Nerd's Eye View blog

Weekend Reading for Financial Planners (Dec 3-4)

December 2, 2016 02:39 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's leading news is that the Department of Labor has won yet another of its cases on the fiduciary rule, as indexed annuity provider/distributor Market Synergy Group has failed in its attempt to have the rule blocked or repealed. While there are still many cases left to resolve, and the potential for appeals, the DoL going 2-for-2 in the past month is a promising sign that the fiduciary rule may be here to stay.

From there, we have several practice management articles this week, specifically around the hiring and compensation process that often comes at the end of the year, from a look at when it makes sense to hire another advisor, to the importance of creating a career track and compensation plan for employees (which is better than the "compensation crisis management" approach of only addressing the issue when an employee reports he/she is about to leave!), and a look at how firms are starting to formulate career tracks and long-term compensation plans to retain the best talent.

We also have a few more technical planning articles, including: a reminder to look at potential year-end capital gains distributions from mutual funds and whether clients should switch to another investment before the distribution happens; how HSAs are starting to gain real momentum (but disproportionately amongst "older" workers aged 55+, who may be contributing to the HSA more as a retirement supplement than simply to cover upcoming health insurance deductibles as originally intended); factors to consider when a client has a potential NUA distribution; and how lifetime immediate annuities can still make sense, even in a low-yield environment, because the reality is that the annuity "income" is actually a combination of interest, principal, and mortality credits (which means interest rates alone only play a moderate role in setting the payouts).

We wrap up with three interesting articles: the first is a look at Julie Littlechild's research on how when advisors make personal breakthroughs in their business, it tends to follow a consistent three-stage process to change; the second is a reminder that while lots of us have work and obligations to do, the greatest success comes to those who are initiators, getting ideas off the ground and going above and beyond the bare minimum required; and the last is a fascinating look at the research showing that most of us have tens of thousands of thoughts that flitter through our heads all day, of which a whopping 80% are negative... which means our success will be determined heavily by our ability to silence the voices and change our beliefs and focus on the positive that allows us to really move forward.

And be certain to check out Bill Winterberg's "Bits & Bytes" video at the end, which this week includes coverage of WisdomTree's $20M capital investment into robo-advisor-for-advisors Vanare (which is also rebranding to AdvisorEngine going forward), a favorable review of new financial planning software provider RightCapital, and an inside look at the capabilities of portfolio performance and accounting software challenger Addepar.

Enjoy the "light" reading!

Do You Need A Big Firm Brand To Succeed As A (New) Financial Advisor?

December 1, 2016 08:01 am 3 Comments CATEGORY: Personal/Career Development

Financial planning is an intangible service that is hard for most consumers to evaluate (at least, until they've actually been through it). And because of the uncertainty about whether the advisor will provide good financial planning value, perceived trust plays an important role in choosing a financial advisor. Yet, most advisors have few credible ways to convey trustworthiness, particularly when getting started - and as a result, will often choose to work for a large well-established firm, in the hopes of leveraging the big brand of a large firm to increase their perceived trustworthiness and ultimately win more clients.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we explore whether it's really necessary to have a big firm brand in order to succeed as a new financial advisor, and whether choosing to affiliate with a well-established national firm is really still the asset it once was.

Because while it's true that a well-known national financial services brand can lend credibility to advisors - especially for new advisors - and help them build trust with their clients, as we've seen following the most recent financial crisis, a firm's brand may become a liability as well. This is particularly concerning given that changes to a large firm's brand are almost always out of an advisor's control, even though the advisor's business may suffer the consequences.

Fortunately, the reality is that for most advisors, the importance of a firm's brand will diminish with time. While clients may initially rely it as the basis for their trust, after gaining experience working with an advisor, client trust begins to shift from the firm to the specific advisor they are actually working with. This shift helps to explain why most advisors still retained most clients (even if they worked at a large firm whose reputation was sullied by the financial crisis), and similar is why most advisors who go independent (to a firm without a known consumer brand) still end out retaining most of their clients.

Fortunately for advisors who may have no desire to work for a big firm, there are other methods for developing trustworthiness as well. Having an effective website, and maintaining professional appearance and conduct, really matter when clients don't have many other indicators of trust to rely upon. And independent advisors can and often do leverage the brands of their RIA custodians - most of which are national consumer brands as well. But ultimately, the "fastest" way to build a trusted brand is still through the development of a niche. Because the reality is that most individual independent advisors will never have the potential to become a nationally known consumer brand... but it is possible to become the known, liked, and trusted expert in a particular niche community in just a few years, which is more than enough for one advisor to build a successful practice!

Understanding The 2017 Income Tax Reform Proposals: President Trump Vs House Republicans

November 30, 2016 07:01 am 50 Comments CATEGORY: Taxes

(Note: For an updated discussion of the final 2017 GOP Tax Plan, see Individual Tax Planning Under The Tax Cuts And Jobs Act Of 2017.)

With the Republican clean sweep of both the White House and both houses of Congress, momentum is building for 2017 to be a major year of tax reform, both for corporations, and for the individuals that financial advisors work with.

Accordingly, in today’s blog post, we delve in depth into both the likelihood of individual tax reform itself, and the details of the proposals from both President Trump, and the House Republicans. In fact, a deeper look reveals significant differences in both the style of tax reform between the President and House GOP proposals, as well as the deficits they imply – which itself could actually prove a stumbling block to getting legislation passed.

Nonetheless, both proposals would drastically simplify the tax brackets, from the current 7 tiers of tax rates, down to just three: 12%, 25%, and a top rate of 33% that kicks in at $225,000 (for married couples, or $112,500 for individuals). Both proposals would still keep preferential rates for capital gains and qualified dividends, although President Trump would retain the current 3 brackets (0%, 15%, and 20%), while the House GOP would simply make the rates 50% of the ordinary tax bracket (which means investment income would be taxed at 6%, 12.5%, and 16.5%).

However, when it comes to deductions, the proposals diverge substantially, with the House GOP suggesting the elimination of virtually all individual tax deductions except the mortgage and charitable deductions (paired with an expanded standard deduction), while President Trump would keep all the current itemized deduction rules, but cap itemized deductions (at $100,000 for individuals, or $200,000 for married couples) while also expanding the standard deduction even more (so only a moderate subset of people between the standard deduction and the cap would ever itemize at all).

Given all these differences, it remains to be seen whether individual tax reform will really happen in 2017, and whether key parts are compromised or delayed to accomplish corporate tax reform instead. In addition, despite now being the minority party in both the House and Senate, the Democrats still retain the ability to filibuster legislation, which will further limit the ability of Republicans to engage in permanent tax reform without compromising some concessions to Democrats. Or alternatively, the Republicans could ultimately pass individual tax reform as budget reconciliation legislation… which, under the Byrd rule, would have to sunset by December 31^st of 2026, setting up a reprise of President Bush’s infamous sunset provision on his signature 2001 tax reform!

Nerd’s Eye View Late-2016 Reader Survey – Your Input Is Requested!

November 28, 2016 07:01 am 0 Comments CATEGORY: Nerd's Eye View

Here at the Nerd’s Eye View, we're always looking for opportunities to make the site and its content a more valuable financial planning resource. Over the years, our regular reader surveys have shaped everything from the visual design of the blog (e.g., making the font size bigger than the tiny size it was when we originally launched!), to the expansion of our Members section to offer webinars and CFP and IMCA CE content, the frequency of the content we publish, and more!

The rapid growth of the blog has been a wonderful affirmation from all of you that we're getting at least a few things right, but I know there's always more we can do to make this even better. And in fact, now that the site (and our staff resources) have grown, we're trying to iterate even faster to make improvements for all of you. As a result, we're accelerating our usual annual reader survey to become a semi-annual survey - and with 2017 coming up, we're anxious for your feedback about what we should be working on for you in the coming year!

And so regardless of whether you're a financial advisor, a related professional that works with financial advisors, someone associated with a vendor who serves advisors, or you're simply an individual consumer who reads this blog for your own benefit, or a member of the media who follows the Nerd's Eye View for story ideas, I hope you'll take a few minutes to answer this survey. It's only 10 questions, should take no more than a few minutes, and will remain open until the end of next week (December 9th).

Thanks in advance for clicking through to take this survey, and for sharing your feedback! 🙂
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Weekend Reading for Financial Planners (Nov 26-27)

November 25, 2016 01:01 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a growing number of advisor surveys showing that more and more advisors are worried about losing clients over their fees... even though there's little evidence to show that any material number of advisors actually are losing existing clients over their fees. Also in the news this week is an announcement from the CFP Board about changes to the CFP CE rules, which won't impact most people, but will have consequences for those who earn CE by teaching, writing, giving presentations, or self-reporting CE credits from non-registered CE sponsors.

From there, we have a few marketing and technology articles this week, from how to create incentives that build your digital marketing email list, to the most common mistakes that advisors are still making when it comes to social media marketing, how to set up an online calendar scheduling tool on your website (and why it matters), and some interesting thoughts from Joel Bruckenstein on the state of financial advisor technology and where it still needs to improve.

We have several practice management articles as well, including: the 7 phases of the client experience as someone moves from prospect to client to referrer (and the issues to consider at each stage to help clients move forward); tips to become a better listener to clients (and what it really means to truly listen effectively); and common myths about getting client referrals (e.g., that asking more for referrals is the best way to get more, when in reality it usually is not helpful at all).

We wrap up with three interesting articles: the first is a look at five different "types" of retirement, as the very nature of retirement itself morphs from the traditional work-save-retire to aggressive early retirement, part-time permanent semi-retirement, and various forms of on-again-off-again temporary retirement; the second is a review of a new white paper suggesting that the classic "active management is a zero sum game" paper by Bill Sharpe may be flawed and that there is probably at least some slight positive sum for active management (at least, before fees); and the last is a look at another study trying to quantify the value of financial advice, finding that an advisor can add a whopping 3.75% of value... with the caveat that more than half the value is simply helping the client not harm themselves.

Enjoy the "light" reading!

Strategies To Rescue A Life Insurance Policy With A Sizable Loan

November 23, 2016 07:00 am 24 Comments CATEGORY: Insurance

One of the virtues of cash value life insurance is that insurance companies are willing to make loans against the policy at relatively favorable interest rates, because the insurance company knows that it can always foreclose on the policy (i.e., force its surrender) as collateral to repay the loan.

Unfortunately, though, while the availability of a life insurance policy’s cash value ensures that the loan will never be “underwater” with recourse to the borrower, the bad news is that the surrender of the life insurance policy itself can still be fully taxable for a substantial gain. Even if the policyowner doesn’t get any of the proceeds, because they’re used to repay the loan. Ultimately, the only way the upside of a life insurance policy becomes fully tax-free is if it matures as a death benefit.

In fact, the reality that the only way to use a life insurance policy’s cash value to repay a loan tax-free is via the death benefit leads to a number of “rescue” strategies for life insurance policies with substantial loans, specifically to help ensure that the policy remains in place until the death of the insured.

In some cases, the accrued loan interest on a life insurance policy is so severe that there’s no way to save the situation – necessitating either a surrender of the policy, or perhaps a life settlement sale transaction for an older insured.

But fortunately, it’s often feasible to sustain the policy with some combination of restructuring the policy’s dividends and death benefit, engaging in partial surrenders or withdrawals, contributing some additional dollars into the policy (either as premiums, or to pay loan interest or repay principal), or even exchanging to a new “life insurance rescue policy” that transfers the policy’s cash value – along with the loan itself – in a tax-free 1035 exchange.

Of course, ideally the insurance policy will be monitored all along, to avoid ever reaching a “surprise” situation where a life insurance policy loan has compounded to the point that it needs to be rescued. But whether it’s a proactive “Bank on Yourself” borrowing strategy, or just accidentally accruing a loan through the Automatic Premium Loan provision on a whole life policy, sometimes a substantial loan does accrue, and it’s necessary to take steps to rescue the policy before an adverse tax consequence results!

Empathy: The Essential Skill To Survive The Robo-Planner Threat

November 21, 2016 07:01 am 10 Comments CATEGORY: Personal/Career Development

The compounding growth of computing power suggests it’s only a matter of time before computers have the same “brainpower” as a human being. In fact, if Moore’s Law – that computing power doubles every 18-24 months – continues to hold, the crossover point where computers are smarter than humans might not even be all that far away. Which has troubling implications for a wide range of knowledge-based professions, from doctors, to lawyers, to financial planners who might someday be replaced by a “robo-planner” instead.

Yet research shows that our brains are hard-wired to process information differently when received from human beings rather than computers. We evolved as social animals – a trait that was vital to our survival in the early years – which means even if a robo-planner could deliver the same advice as a human, we might be less likely to take it.

In turn, this implies that the key trait for financial planners in the future will be the one skill that our brains are not programmed to receive from a computer: empathy. Because we need to feel that we are heard and understood before we’re willing to take someone’s advice about how to change our behavior, and those feelings of connectedness are an exclusively human-to-human domain.

Unfortunately, though, in today’s environment, there’s remarkably little in the way of “empathy training” for financial planners. But the good news is that empathy training is possible, and is actually on the rise in a number of other professions, from medicine to law and even to the military and the police. Which suggests it may only be a matter of time until it’s more readily available for financial advisors as well.

Still, though, with the onward marching of computing power, our transition from being “knowledge workers” to “relationship workers” may be here sooner than we realize. The good news is that means “robo-planning” will not be the end of human financial planners. But it remains to be seen whether or how many of us will be ready if and when the moment of change comes?

Weekend Reading for Financial Planners (Nov 19-20)

November 18, 2016 02:39 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with several big news stories, including a look at the SIFMA/FSI lawsuit against the Department of Labor's fiduciary rule in Texas (where the judge's questions suggest some possibility that the DoL could actually lose), a review of the other DoL rule implemented in 2016 that's at risk under President Trump (the safe harbor for states to create automatic enrollment IRAs without ERISA fiduciary exposure), and the big Advisor FinTech news that robo-advisor-for-advisors Vanare has raised a whopping $20M Series A round from ETF provider WisdomTree (and is being renamed AdvisorEngine in the process).

From there, we have a few technical articles, including a look at how variable withdrawal strategies can both improve average retirement income and reduce the risk of failure, how Medicare Part B premiums are changing next year (and what clients should consider, especially if they're just getting started in Medicare Part B this year or next), and planning strategies for Social Security for divorcees.

We also have several practice management articles this week, all focused on building out your advisory team, including: how to attract great team members by creating a Career Opportunities page on your website (even if you're not hiring right now); what your team members are looking for from the advisor-founder to be happy and successful (and better support the success of the firm); and the benefits of hiring a dedicated operations team member (or creating an entire dedicated ops department) for your advisory firm.

We wrap up with three interesting articles: the first is a preview of a chapter from Nassim Taleb's new book "Skin In The Game", about why salespeople must be separated from advisors, and how the ability of clients to sue (e.g., under a fiduciary rule) is actually a crucial mechanism to ensure advisors have reasonable "skin in the game" for their recommendations; the second is a review of the recent global OECD study on financial literacy, which finds that not only do consumers struggle with a wide range of irrational behavioral finance challenges, but also that more than half the world's adults are just sheerly financially illiterate; and the last is a great reminder of what it really takes to be sustainably successful as a business owner, and how it's not about just creating a great product or service, but also about being able to continually learn, empathize more, communicate better, try (and fail) more, and maintain a longer term view than any of your competitors.

And be certain to check out Bill Winterberg's "Bits & Bytes" video at the end, which this week includes coverage of the news that Wells Fargo is partnering with robo-advisor SigFig, a nasty two-day systems outage at Cetera (and the lessons in business continuity), and a FINRA announcement that Lincoln Financial is being fined a whopping $650,000 for failing to vet the security of a third-party technology vendor.

Enjoy the "light" reading!

Is It Worthwhile To Get A Financial Planning PhD?

November 17, 2016 07:39 am 17 Comments CATEGORY: Personal/Career Development

With over 75,000 CFP certificants, having an advanced designation is not the differentiator it once was in the marketplace. Instead, the successful growth of CFP certification, along with rising consumer awareness of the CFP marks, is turning the CFP into a minimum standard to be recognized as a professional, and those who really want to differentiate must pursue even most "post-CFP" certification instead.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we explore whether getting a PhD in personal financial planning is a good way to differentiate as an advanced practitioner... or rather, why a financial planning PhD is probably a bad idea for even sophisticated financial advisors.

Because the reality is that a financial planning PhD is really not just the ultimate advanced designation in financial planning. It's really a research degree, with content that teaches students how to actually do real research, applying proper research methods and conducting the appropriate statistical analyses. A financial planning PhD doesn't actually teach much at all about how to do financial planning; in fact, most of the PhD programs will expect candidates to have already learned that before applying (and/or may have to take "pre-doctoral" courses just to get the requisite education first).

Instead, the real purpose of getting a PhD in financial planning is to teach financial planning (at a higher education institution), or to do real research in financial planning. The good news is that there are a growing number of opportunities in both - in fact, the whole purpose of the origin $2,000,000 seed grant that the CFP Board made to Texas Tech's personal financial planning PhD program in 2000 was specifically to help create financial planning PhDs who could go create and teach in other financial planning PhD programs (which is exactly what happened). And there is certainly no shortage of applied financial planning research opportunities.

But the bottom line is simply to recognize that practitioners who want "advanced" financial planning designations should seek out post-CFP designation programs, or perhaps a Master's in Financial Planning. But a PhD is not just a more advanced designation; it's really a teaching and research degree, and is best suited for those who really want to teach and do research, either in lieu of becoming a financial planning practitioner, or perhaps as a second career for those practitioners who are ready for a fresh new challenge!

The Future Of Estate Planning And Potential Repeal Under President Trump

November 16, 2016 07:01 am 7 Comments CATEGORY: Estate Planning

In recent years, both President-Elect Trump and the Republicans have called for a repeal of Federal estate taxes, and with the Republican clean sweep in Washington, all eyes are on potential legislation to eliminate the estate and gift tax in 2017.

In today's guest post, from estate planning gurus Jonathan Blattmachr and Marty Shenkman, we look at the prospects for estate tax repeal, and what it could actually mean for both the future of estate planning, and the near-term strategies that clients might want to engage in... or not...

Because the reality is that total repeal is not entirely certain - at least, not permanent repeal. The lack of 60 Republican votes in the Senate means legislation to totally repeal the estate tax could be filibustered, and while estate tax repeal could be passed as budget reconciliation legislation with a simple majority, that's only possible if it includes another infamous 10-year sunset provision thanks to the so-called Byrd rule. In addition, even if the estate tax is repealed, it's not clear whether the gift tax would also be repealed, nor whether the systems might at least be partially replaced with other tax exposure at death - for instance, either a requirement to report all capital gains at death, or a renewal of the "carryover cost basis" rules that were temporarily applicable in 2010. And all of these changes could also end out on the cutting room floor, a bargaining chip the Republicans concede in exchange for getting some other legislation done.

Given these dynamics, the world of estate planning has a dark cloud of uncertainty hovering over it. Actual repeal could dramatically reform the focus of estate planning, eliminating the focus on estate tax planning and shifting it instead towards asset protection planning (and to a lesser extent, income tax planning). However, the potential for repeal with a sunset provision limits the ability to fully count on estate tax repeal from a planning perspective, which means it may still be desirable to shift assets out of the estate, "just in case". On the other hand, if there is no carryover cost basis (and step-up in basis remains), then it may be especially damaging to shift assets out of the estate, rather than retaining control to enjoy a step-up at basis in death.

Which ultimately means that many popular estate planning strategies will remain in place, at least for now, and especially for those just trying to manage estate tax exposure given the recently proposed Section 2704 Treasury Regulations that would drastically curtail family limited partnership discounts. But realistically, perhaps the most likely outcome will simply be that a lot of substantial estate planning grinds to a halt for the next 3-6 months, until it becomes clearer whether or how much of a focus the new Republican administration will really take regarding estate tax repeal, or not.