Nerd's Eye View blog

Weekend Reading for Financial Planners (Mar 25-26)

March 24, 2017 02:53 pm 7 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with an interesting new consumer survey from J.D. Power (and a similar one from Spectrem) finding that the majority of consumers currently using commission-based investment accounts don't want to switch to a fee-based solution instead, even as studies also find that those who use fee-based accounts are more satisfied with what they pay... and reinforcing that while there may be some harm caused by inappropriate commission-based sales, there is a segment of consumers that don't want to pay ongoing fees and would prefer to just engage via commissions when they wish.

From there, we have a few practice management articles, from a look at how the biggest key to getting new clients may be "approachability" (which is far easier said than done!), to a discussion of what the real difference is between a TAMP and a "robo-for-advisors" solution (as the two increasingly converge towards each other), what to do (and not to do) when talking to the media as a financial advisor to get PR exposure, and what your website homepage must include in order to be appealing to prospects (even including the ones that were already referred to you, but are still checking you out online first!).

We also have several more technical articles this week, including: strategies for using bonds to meet retirement expenses; whether the rules limiting upside return projections on indexed universal life policies under Actuarial Guideline 49 went far enough; what to do when a retired couple applies for long-term care insurance but only one of them gets it (and the other gets declined); and an in-depth look at how the number of publicly listed stocks has dropped by almost 50% in just the past 20 years, as fewer and fewer companies choose to IPO in the public markets, even as M&A activity continues, resulting in a more-and-more concentrated number of publicly traded mega companies (and potentially less diversification even for the investor who buys a total market index fund).

We wrap up with three interesting articles about spending and saving behaviors: the first is a fascinating look at how a couple earning $500,000/year in a major metropolitan area can still spend "reasonably" (at least, relative to their income) yet find themselves living paycheck to paycheck; the second dives into how one Millennial blogger managed to accumulate $1M in investments in barely 5 years by converting his long-term savings goals into a daily savings effort (which so motivated him that as his income rose, he saved virtually all of it, accelerating his financial success); and the last looks at how anyone can get their financial life more streamlined and organized (which, notably, is something few financial advisors actually focus on directly, even though it could arguably be a complementary or even a separately paid service!).

Enjoy the "light" reading!

Does It Matter Whether You Get Your CFP From A “Top Ranked” Program?

March 23, 2017 08:36 am 9 Comments CATEGORY: Personal/Career Development

For parents these days, there's a huge focus these days on not just getting kids into college, but getting them into the "right" college. And whether it's realistic or not, many people by default want to plan for their kids getting into recognized Ivy League schools like Harvard, Yale, or Stanford, in the hopes that studying at a "top school" will help their kids' future career prospects. Accordingly, it's perhaps no great surprise that more and more people who are looking to study for their CFP certification are also asking the question of what the "best" or "top ranked" CFP programs are, and whether it matters where you go to get your CFP. Particularly in light of the fact that some of the largest CFP education programs are completely unknown outside of our industry.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, I discuss why for most people, it doesn't really matter if you get your CFP certification from a "top ranked" CFP program or not, and what criteria you should really focus on instead when getting your CFP education.

First and foremost, the primary reason that it doesn't matter where you get your CFP education is that most clients really don't care what school you went to school. They just rarely ask. And even when it does happen, it's not difficult to explain the credentials of an industry -specific educational institution like the American College or the College for Financial Planning - and then move on. Because ultimately, if of getting your CFP marks gives you expertise and confidence that you communicate accordingly, that is the primary benefit of CFP certification! Not getting the "right" institution at the top of your degree.

That being said, tt is worth noting that there are some situations where the school you get your CFP from may matter, at least a little. The first is when you are trying to get a financial planning job. Not a position where you need to go and get clients, but an internal position at a financial planning firm. Because when a firm is hiring someone, they have very little to look at... and as a result, having a school like Texas Tech or Virginia Tech on your resume – since these are schools known to have reputable CFP programs – can at least cast a positive "halo effect" on you. But don't count on that getting you the job. It might help you get an interview and tilt the scales in your favor a bit, but it ultimately comes down to what you learned in your CFP program. And that means if you ultimately want to land a job, focus on picking the program that allows you to learn the material best, because that is what will get you past an interview to an actual financial planning job!

The other time you may want to consider where you get your CFP is if you plan to go into academia. Although even in academia, it still isn't about where you get your six CFP education courses per se, but where you get a masters degree or a Ph.D. could truly matter. In this case, you aren't trying to win over consumers or persuade an employer to hire you, but in academia, school rankings simply matter more. Many schools like to have a good "academic pedigree" for their professors. Yet, even within academia, it's going to matter what type of job you ultimately want. If you want to help start a new CFP program or primarily teach undergraduates, then where you get your degree won't matter as much. If you want a tenure-track research position at an R1 research university or business school, then where you get your degree will be more important, even if it doesn't matter so much where you took your CFP courses.

The bottom line is, for most people getting their CFP certification – especially those who are just wanting to get a job or build an advisory firm getting clients – don't stress about where you get your CFP education. Instead, stress about finding a program where you can do well, and actually learn the content! Because, in the end, the biggest determinant of your success will be how well you actually learn the material and can confidently use it. Ultimately, this comes down to educational fit – not academic pedigree!

The Evolution Of The Four Pillars For Retirement Income Portfolios

March 22, 2017 07:00 am 14 Comments CATEGORY: Investments

The research on the optimal strategy to generate retirement income from a portfolio has been evolving for decades.

In the 1950s and 1960s, with the initial rise of a portfolio-based retirement, the leading strategy was simply to buy bonds and spend the interest (by literally “clipping the coupons” from the bearer bonds of the time). Until the inflation of the 1970s ravaged the purchasing power of bond interest.

The harsh consequences of inflation on bond portfolios led to a dramatic shift by the 1980s, as retirees increasingly purchased high-quality dividend-paying stocks instead, counting on the ability of businesses to raise prices and keep pace with inflation… which also helps their dividends to rise and keep pace with inflation as well.

The dividend strategy was popular until eventually retirees realized that owning stocks and focusing on the dividends, while ignoring the capital gains, just leads to large retirement account balances that could have been spent along the way. As a result, by the 1990s, retirement portfolio strategies shifted again, to consider a more holistic “total return” approach that incorporates interest, dividends, and capital gains as well.

Unfortunately, though, capital gains may be one of the largest drivers of total return in the long run, but it’s also one of the least stable, forcing the retiree to periodically rely on the portfolio principal as well. Of course, in the end, retirement principal that is unspent is arguably a wasted spending opportunity – where the “optimal” retirement portfolio is for the last check to the undertaker to bounce. On the other hand, given the uncertainty of a retiree’s time horizon – not knowing when you’re going to die – means in practice, the principal can and should be used more dynamically, spending from it in some years but leaving it untouched in others.

Which means ultimately, the modern retirement portfolio will really rely on four pillars for retirement income – interest, dividends, capital gains, and principal. Or stated more accurately, the four pillars of retirement cash flows – since the treatment of the pillars as “income” for tax purposes can vary depending on both the pillar itself (interest is taxable and principal liquidations are not), and the varying types of retirement accounts (from pre-tax IRAs to tax-free Roth accounts).

Nonetheless, the fundamental point is simply to recognize that a retirement portfolio has multiple ways to generate the desired cash flows for retirement. And in fact, in a low yield environment, it can be especially important to diversify across all four pillars – or retirees take on additional risks in stretching for yield, from interest rate and default risk (from longer-term or lower-quality bonds), to the concentration risks of buying just a subset of the highest dividend-paying sectors (which, as the financial crisis showed, can expose the portfolio to severe risk along the way!).

#FASuccess Ep 012: Delivering Profitable Financial Planning To Millennials For A Monthly Retainer Fee With Sophia Bera

March 21, 2017 07:00 am 19 Comments CATEGORY: Financial Advisor Success Podcast

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

This week’s guest is Sophia Bera, the founder of Gen Y Planning, a financial advisory firm that is successfully and profitably delivering financial planning to Millennials, by charging them an ongoing monthly retainer fee to access her financial advice.

Sophia’s path to launching her advisory firm was first the subject of a Nerd’s Eye View guest post back in 2013, when she launched her independent RIA for under $10,000 (in a world where most people said it wasn’t possible to get launched for so little!). So I decided to check with her to see how it’s going… and found out that she had replaced her prior job salary within 18 months of her new practice, and now after 3 full years, she’s already taking home $100,000 of profits after all expenses, and is growing rapidly with 2 new clients per month, almost all of whom are in their 20s and 30s.

Sophia’s firm is a great example of not only the fact that Millennials can be served profitably, but the power of having a niche. Because not only is Sophia’s firm actively growing, but her primary source of new clients is Google. That’s what happens when you have a niche. Just search for “Financial Planning for Millennials” yourself, and you’ll see that Sophia is at the top of the search results as the recognized expert in her niche!

In this episode, Sophia breaks down exactly how her fee structure and service model work, from how she charges a combination of upfront and ongoing advice fees, how she incorporates investment management for certain clients (using a “robo-advisor” platform to do it!), and what exactly it is she does for clients throughout the year (and why it’s not necessary to do something for them every month!). And Sophia goes into detail about what client retention looks like with a retainer model as well, and how she sees her business growing over time.

And be certain to listen to the end, where Sophia talks about how her practice has evolved into an entirely “location-independent” virtual advisory firm, and how that not only helps her to live the lifestyle she wants, but also to diversify her income streams across financial planning, speaking, writing, and even a new coaching service for other financial advisors who want to build a similar business for themselves.

So if you’ve been curious to know how exactly to serve young Millennial clients in your firm, or have been wondering what it would be like to “take the plunge” and start your own business to do it yourself, I hope you enjoy this latest episode of the Financial Advisor Success podcast!

What Is Financial Coaching, And Best Practices For Becoming One

March 20, 2017 07:01 am 51 Comments CATEGORY: Practice Management

While the number of business models for financial advisors continues to grow, from its commission-based roots, to the AUM model, and more recently to hourly and retainer models, the fundamental challenge is that virtually all of those models are still focused on the "traditional" domains of financial planning, including retirement, insurance, estate, taxes, and investments. When the reality is that for a huge swath of Americans, their needs for financial advice are focused on issues like credit card debt, building an emergency fund, or just getting their head around their budget for the first time. The problems are half about financial literacy, and half about behavior change and forming good financial habits around spending and cash flow... neither of which are part of the typical engagement with a financial advisor.

But what's the alternative? Increasingly, it's a new domain being called "financial coaching" instead. And in this guest post, Garrett Philbin of Be Awesome Not Broke (a financial life coach who helps people get out of debt and save towards their goals!) shares some of his own thoughts, tips, and processes, and guidance for those who want to try running a financial coaching practice instead of a traditional advisory firm. From the regulatory and compliance issues, to the business model and how to charge clients (because yes, there are people who really do pay for this kind of help!), the software and tools that can help, to the actual services and deliverables provided to coaching clients.

Ultimately, the key point is to recognize that financial coaching is emerging as a distinct service from what we traditionally do as financial advisiors, and one that reaches a distinct clientele (who have been grossly underserved by the financial advisor marketplace so far!). For some, that means coaching is an appealing way to expand an advisory firm to reach a new type of clientele. For others, it might even be a preferable alternative to the "traditional" path as a financial advisor, with what is still a $100k+ income potential. In fact, as Garrett notes, financial advisors and financial coaches can be an excellent professional relationship to cross-refer clients who need the services of one or the other!

So whether you've heard of financial coaching but don't know what it is, have been thinking about adding financial coaching services as an offering, want to become a financial coach instead of a financial advisor, or are simply interested in how your clients may benefit from working with a financial coach... I hope that you find this guest post from Garrett to be helpful!

Weekend Reading for Financial Planners (Mar 18-19)

March 17, 2017 02:55 pm 6 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with a "surprising" Field Assistance Bulletin issued last week by the Department of Labor on its looming fiduciary rule, noting that there's a real possibility that the rule will not be delayed by the April 10th applicability date, but then stating that if the delay (or even a non-delay outcome) comes shortly thereafter, the DoL won't enforce the fiduciary rule during the gap period (though notably, any damaged clients in the gap period could conceivably just sue directly).

Also in the news this week was the announcement trhat Schwab has officially pivoted away from its robo-advisor to a new hybrid offering dubbed Schwab Intelligent Advisory, which will provide advice directly from CFP professionals (in addition to automated portfolios); at the same time, T. Rowe Price announced the launch of its own pure robo solution, ActivePlus Portfolios, though the offering will be limited to providing an asset allocation of T. Rowe Price's own mutual funds (at no additional cost, beyond the mutual fund expense ratios themselves). Also in the news this week was the revelation that Morningstar is actually preparing to launch its own mutual funds for its Morningstar Managed Portfolios advisor platform, which they suggests will reduce costs on the platform by as much as 20%, but in the process, puts the firm in the conflicted position of being both a rater of mutual funds and a manager of some.

From there, we have a number of technical articles, including: the news that the Tax Data Retrieval Tool from the IRS that is used to facilitate income verification for the FAFSA (and income-based repayment plans for student loans) has been taken offline for several weeks due to potential criminal activity (identity thieves trying to steal taxpayer information); an analysis from Ed Slott of the prohibited transaction rules for IRAs that can potentially disqualify the entire account if non-traditional assets are not handled properly; and new research that suggests a slightly different approach to retirement income planning, where consumers don't simply diversify their portfolio assets, but instead try to diversify amongst the available "Retirement Income Generators" (RIGs) - which might include systematic portfolio withdrawals as one component - to effectively "pensionize" retirement.

We also have several practice management articles this week, from the challenge of figuring out the "right" valuation of your advisory firm (recognizing that outsider buyers often offer higher valuations than internal succession plans, but if key employees leave the outside deal could end out paying less in the long run after all), to the question of whether advisory firms should offer more flextime to employees (and how to structure it), and a look at the rise of Interactive Brokers as a new low-cost niche custodian for independent RIAs (especially those who trade actively and globally).

We wrap up with three interesting articles on the dynamics of managing advisory firms: the first reviews a major new research study of the industry, finding that there appears to be a substantial gender bias in advisory firms when it comes disciplining misconduct, with male advisors being 3x more likely to commit serious misconduct, with a 20% larger average damages settlement for consumers, yet it's female advisors with misconduct who end up being 20% more likely to get fired and 30% less likely to find another advisory job (though notably, the difference largely vanishes once there are females amongst the ownership or executive suite!); the second is a look at an advisor who decided to establish her RIA as a B Corporation, a new voluntary certification that businesses can obtain to affirm that they will operate not just to maximize profits, but the interests of all stakeholders (which aligns especially well to independent RIAs that serve as fiduciaries to clients in the first place!); and the last is a look at how businesses need to be cautious not just to espouse certain "noble values" that all employees aspire to, but actually include those values in their interview/hiring process, firing employees who fail to live up to them, and promoting those who espouse them best in practice – because otherwise, it doesn't matter what the firm says, if what it rewards is different, eventually all employees will migrate their behaviors to fit the values that are being rewarded, not the ones written in a corporate Core Values statement.

Enjoy the "light" reading!

How Do You Know It’s Time To Leave Your Advisory Firm?

March 16, 2017 08:26 am 1 Comment CATEGORY: Personal/Career Development

Finding your first good job as a financial planner can be tough. Not only because it's challenging just to find a job at all, but because it's not always clear up front which firms really do financial planning or not, and which jobs will be real financial planning jobs versus just a sales job. In many cases, the only way to find out is to take the job that's available, make the best of it, and hope it turns into a good long-term career path. Except when it turns out it's really not a good match at all... and then suddenly the challenge is figuring out whether it's time to leave, and whether having a short-term job stint on your resume will hurt your future career chances even more! So what should you do?

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, I discuss how to know it's time to leave your advisory firm to find another opportunity - based on whether the firm was a bit fit philosophically, or just not a good long-term growth opportunity - and best way to handle the situation if you find yourself in it.

First and foremost, though, remember that the best way to fix a problematic situation is not to make a change at all, but try to change the firm from within, rather than just running away from the problem. If you are worried about the investment or planning philosophy, or want to know if there's a better long-term career opportunity, then ask - broach the conversation with the firm owner. But it's important to be tactful in how you do this. If you are critical of your boss or the firm owner, they will likely just defend themselves, because that's human nature. Instead, come up with an actual solution, and offer it by having a "what if" conversation rather than a confrontational "why" conversation. If you come to the table with a proactive solution, most firm owners will actually be happy to work with you, adopt a solution, and get the firm in a better position than it was before!

Similarly, when it comes to career opportunities, if you want a career path, you may need to ask for it! I'm always amazed at how often people complain about having a lack of a career track, when they've never raised the conversation themselves! And realize that for most smaller advisory firms (which is most firms), this may be the first time they've taken someone through a career track, so the reality is they literally don't know what their career path is. Don't just sit back and expect that a perfect career track is going to be waiting for you, but instead, initiate the conversation ask about your opportunities with the firm as it continues to grow! The emphasis on continued growth is important, because both you and the owner want to be in a position of sharing a growing pie, rather than fighting over bigger pieces of a pie that isn't growing. If you find yourself in the latter position - in a firm that just isn't growing at all - the odds of a career track emerging are almost nil.

However, after having the tough conversations, the reality is you may decide that it really is time to leave. Perhaps something unethical is going on and you need to get out immediately. Or maybe the pie just isn't growing and that isn't going to change, so there's simply going to be nothing to share in the future. If that's the case, then what you should do next depends on the situation you are in. If you're really uncomfortable with how the firm operates and they truly aren't doing right by its clients, then get out right away. Life's too short for not doing right by your clients. But if it is "just" a lack of future growth, then realize that you can take your time and make a smart transition. Get your CFP experience (or finish the coursework if necessary!), save up some money for the transition, and take your time to truly do your due diligence on the next firm you work for. If you're checking the job boards and networking through industry associations, you may have a better chance of finding a good fit.

But in either case, understand that ultimately you don't have to worry about being labeled a "job-hopper" – or at least if it only happens one or two times. Just be straightforward about your prior situation, and take ownership for not doing your proper due diligence the first time around. Most advisors will understand that this happens, and will appreciate the attention you are paying this time. But whatever you do, don't make the transition without learning from it! If you go through too many entry-level positions without figuring this out, then ultimately, you may have good reason to worry about being labeled a job-hopper!

Social Security Rules And Strategies For Divorcee Spousal Benefits

March 15, 2017 07:01 am 1 Comment CATEGORY: Retirement Planning

One of the key benefits of Social Security is the spousal benefit – a payment at retirement that goes not to the worker who paid into Social Security over time, but his/her spouse. The payment was originally designed to provide retirement support for what were typically (at the time) stay-at-home spouses in a single-income household, and still remains relevant today for many spouses who take at least some time off from work to raise a family.

However, the spousal benefit is not only available for currently married couples; single people who were previously married may also be entitled to a spousal benefit, based on the ex-spouse’s earnings record. This spousal benefit for divorcees becomes available as long as the couple was married for at least 10 years, and the divorcee has not remarried.

For some divorcees, the ex-spouse’s spousal benefit is a key pillar of retirement income, and choosing when to start the benefit – early at a reduced amount, or at full retirement age for the full amount – is a crucial decision. For others, the ex-spousal benefit will ultimately be trumped the divorcee’s own retirement benefit from years of working. But for those born in 1953 or earlier, who are eligible for retirement and (ex-)spouse benefits, there is still an opportunity to further leverage the spousal benefit by filing a Restricted Application for just the ex-spouse’s benefit at full retirement age, and switching to his/her own individual benefit at age 70 – increased by 32% Delayed Retirement Credits!

For some divorcees, though, the biggest opportunity of the ex-spouse’s spousal benefit is simply recognizing when it’s available, and claiming it properly, as if the ex-spouse’s benefit is larger, the divorcee can actually step up his/her benefit to the higher amount!

#FASuccess Ep 011: How Launching An Advisory Business Can Be Safer Than Working In One with Alan Moore

March 14, 2017 07:00 am 3 Comments CATEGORY: Financial Advisor Success Podcast

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

My guest this week is Alan Moore. Alan and I co-founded the XY Planning Network in 2014, but the reason I invited him to the podcast has little to do with XYPN itself, and everything to do with his own fascinating path as a financial advisor, business owner, and successful entrepreneur.

Because Alan started out his career as most of us are taught from the days we’re young – to go out and try to find a stable job with a steady income, and move up the ladder over time. Except Alan realized barely 6 months into his first job that it wasn’t going to be the right fit. Only to change to another job… from which he got fired in another 6 months. And so, realizing that perhaps being an employee just wasn’t the right fit, Alan decided to launch his own advisory firm. From scratch. At age 25.

These early experiences led Alan to the counter-intuitive conclusion that perhaps the traditional view of trying to find a job with a steady income is wrong, and that it can actually be more stable (at least in the long run) to build a business from scratch. Because as a business owner, even your best client firing you might only cost you a 2% to 5% of revenue… which is a lot “safer” than relying on a single boss who can take away 100% of your income in a heartbeat by firing you!

In this podcast episode, we talk about Alan’s journey from financial planning college student, to getting involved as a volunteer with NAPFA and its young-advisor group Genesis, to his path from employee to (young) entrepreneur of his own advisory firm, how he later launched a second business (XY Planning Network) as well, and how and why he ultimately made the decision that he couldn’t keep both a B2B and B2C business and would have to wind one down to fully focus on the other.

And be certain to listen to the end, where Alan talks about the rut he got into that almost led him to leave his rapidly-growing business entirely after a particularly bad month, and what it took to turn everything around and re-energize him in the business again.

So if you’re thinking about making the switch from employee to entrepreneur, or perhaps are an advisory firm business owner wondering how to better keep your young entrepreneurial employees, I hope you enjoy this latest episode of the Financial Advisor Success podcast!

12b-1 Fees: It Is Time To Bid Them Farewell?

March 13, 2017 07:01 am 0 Comments CATEGORY: Investments

From its start in 1980, the 12b-1 fee was controversial – a distribution charge assessed against current mutual fund investors, that the fund company can use to market the fund to new investors. In other words, the mutual fund got to use investor dollars (rather than its own money) to grow the fund’s assets under management (AUM).

In theory, this use of the mutual fund investor’s own money to market the fund company’s products was supposed to be good for the investor, because it would help grow and scale the fund and bring down its operating expense ratio. However, several decades later, subsequent analysis is finding that while mutual funds that charge 12b-1 fees are successful at incentivizing salespeople to bring in more assets under management, the 12b-1 fee isn’t living up to its promise of helping to scale up and bringing down the expense ratio as the mutual fund grows.

At the same time, the reality is that investor behaviors are shifting as well. A growing number of consumers are purchasing their investments directly, avoiding the 12b-1 fee altogether by eliminating the mutual fund salesperson middleman. And as more and more financial advisors become affiliated with an RIA firm and get paid an AUM fee on an advisory account, the 12b-1 fee is less and less of a driver to incentivize financial advisors anyway.

In fact, the entire shift of financial advisors from being mutual fund salespeople (compensated by upfront commissions and ongoing 12b-1 fees) to operating as actual financial advisors instead (compensated by fees directly from their clients) raises the question of whether the 12b-1 fee is still relevant at all. Especially given the 12b-1 fee’s controversial roots, and the misalignment it creates between who pays the marketing and distribution costs, and who actually benefits from it.

Of course, the reality is that financial advisors, custodians, broker-dealers, and product providers still need to get paid for what they do, which means eliminating the 12b-1 fee still won’t necessarily bring down costs for the end client. Instead, it would likely just shift where and how financial advisors and their platforms get paid. Nonetheless, given the 12b-1 fee’s implicit conflicts, and their declining relevance, arguably it’s time to create a more appropriate pricing structure for the realities of today’s investment marketplace!