Nerd's Eye View blog

#FASuccess Podcast Ep 001: Rick Kahler on Entrepreneurial Persistence & Building a $200M AUM Practice

January 3, 2017 07:01 am 12 Comments CATEGORY: Financial Advisor Success Podcast

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

My mission with #FASuccess is to help you be more successful as a financial advisor - whatever "success" means to you. In this new weekly podcast, we'll feature interviews with successful financial planners who share their stories about what it took for them to succeed, along with consultants who work with advisors and help them get to the next level.

In particular, it's my goal to highlight the "Iceberg Illusion" of success - that what little we see outwardly of other people's success is, like the tip of an iceberg, just a small part of what it really took to be successful. On the podcast, it's my goal to dig deeper, and help reveal the real struggles that every financial advisor will face from time to time in a business or career... and what it takes to persist and push through.

In this first episode, I talk with Rick Kahler, a financial planner in Rapid City, South Dakota, who by any classic industry measure has been very successful. He's built a practice up to 100 clients and $200M in assets under management, supported by 7 staff, and taking home more than $350,000 of income from the firm. Yet the reality is that it hasn't always been this way for him. For most of his early career, Rick worked as a mortgage and real estate broker, where financial planning was just a "side job" that built slowly over time... and as a result, when he decided to focus fully on the firm, he took a major step back in his income that took years to recover.

Rick’s story is truly humbling as he openly shares the events and decisions that brought him to where he is today. You’ll hear about his decisions that worked well in growing his practice, and quite frankly the sheer persistence in Rick’s professional career that allowed him to consistently and repeatedly overcome roadblocks and challenges. Between at one point losing 5 out of 6 employees in under 60 days, to facing insolvency and near bankruptcy 6 times, and failing on multiple other businesses before focusing on his advisory practice, Rick’s ability to persist when times are uncomfortable is truly inspirational.

I hope you enjoy this first episode of the Financial Advisor Success Podcast! And please share your comments once you listen, and let me know what you think and how we can improve from here!

Announcing New Nerd’s Eye View Updates For The 2017 New Year!

January 2, 2017 07:02 am 9 Comments CATEGORY: Nerd's Eye View

Every year, we look to make improvements to Kitces.com and the Nerd’s Eye View blog to make it more valuable for all of you, the readers, based on your feedback to our reader surveys. And as we kick off the 2017 New Year, I’m excited to announce several new features and changes we’re making today and in the coming month to better serve you!

First and foremost, I’m thrilled to announce the launch of the Financial Advisor Success podcast. An increasing number of you have been asking for us to add a “Kitces podcast” that you can listen to while you commute or work out, and after a year of planning and preparation, it’s finally here! The first episode will air tomorrow – Tuesday, January 3^rd – and going forward, will become a regular part of our weekly content every Tuesday!

In addition, in the coming quarter we’ll be launching a new opportunity to CPAs to earn Continuing Professional Education (CPE) credits, on top of the CFP and IMCA CE credits we already offer. The new CPE credits will be offered for any and all of the more-than-30-hours of Kitces.com content that is already eligible for other types of CE, at no additional cost (beyond the requirement to join our Premium Members Section itself).

We’re also making a number of tweaks to the visual style and format of the blog as well, to help make it easier to read and enjoy. This includes both adjusting the default font to be a little darker and easier to read on mobile screens, and new font resizing buttons that make it easier for you to enlarge the size of the text (without otherwise distorting the reading format). And we’re working on an adjustment to the sign-up prompts so that they’ll be fully eliminated once you’ve already signed up (which due to technical challenges, will be implementing later this quarter).

I'm also excited to announce that we're expanding the content team here at Nerd's Eye View, and have hired Derek Tharp, who is finishing up his Ph.D. in Financial Planning at Kansas State and will be both helping me on behind-the-scenes research to support our articles, and also publishing a few of his own from time to time. We're also slightly expanding our available Guest Post slots, if you're interested in submitting something yourself to be featured on Nerd's Eye View!

And last but not least, I’m excited to announce that the votes are in for naming the Nerd’s Eye View community, and the overwhelming winner was that you wanted to be called the “Nerd’s Eye Crew” of readers! (But if you still don’t think that’s the “right” name, please leave your feedback in the Comments section at the end of this post!)

Weekend Reading for Financial Planners (Dec 31 – Jan 1)

December 30, 2016 02:44 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 a Court of Appeals has ruled the SEC's process of hiring Administrative Law Judges (ALJ) into its in-house court system is unconstitutional, setting the stage for a potential Supreme Court case to decide its fate (with the possibility that Republicans will preemptively intervene to legislate against them first!). Also in the recent news is the announcement that a new Registry for Fiduciary Advisors from the Institute for the Fiduciary Standard has launched, and gathered its first member: former FPA president and CFP Board Disciplinary chair Dan Moisand.

From there, we have several practice management articles this week, including: a look at how Schwab's standard account agreement could actually trigger custody for the RIAs that use its platform; how a white-label ETF provider works (for any advisors curious about what it takes to launch their own ETF!); and the differences between 3(38), 3(21), and 3(16) fiduciaries under ERISA as the new DoL fiduciary rules loom large in 2017.

We also have several technology-related articles, from a review of the new financial planning software provider RightCapital, to a new retirement planning solution called the "Big Picture App" that finally makes it possible to illustrate the 4% safe withdrawal rate strategy with clients (under various time horizon and asset allocation assumptions), to a look at how video conferencing and other technology tools are making it possible to "untether" financial advisors from the geographic location of their clients (or even needing to be physically at an office at all). There's also a good article from Ryan Neal of Wealth Management on whether the real technology threat to financial advisors wasn't "robo" automation, but the next stage of Artificial Intelligence (AI) that may come next.

We wrap up with three interesting articles: the first is a look at some of the questions you should ask yourself if you're feeling "stuck" in your advisory career and business, and need to figure out how to take the next step forward; the second is a striking look at the real-world challenge of work-life balance, as told through the Four Burners analogy (that ultimately, we have to balance work, health, friends, and family, and there just isn't time to support more than 2 or 3 burners at any given time without sacrificing them all); and the last provides some great tips on how to get "unstuck" in 2017 by making incremental changes to improve your business or career throughout the year... and recognizing that the biggest opportunity for a breakthrough is not about finding a magic bullet solution, but about making the commitment (of time and focus) to begin working on those needed changes as 2017 gets underway.

Enjoy the "light" reading, and have a safe and happy New Year!

My Top 5 Tips For Blogging Success As A Financial Advisor

December 29, 2016 07:48 am 27 Comments CATEGORY: Marketing

For financial advisors who want to get clients through digital marketing, blogging to demonstrate your expertise to prospective clients is a cornerstone of the strategy. The challenge, however, is that creating blog content - like saving for retirement - can be a slow and arduous process, with good habits and consistent actions repeated for a long, long time before there are any material results to show for it.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, I share my top five tips for achieving blogging success as a financial advisor, based on my own experience in building this Nerd's Eye View blog.

The first key is to create some structure for yourself with an editorial calendar. Having systematic deadlines that you've committed to meet on a regular basis is crucial for creating the self-accountability necessary for follow-through action, and can help you get into a steady rhythm of producing content.

Second, create a standard template for your actual blog posts. Whether you adopt a 3x3x3 structure akin to what I use here on Nerd's Eye View, or something else that fits your own structure... a formal template for how you organize your thoughts can greatly expedite the writing process for your next article.

Third, have a system to capture content ideas, based on the conversations you're having with clients and prospects. If you're sitting down and trying at that moment to figure out what to write, you're doing it wrong. Write down the ideas as they come up in conversation (or at least, jotted down immediately after the discussion ends), so that by the time you need to write, it's simply a question of which article topic that's already on your list will be the one you write up next.

Fourth, recognize that you don't have to make your writing perfectly polished alone. Your job is to demonstrate your expertise; freelance editors are very affordable, and can be hired to review the article later, fix the typos and grammar, and help make the final product a little easier to read. There are even editors who specialize in working with financial advisors and investment writing.

And last but least, realize that results - in terms of new clients - aren't going to come right away, so you need to measure what leads to future success, which is reader activity. Many advisors, when failing to see any immediate new client results from their efforts, get frustrated and give up too quickly. Fortunately, Google Analytics is an excellent tool for measuring what's going on when it comes to your website, and help you track how many people are visiting and signing up to receive your content in the future. If the readership is growing, the new clients will follow as the trust builds over time.

Ultimately, blogging can be an effective way to demonstrate your knowledge and expertise with prospective clients, but because it takes time and consistent effort, adding some structure to your process is crucial to sustain blogging until it produces real results as a digital marketing strategy!

How An S Corporation Can Reduce FICA Self-Employment Taxes

December 28, 2016 07:02 am 20 Comments CATEGORY: Taxes

One of the fundamental differences between corporations and partnership business entities is that the former faces “two tiers” of taxation – once at the corporation level, and again when profits are distributed as dividends to the shareholder – while the latter are only taxed once to their owners as “pass-through” entities. Of course, the reality is that there are a lot of factors that go into determining the right kind of business entity, beyond just the pass-through taxation treatment or not, though in practice it is often a material factor.

A hybrid mid-point between the two is an S corporation, which is recognized as a corporation for legal purposes – including for liability protection, and transferability of stock shares – but still taxed as a pass-through business, similar to a partnership.

However, in practice the pass-through tax treatment of an S corporation isn’t exactly identical to a partnership, because with a partnership all pass-through income is subject to self-employment FICA taxes (as high as 15.3%), while an S corporation only pays FICA taxes on salary compensation to its owners, and not the remaining profits paid out as nontaxable dividend distributions.

To prevent everyone from just converting partnerships into S corporations that all pay their owners $0 in salary – to completely avoid FICA taxes – the IRS still requires that S corporation owner-employees be paid “reasonable compensation” for the services they render to the business.

Nonetheless, the reality is that for highly profitable businesses, especially with multiple owners and/or multiple employees, there is clearly a portion of profits, over and above just reasonable salary compensation, that can be distributed as a dividend to the S corporation owners, saving FICA self-employment taxes in the process. For profitable businesses, the tax savings can be thousands or even a few tens of thousands of dollars in savings.

Ultimately, not all small businesses can take advantage of these rules. Some don’t meet the ownership requirements of an S corporation, and others are so small and dependent on their owners that realistically, “reasonable” compensation would be 100% of the business profits anyway. Nonetheless, there are many high-income partnerships (or LLCs taxed as such) that might benefit by switching to an S corporation (or making an election for the LLC to be taxed as an S corporation), specifically to split the business profits into FICA-taxable wages and FICA-exempt S corporation dividend distributions. At least, until or unless Congress shuts down this perceived “loophole” and reunifies the taxation of S corporation dividend distributions with the pass-through income of partnerships!

2016 Highlights – The Top 20 Nerd’s Eye View Blog Posts You Might Have Missed

December 26, 2016 07:01 am 2 Comments CATEGORY: Nerd's Eye View

As 2016 comes to a close, I am so thankful to all of you, the growing number of readers who continue to regularly visit this Nerd's Eye View blog, and have been kind enough to share the content with your friends and colleagues as well (which I greatly appreciate!). Over the past year, the cumulative readership of the blog has grown yet another 35%, with more than 160,000 unique readers coming to Nerd's Eye View last month. The continued growth has meant more reinvestments into features and even staffing, to continue to build this platform for the benefit of advisors. And we'll be announcing a number of major new initiatives in early 2017 as well!

Yet notwithstanding how many of you have made reading the Nerd's Eye View a weekly habit, I realize that the sheer volume of articles can feel overwhelming at times, and that it's not always possible to keep up with it all. And blog articles, once published, are usually quite quickly left in the dust as the next new article comes along.

Accordingly, just as I did last year and in 2014, I've compiled for you this Highlights list of our top 20 articles of 2016 that you might have missed. So whether you're new to the blog and haven't searched through the Archives yet, or simply haven't had the time to keep up with everything, I hope that some of these will (still) be useful for you! And as always, I hope you'll take a moment to share articles of interest with your friends and colleagues as well!

In the meantime, I hope you're having a safe and happy holiday season. Thanks again for another successful year in 2016, and I hope you enjoy all the new services we'll be rolling out in 2017, too!

Weekend Reading for Financial Planners (Dec 24-25)

December 23, 2016 02:31 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a discussion of the latest RIA benchmarking study from Fidelity, which again finds that advisory firm fees are holding steady against robo-advisors, but that growth rates are falling... and suggests that perhaps growth rates are down precisely because advisors aren't paying enough attention to industry pricing pressures. Also in the news this week is an SEC announcement that they will be putting more scrutiny on independent RIAs with multiple office (i.e., "branch") locations. And the mutual fund industry still appears to be scrambling to find common ground regarding share classes for broker-dealers as the DoL fiduciary implementation date looms large in April.

From there, we have several practice management articles this week, including: why the "pitchbook" is dead, but advisors should consider making a "Capabilities" deck to present to prospects; tips on what to say in a bad prospect meeting to turn the conversation around; and tips to finding a financial advisor business coach (from a financial advisor who went through the process).

We also have a few more technical articles, from a look at how the combination of SPIAs to guarantee essential expenses and withdrawal-smoothing strategies for the rest fares better than using either technique alone, to a look at where it makes sense to use an ETN (exchange-traded note), and a recent Morningstar meta-analysis finding that SRI portfolios do not actually require the investor to sacrifice returns to meet sustainable investing objectives.

We wrap up with three interesting articles, all around the theme of improving and easing the management of household finances: the first is a series of tips from a financially independent retiree about how he's simplified his financial life; the second is a look at personal finance tips from a meeting of ultra-wealthy investors; and the last is a series of 20 personal finance "rules" that, while relatively simple and straightforward, can be remarkably powerful in the aggregate to get any household on a better track towards financial independence.

And be certain to check out the video at the end... an interesting exploration by Myra Salzer of the topic of "Wealth Prejudice", and how those who inherit substantial wealth actually face significant social challenges, as they are effectively "born into" a form of social minority that has a number of unfavorable stigmas associated with it!

Enjoy the "light" reading!

Is Schwab Intelligent Advisory A Threat To Independent Financial Advisors?

December 22, 2016 12:06 pm 29 Comments CATEGORY: Technology & Advisor FinTech

Last week Schwab announced the release of a new "robo" service, called Schwab Intelligent Advisory. And while the announcement was met with little attention from financial advisors, this announcement is a much bigger deal than most advisors and industry commentators have given it credit to be.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we explore what Schwab Intelligent Advisory really is, why it's not a robo, and why that actually means Schwab Intelligent Advisory is even more of a real threat to independent RIAs.

Because while the media instantly dubbed Schwab Intelligent Advisory as a "robo" service, it is actually much more. Schwab Intelligent Advisory provides comprehensive financial planning plus investment management, delivered by real CFPs, who are available 24/7, at a cost of just 28 basis points, and an account minimum of just $25,000.

In other words, Schwab Intelligent Advisory is truly designed to be a mass affluent financial planning and investment management solution. Schwab is clearly looking to compete with Vanguard's Personal Advisor Services (undercutting their 30 basis point cost), but Schwab Intelligent Advisory won't only be a competitor to Vanguard. Instead, the reality is that Schwab will be a threat to any advisor serving the mass affluent market – which is most of us in the independent RIA community!

Realistically, Schwab's intention is certainly not to go directly after the clients of advisors who utilize their custodial services - more likely Schwab sees an opportunity to fill the void when headcounts drop after salespeople can't meet DoL fiduciary - but one way or another, Schwab's marketing message is going to reach mass affluent investors, who will realize Schwab Intelligent Advisory's services look an awful lot like their existing advisor's (but at a much lower cost!).

Schwab's announcement is also bad news for robo-advisors, but potentially great news for the CFP Board. Disregarding Vanguard Personal Advisor Services (which isn't truly a robo), Schwab Intelligent Portfolios is currently the largest robo-advisor with more than $10 billion in AUM. That means that despite already being the largest robo, Schwab is shifting their attention towards a more comprehensive model that can actually take business away from other advisors, suggesting that when Schwab looks at its robo data, it sees the real opportunity isn't a pure robo after all! Fortunately for the CFP Board, if Schwab (and competitors) are successful, they are going to be hiring hundreds of CFPs, and continuing to drive demand for the designation as firms require their employees to pursue it.

Ultimately, the emergence of models like Schwab Intelligent Advisory will benefit consumers, but advisors must acknowledge that for anyone serving the mass affluent (which is most of us!), the marketplace is about to become much more challenging, and the crisis of differentiation is just going to keep getting worse.

How Behavioral Biases Lead To Hard-To-Capture But Sustainable Alpha

December 21, 2016 07:00 am 9 Comments CATEGORY: Investments

The “Paradox of Skill” is the recognition that as the average skill level of a group increases, it actually becomes harder and harder for superstars to occur; as the skill level rises, the variability around the group average declines. This phenomenon helps to explain why despite the improvement in baseball players, no one has hit over .400 since Ted Williams did it 75 years ago, and also provides insight on why it’s getting harder and harder to find “good” active investment managers. Because the whole field has gotten so much better, it’s actually become incredibly difficult to stand out from the (already excellent) pack.

As a result, a growing base of data suggests that the amount of available alpha is shrinking, a combination of both the paradox of skill itself, and the mere fact that more and more investment research is revealing previously unknown investment factors that, once known, can no longer be exploited the way they were in the past.

Yet despite this trend, a number of known investment opportunities have continued to persist, even though they’re widely known. For instance, it’s long since been documented that small cap outperforms large cap, that value generates a long term premium over growth, and that stocks exhibit momentum effects. But for all the research showing these outperformance opportunities to be available, investors fail to invest sufficiently to fully take advantage of them.

The gap, however, may be at least partially explained by the growing field of behavioral finance, and research that shows all the ways that we fail to invest “rationally” despite having all the available information (or without bothering to get it in the first place). And in point of fact, many of the most popular – and persistent – alpha opportunities, from small caps to value to momentum, are actually well-explained by common behavioral biases (including the availability, familiarity, and recency biases) that are hard-wired into our brains. Which helps to explain why they’re persistent – because their very nature is the tendency to impact our investment decisions, even when we “should” know better.

Of course, the caveat is that “sustainable alpha” opportunities created by persistent behavioral biases may be the hardest to exploit, precisely because those behavioral biases impact us as well – both in the investment decisions we make, and as advisors, the investment decisions we must justify to clients (who themselves have the same biases). Or viewed another way, it may be the persistent challenge and “risk” of trying to buck the behavioral trends that generates the risk premium associated with sustainable alpha in the first place!

How The UK RDR Ban On Commissions INCREASED Demand For Financial Advice

December 19, 2016 07:01 am 16 Comments CATEGORY: Planning Profession

The Department of Labor's fiduciary rule has become a highly contentious issue in the US, with some suggesting that it will ultimately improve the quality of advice for consumers, and others suggesting it will lead to a damaging mass exodus from the industry. But the reality is that debates about lifting the standards for financial advice is not unique to the US; in fact, countries ranging from Australia to India, and from the Netherlands to the UK, have all enacted even more stringent reforms than the DoL's fiduciary rule, in most cases resulting in an outright and total ban on all investment commissions. Which provides us an interesting glimpse into how the financial services industry really is impacted as fiduciary standards are raised and commissions are reduced.

In this guest post, industry commentator Bob Veres shares his recent interview with Keith Richards, regarding the ban of commissions in the UK that was implemented in 2013 after their Retail Distribution Review (RDR), and how it has impacted demand for financial advice. Richards is the CEO of the U.K.'s equivalent of FINRA, and a former executive at UK equivalents of a major life insurance company, and before that a major broker-dealer.

Given his background, Richards was not surprisingly a major skeptic of the commission ban before it was enacted. But the "surprise", he reveals, is that the ban on commissions has actually created an environment which is better for both the industry and advisors. Richards believes that transparency and separation of fees from products has resulted in advisors better understanding the needs of their clients and articulating the value they provide, which has resulted in clients who are perfectly willing to pay for an advisor's expertise. In fact, demand for financial advisors is on the rise since commissions were banned, and financial intermediaries that feared a massive decline in revenue are actually seeing an increase, instead!

However, there are some reasons to believe that a ban on commissions in the US might not play out the same way it did in the UK. The key distinction is that nearly 20 years ago, the UK began to lift the educational standards for financial advisors, which meant that by the time commissions were banned and advisors had to get paid for advice, they were actually reasonably well trained to deliver that advice. By contrast, in the US, a wide swath of "financial advisors" have nothing more than basic Series 7 or Series 65 licenses, and consequently might not have enough training and education to get paid for their advice alone, if they were actually required to do so! Which means ultimately, lifting the standards for financial advice in the US needs to consider both the fiduciary duty of loyalty, and educational competency standards as well!

Nonetheless, for those advisors - or executives at financial services companies - who fear that a fiduciary standard and limitations on commissions would be destructive to the financial advisor business model, hopefully this perspective on how an even more stringent fiduciary standard and commission ban in the UK actually increased demand for financial advice, and the success of financial services companies, will be helpful food for thought!