed away, and in today's weekend reading, we highlight what many view as the seminal article on how financial planners must evolve to truly become a recognized profession... an article he first published in the Journal of Financial Planning in 1990, that we are all collectively still trying to live up to today. Rest in peace, Dick Wagner.