Nerd's Eye View blog

When Do You Actually Have To Register As A Financial Advisor?

January 19, 2017 09:22 am 10 Comments CATEGORY: Practice Management

With more and more people looking to become a financial advisor – given both the rewarding nature of helping people and the income potential it brings – questions about when you actually have to register as a financial advisor are becoming more common. Does any financial advice trigger a requirement to register? What kind of license do you need to become a financial advisor? And can you wait until you get clients, before you go through the process?

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss the exact rules that determine when you have to get a license to become a financial advisor - or technically, to register as an investment adviser by creating an RIA and becoming an IAR (investment adviser representative) of that business.

The core requirement under the Investment Advisers Act of 1940 is that it's "being in the business of giving investment advice for compensation" that triggers the need to register. While there are forms of financial advice that may not require registration, such as "financial coaching", the reality is, almost anyone who's holding themselves out as a financial advisor - particularly as a CFP certificant - is likely giving some form of investment advice, and consequently will need to register.

Registration as an investment adviser can happen one of two ways: either registering with the primary state in which you do business, or registering with the Securities and Exchange Commission (SEC). However, registering with the SEC requires a minimum of $100M of regulatory AUM, or doing business (requiring registration) in 15+ states; as a result, most advisors just starting out will initially register the RIA at the state level, and then become an IAR (investment adviser representative) of that RIA.

Notably, though, to become an IAR, you must also pass the Series 65 exam (or have the Series 7 and 66 if you are coming from a broker-dealer). Most states will waive this requirement for those with an advanced certification such as the CFP, CFA, CHFC, or the AICPA's PFS. But ultimately that means to get started, you must both pass the Series 65 exam (or possess one of the requisite designations), and go through the registration process.

And the registration process in the advisor's home state itself should be done before actually going into business. As the financial advisor adds clients in other states, and crosses more than five clients (for most states), it's also necessary to extend the registration in those states. But soliciting the first client requires the advisor to at least create the initial RIA in their home state, first.

Fortunately, it's still fairly inexpensive to get up and running as a financial advisor (at least relative to the income potential it brings, and the cost of starting a business in other industries). However, that doesn't mean it's easy to make the transition - because the real challenge is not just the startup cost to become a financial advisor, but filling the "income gap" of launching a business with no clients or revenue, and needing to build up to the point where you can actually pay yourself a fair wage! On the other hand, in the long run, successful financial advisors still have the potential to make many times the average household income in the US!

Social Security Full Retirement Age Increases For First Time Since 2005

January 18, 2017 07:02 am 16 Comments CATEGORY: Retirement Planning

Under the original rules for Social Security, workers upon reaching their "full retirement age" of 65 became eligible for a retirement benefit, with a slight increase in benefits if the worker delayed to as late as age 70. Later, prospective retirees also got the option to start benefits as early as age 62. Thus, under the current framework, those eligible for benefits can choose any starting age between 62 and 70, with an actuarial adjustment to benefits for starting earlier or later than full retirement age.

However, full retirement age itself is a moving target, as part of a multi-decade phased increase in the full retirement age from the original age 65, up to age 67 instead. For the past decade, upon reaching age 62, prospective retirees were all faced with a full retirement age of 66, but beginning in 2017, those turning age 62 this year are not actually eligible for full benefits at age 66. Instead, the full retirement age has shifted to age 66 and 2 months, and by 2022 will rise all the way to a full retirement age of 67 (for everyone born in 1960 or later). Except in the case of survivor benefits, where the full retirement age for 62-year-olds won't kick in until 2019, phasing in through 2024... which means for a period of time, there will be different full retirement ages for retirement versus survivor benefits!

Since the adjustment to full retirement age is based solely on birth year, though, the reality is that those who are impacted cannot necessarily "do" anything to change the outcome at this point – which is to effectively cause a slight decrease in the value of Social Security benefits, as the prospective retiree must wait a little longer to get the full benefit (or take a reduction to keep claiming it at the previous full retirement age of 66). Fortunately, the total reduction is barely more than a 1% haircut, growing to a maximum reduction of about 7% once the full retirement age shifts all the way to age 67.

And notably, while the full retirement age is now later – which means starting benefits at age 62 is "even earlier" and causes more of a reduction, while delaying until age 70 is "less" of a delay and doesn't give as much of an increase – the relative value of delaying Social Security benefits isn't substantively changed. For those who are optimistic about life expectancy, concerned about market returns, or wanting to hedge against inflation, the value of delaying Social Security remains about the same. However, because of how early benefit reductions are calculated for survivor benefits, the new rules actually do substantially reduce the value of delaying widow(er) benefits for surviving spouses – at least, if they're not also facing the Social Security Earnings Test!

#FASuccess Podcast Ep 003: Julie Littlechild On Becoming A More Referable Advisor

January 17, 2017 07:02 am 5 Comments CATEGORY: Financial Advisor Success Podcast

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

This week, we’re changing it up a little bit - rather than speaking with a financial advisor, my guest is Julie Littlechild, a speaker, writer, and researcher focused on understanding and improving financial advisors’ engagement with their teams and their clients. She is now the founder of Absolute Engagement, a firm that is conducting ongoing research into personal, client, and team engagement in advisory firms, and has also done extensive research on generating client referrals.

In this episode, Julie shares what she's learned from her real-world research about what works – and what doesn't – for financial advisors, including why asking clients for referrals is generally a terrible way to actually get referrals, and how to reposition yourself to become more referable. Julie also shares her research on how advisors can get more energized and re-engaged in their practices, and how her own experience of building and then selling her coaching business gave her perspective on the challenge of staying engaged in the business you've built.

So whether you're a financial advisor trying to generate more and better client referrals, or feel like you've hit a wall and need to get re-energized in your own business, I hope you enjoy this latest episode of the Financial Advisor Success podcast!

The DoL Fiduciary Class Action Lawsuit That Will Really Transform Financial Advice

January 16, 2017 07:00 am 12 Comments CATEGORY: Regulation & Compliance

With the implementation date of the Department of Labor’s fiduciary rule looming large in April, all attention has been focused on how financial advisors and their Financial Institutions are making adjustments to manage their compensation conflicts of interest, to avoid breaching the fiduciary’s fundamental duty of loyalty to act in the client’s best interests.

However, the reality is that being a fiduciary actually entails two core duties: the first is the duty of loyalty (to act in the client’s best interests), and the second is the duty of care (to provide diligent and prudent advice, and only in areas in which the advisor is competent to provide such advice). After all, a fiduciary obligation is relatively meaningless with only a duty of loyalty, if there’s no expectation of competency; otherwise, consumers would still be harmed by unwitting negligence, even if there was no intentional (or conflicted) self-enrichment.

And the distinction matters, because the Department of Labor’s Best Interests Contract Exemption attaches a fiduciary obligation to the Financial Institution itself, including the potential for a class action lawsuit against the institution for failing to meet its fiduciary obligations. Which means a Financial Institution could face a class action lawsuit not only for systemic breaches of the fiduciary duty of loyalty (e.g., by utilizing too much conflicted compensation), but also by systemically breaching the fiduciary duty of care but not sufficient training their advisors.

In other words, Financial Institutions face the risk that they will be sued in a class action lawsuit for failing to put their financial advisors through the training and education (e.g., professional designations) necessary to ensure that the advisor would even know what the “best” advice for the client was in the first place!

Unfortunately, right now there actually is no universally accepted minimum competency standard for financial advice (or in the case of DoL fiduciary, retirement advice), though certainly recognized rigorous designations that include both education and an advice process – such as the CFP Board’s CFP certification, and RIIA’s RMA designation – provide a likely path of safety for Financial Institutions. Which means in the coming year, there may soon be explosive growth in programs like the CFP and RMA, as Financial Institutions recognize and then try to minimize their exposure to a class action lawsuit for failing to meet the fiduciary duty of care.

Weekend Reading for Financial Planners (Jan 14-15)

January 13, 2017 02:30 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the SEC's latest 2017 list of RIA exam priorities, which for the first time will explicitly include delving into so-called "electronic investment advice", which appears to include both "robo" advisors, and heavily tech-automated human advice services (e.g., Vanguard Personal Advisor Services and the future Schwab Intelligent Advisory).

Also in the news this week is a lot of discussion of changing share classes for mutual funds and variable annuities, as the industry approaches the home stretch for the rollout of DoL fiduciary – including the rise of a new T-class mutual fund share that will likely replace A-shares together over time (with a uniform lower upfront commission across all types of funds), the decline and near disappearance of L-share variable annuities, and the emergence of a new I-share (advisory share class) variable annuity (which represented more than 50% of all new variable annuity filings last year).

From there, we have a few articles on practice management around the theme of hiring and retention, including a look at how it's just as important to create a career development plan for employees as a financial plan for clients, a discussion of whether financial incentives are really an effective motivation (or not), and how crafting a bona fide career track is becoming essential for long-term employee retention.

There are also a couple of technical planning articles this week, including a discussion of why it is that almost no retiree can actually start Social Security right at age 62 (instead, it's 62 and 1 month in most cases), the issues to consider when weighing an NUA distribution decision, and the role advisors can play in helping clients coordinate financial surrogates in the event of incapacity (given that more and more companies are coming up with their own process to name surrogates, which means there may be multiple people sharing the role with a 'traditional' attorney-in-fact under a durable Power of Attorney!), and what to watch out for regarding investment issues when reviewing a new client's tax return.

We wrap up with three interesting articles on the theme of charity: the first is a look at how behavioral finance research is now being applied to our charitable giving (and finding that we can be just as irrational about our charitable endeavors as our investment portfolios!); the second delves into the reality that in some cases people give for bona fide charitable purposes, and in others it's for social recognition, and while arguably the "true" measure of charity is whether you give so much you must actually make your own sacrifices, the more effectively a financial planner helps a client live modestly, the more room there is to give without further impinging on lifestyle; and the last is a look at the rise of pro bono financial planning in particular, with a growing number of financial planners engaging in such activities (often through local FPA chapter activities), and the rise of the Foundation for Financial Planning, a grant-making organization that supports pro bono financial planning primarily through donations from financial planners.

Enjoy the "light" reading!

The 4 Different Types Of Fiduciary Financial Advisors

January 12, 2017 07:44 am 20 Comments CATEGORY: Planning Profession

While the looming DoL fiduciary rule has heightened consumer awareness of the concept of fiduciary duty, the reality is that being a "fiduciary" (or not) isn't actually a singular concept. While conceptually, it's about acting in the interests of the client, and honoring the fiduciary duties of loyalty and care, not all regulators define (nor enforce) those terms consistently.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, I explore four different types of financial advisor fiduciaries, including RIAs that are SEC fiduciaries, DoL fiduciaries serving retirement investors, CFP fiduciaries providing financial planning, and voluntary fiduciaries who decide to step up to honor private/third-party fiduciary standards.

One reason for varying fiduciary standards is the fact that different industry channels are regulated by different overseers – each of which defines fiduciary obligations in their own way. Registered Investment Advisers (RIAs) are overseen by the SEC and state regulators, which have both adopted a disclosure and transparency oriented approach to fiduciary duty, but only to investment advice and investment management. While the DoL fiduciary rule impacts anyone giving advice on retirement accounts (and not taxable investment accounts), but is more stringent in its limitations on conflict of interest. And the CFP Board requires that certificants often adhere to a fiduciary duty, but the requirement depends on specifically whether the certificant is actually doing "finanical planning" for a client.

And organizations with voluntary fiduciary standard for their advisor members - like NAPFA and the XY Planning Network - have their own definitions of when a fiduciary duty applies, and what conflicts are and aren't permitted. In addition, RIAs who are struggling to differentiate as fiduciaries - now that DoL fiduciary will apply the rule to more advisors in the future - are looking to even more stringent versions of voluntary fiduciary rules, such as the new Fiduciary Registry from the Institute for the Fiduciary Standard, or CEFEX certification.

The bottom line, though, is simply that there are many different definitions of fiduciary duties, and two advisors who are both "fiduciaries" might still have very different fiduciary obligations. And unfortunately, given the research showing that consumers struggle even to understand the difference between fiduciary and suitability standards, it's not likely most will grasp the nuances of the many different types of fiduciary duties anytime soon.

Squaring-The-Survival-Curve And What It Means For Retirement Planning

January 11, 2017 07:01 am 1 Comment CATEGORY: Retirement Planning

It's become a well-recognized phenomenon that life expectancies are on the rise, and have been for more than a century now. For many, this leads to the "inevitable" conclusion that someday we'll all be living to age 150 and beyond, and that we need to plan for drastically longer retirement time horizons - or even that retirement itself will be transformed (or become irrelevant) if medical breakthroughs allow us all to enjoy 100+ years of active lifestyles. However, a fresh look at the data reveals that this may not actually be the likely outcome.

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 – delves into the nuances behind the changes in mortality rates over the past century and in recent decades, and what they imply about the future.

Because the interesting phenomenon of recent advances in life expectancy in particular is that while overall life expectancies have been rising, most of the gains are attributable to people living closer to the maximum human lifespan (rising up towards about 115 years), and not as much from increases in the maximum age itself. And in the past two decades, the empirical data suggests that the maximum lifespan of human beings has stopped increasing altogether, peaking out around age 115. As a result, future medical advances may simply make us more and more likely to live to that maximum age, but there's little evidence to suggest that anyone is ever going to live to 150 and beyond... a phenomenon known as "squaring the (survival) curve".

The significance of rising life expectancy being due primarily to an increasing likelihood of living to maximum age, but not increasing the maximum age itself, is that retirement planning may need to adjust for a longer active phase of life... or more pessimistically, for prolonged periods of substandard health as what might have killed us in the past now simply slows us down! The potential for continued squaring the curve may also dramatically change the pricing and even the relevance of various types of insurance products, as long term care insurance becomes less necessary (if we're healthy for more of our lifespan), and annuity mortality credits become less available (because people die close together at the end of their maximum lifespan).

But the fundamental point is simply to understand that the ongoing rise in life expectancies doesn't necessarily mean that someday everyone is going to live to age 150 and beyond. It may simply mean that more of us will live to approach what appears to be a "maximum" human lifespan around age 115... and in fact, recent shifts in who is living longer (and who is not) suggests that we may have already hit that longevity wall.

#FASuccess Podcast: How Ron Carson Built Carson Wealth & Carson Institutional

January 10, 2017 07:01 am 6 Comments CATEGORY: Financial Advisor Success Podcast

Welcome to the second episode of the Financial Advisor Success Podcast!

In this episode, I spoke to Ron Carson, a veritable legend in the world of financial planning. Not only has he been the top-ranked advisor at LPL for 25 years running(!), and is regularly recognized at the top of lists like Barron’s for the size of his advisory business Carson Wealth, but Ron is also the founder of the Peak Advisor Alliance, and Carson Institutional… in addition to founding his own charitable endeavor, the Dreamweaver Foundation.

It’s taken Ron considerable energy and determination to get where he is today, and this interview sheds light on all the hard work he’s done to build such an impressive career. While it may seem like successful people simply spring into existence, I hope these interviews show you that all financial advisors, even those who have been incredible successful, still struggle at times.

And Ron Carson is no exception. In this episode, Ron talks candidly about his humble beginnings and the moment of physical, emotional, and professional burnout - when he was about to give up after failing to break $30,000 of GDC after six years - and how the actions he took in his moment of desperation actually turned into his career-making opportunity. He also shares the mistakes he’s made along the way, including his slow adoption of technology, and struggles to delegate and invite other (über-talented) people into his business’s inner circle. We also discuss Ron’s thoughts on making your employees into stakeholders, how he juggles the advising, mentoring, and charitable businesses he’s founded over the years, and more!

I hope you enjoy this second episode of the Financial Advisor Success Podcast! Please share your comments here on the blog of what you think, and I hope you’ll leave us a review on iTunes as well (which is important as iTunes looks to reviews to decide which podcasts to make most visible for other financial advisors who are searching!).

The Latest In Financial Advisor #FinTech (January 2017)

January 9, 2017 07:01 am 0 Comments CATEGORY: Technology & Advisor FinTech

Welcome to the January 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 big news of the early 2017 rollout of Schwab Intelligent Advisory, a new service that was initially dubbed another "robo" but in reality is a financial advice solution powered by human CFPs who will simply leverage MoneyGuidePro financial planning software and virtual client meetings using telephone, video chat, and email to service clients... but at a "robo" price of just 28bps with a $25,000 minimum. The new Schwab Intelligent Advisory service is likely intended as a play to capture mass affluent consumers as the DoL fiduciary rule impacts and disrupts at least some broker-dealers... but in the process may also pose a serious competitive threat to the independent RIA community, including a large number of advisory firms that currently custody their assets at Schwab!

From there, the latest highlights also include:

Smarsh acquires MobileGuard to expand their text message compliance archiving services.
eMoney Advisor launches a new data gathering and client onboarding solution, threatening independent players like PreciseFP.
Orion Advisor Services launches a fee benchmarking tool to help advisors substantiate their pricing as "reasonable compensation" under DoL fiduciary.
Finicity raises a $42M Series B to expand their account aggregation capabilities after completing the takeover of the old Intuit Financial Data API.
Blucora's Tax Act partners with Legg Mason's robo-advisor Financial Guard.
Personal Capital blows through its VC growth targets and earns its remaining Series E ahead of schedule.
Will digitization of financial advisor business metrics eventually create fully automated tools to provide advisory firm valuations?

You can view analysis of these announcements, and more trends in advisor technology, in this month's column, including a look at the new national sponsorship arrangement between the FPA and Betterment for Advisors, how XTiva is trying to create a marketplace for enterprise "sales management" solutions for wealth management firms, and the recent rollouts of TD Ameritrade's new VEO One platform and Envestnet's new Yodlee app for Tamarac advisors to turn their portfolio accounting client portal into a fully holistic performance financial management dashboard for clients.

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 (Jan 7-8)

January 6, 2017 02:51 pm 3 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the news that President-Elect Trump has selected Wall Street attorney Jay Clayton to take over as Commissioner of the SEC for Mary Jo White... signaling a potential shift of the SEC's focus away from rulemaking and enforcement, and putting into doubt whether the SEC is likely (or not) to move forward on its own fiduciary rule in the coming years.

Also in the news this week is progress from the Department of Labor to carve out a Financial Institution exemption for IMOs to qualify for the Best Interest Contract and oversee independent annuity agents selling indexed annuities, and a new study from Cerulli finding that despite their tech-savvy inclinations, younger consumers are actually the most likely to be willing to pay for financial advice (but still necessitating a different business and service model than the traditional AUM-centric comprehensive-wealth-management approach used for retirees).

From there, we have a number of articles on marketing and business development this week, including: how to make 2017 the year you generate a better "return on effort" by better focusing your marketing activities; the importance of managing your digital first impression to prospects who check you out online; the core information than any/every financial advisor website must convey to prospects (but most don't); how a "Now" page on your website can help humanize you and make a better connection to prospects; a study that found the fastest-growing RIAs really are more likely to effectively check the boxes on digital marketing strategies; and a look at how many advisors may be self-sabotaging by separating "business and friendship" when in reality they should focus on conveying their passion and let friends and colleagues who want help come to them and work together.

We wrap up with three interesting articles: the first is a call from Don Trone of 3Ethos to the CFP Board to stop holding out as a fiduciary champion when the CFP Board's practice standards still allow many CFP certificants to avoid a fiduciary duty, and the organization's opaque governance and limitations on its own accountability make it look hypocritical in calling for higher standards for advisors; the second is a look at how the world of mutual funds also faces an odd double-standard, where 401(k) plan administrators can be sued for using high-cost mutual funds that they don't even profit from, but the mutual fund companies themselves face no accountability for trying to sell those high-cost funds in the first place; and the last is a fascinating look from the Wall Street Journal at the evolution of the 401(k) plan, and how even its original creators are not happy with how the 401(k) plan has largely replaced the defined contribution pension plans it was originally supposed to just supplement.

And for those who may be interested, at the end you can check out what I've done to implement my own New Year's Resolution to get healthier in 2017 – by supplementing my existing standing desk with a new under-desk treadmill. In fact, all the background articles for this week's Weekend Reading were curated for you as I walked (in place) for several miles while reading and typing!

Enjoy the "light" reading, and I hope you had a safe and happy New Year!