Nerd's Eye View blog

Weekend Reading for Financial Planners (Dec 17-18)

December 16, 2016 02:50 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the news of yet another legal victory for the Department of Labor, as the request from the National Association of Fixed Annuities (NAFA) for a preliminary injunction to stop the DoL fiduciary rule was denied (though NAFA's appeal for its original loss to the DoL is still pending).

Also in the news this week was the launch of Schwab's new Intelligent Advisory service, an expansion of its "robo-advisor" program for the mass affluent that will provide access to a CFP certificant who provides a personalized financial plan (in addition to investment management), all for a mere 0.28% AUM fee (plus the cost of the underlying ETFs) with a $25,000 minimum - a bold competitive shot across the bow of Vanguard's Personal Advisor Services (with a 0.30% AUM fee and a $50,000 minimum), but also to a wide swath of independent financial advisors who also work with mass affluent clientele (some on Schwab's own Institutional platform!).

From there, we have a slew of advisor technology articles this week, including: the latest results of the annual Financial Planning tech survey (though unfortunately, this year FP magazine is limiting access to the survey results!) and only highlighting the top few companies in each category; a review of new advisor marketing tools Snappy Kraken and Twenty Over Ten; a discussion of the new PFM app Moven, which competes primarily in the banking space but could see adoption from the clients of financial advisors; a look at "sleeve accounts" in portfolio accounting software and why they can be more efficient than just creating multiple accounts to separate clients' assets; a review of the latest (and pending) tech developments at the major RIA custodians (Schwab, Fidelity, and TD Ameritrade); how Riskalyze intends to deploy its new $20M of private equity (by pivoting from "just" a risk tolerance assessment tool to a broader "robo" solution that supports acquiring and onboarding new clients); and a look at the explosion of new DoL compliance technology tools (and why there may already be "too many" for what most advisors really need).

We wrap up with three interesting articles, continuing the technology theme: the first is a look at the ever-expanding impact and power of social media tools, which aren't just a marketing channel but are allowing people to organize new social and political movements in ways that simply weren't feasible in the past; the second is a review of several financial-oriented websites and apps that are increasingly pivoting towards becoming "automated financial assistants", from Digit to Mint to Credit Karma, which could begin to compete with financial advisors, or simply complement areas they don't typically advise on anyway; and the last is an overview of the empirical research that still suggests, in the end, that technology and automation really don't cause mass unemployment, and can even boost employment in some sectors (as the number of bank tellers increased after the introduction of the ATM), but with the accelerating pace of technology change, suggests that at a minimum we need to get better about helping people prepare for new jobs and industries (which has both job training and financial planning implications!).

And be certain to check out Bill Winterberg's "Bits & Bytes" video at the end, which this week includes coverage of the new Schwab Intelligent Advisory solution, the news that Finicity has raised $42M of venture capital to begin development again on the "old" Intuit Financial Data APIs, and the rollout of Yodlee account aggregation capabilities on the Envestnet|Tamarac Advisor Xi platform.

Enjoy the "light" reading!

Is Financial Planning An Industry Or A Profession?

December 15, 2016 08:26 am 3 Comments CATEGORY: Planning Profession

In financial services, the terms "industry" and "professional" are often thrown around casually and used interchangeably. But in the end, are financial advisors simply part of the financial services "industry", or do they deserve to be recognized as "professionals" instead? Is there a point at which we switch from one to the other? What does it take to really earn the label of "professional"?

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we explore the difference between an "industry" and a "profession", and what this distinction means for those who wish to see financial planning regarded as a bona fide profession.

Because the reality is that there truly is a difference between an industry and a profession. Bona fide professions – such as divinity, medicine, and law – are distinguished from other occupations by common elements, such as having a specialized body of knowledge, education and experience requirements, societal recognition of the "good" they provide, ethical requirements (to which they're actually held accountable), and control of their terms and labels (and who can and cannot hold out as a professional).

By contrast, the term "industry" typically refers to a grouping of companies focused around particular service or business activities. Industries are also broader in scope than professions. Professionals may work within an industry, but there's more to an industry than just professionals. Which means it's not a matter of whether financial advisors are professionals or part of an industry, but that as professionals they would still be part of an industry.

Nonetheless, the question still arises as to whether financial planning itself really merits the label of being a profession... and unfortunately, it appears the answer is "No", or at least "Not Yet". Because while many financial planners have voluntarily decided to fulfill more rigorous education, examination, experience, and ethical requirements (such as via CFP certification), the reality is still that anyone can choose to call themselves a financial advisor or a financial planning professional, and the public often can't tell the difference (at least, not until after the fact).

Which means until financial planning (re)gains control of its terms, the financial services industry will continue to include both the financial advisors who elevate themselves to the standards of a professional, and also all the rest who may hold out as "financial advisors" to the public but who have little actual training as such!

Policy-Based Financial Planning: Linking Financial Life Planning To Actionable Recommendations

December 14, 2016 07:02 am 1 Comment CATEGORY: Client Trust & Communication

The Investment Policy Statement (IPS) is a staple of investment management and provides crucial guidance for (discretionary) investment managers about how to implement portfolio strategies on behalf of a client in times of uncertainty (when the client may not be there in person to help make the decision).

Yet the reality is that the concept of a “policy statement” transcends just the world of investments. Arguably, it can be effective across most domains of financial planning – not necessarily to establish a plan of action for the advisor in the absence of the client, but for the client today to establish a plan of action for handling an uncertain future. In this context, the “financial planning policy statement” is a form of choice architecture, narrowing future decisions in a manner that can help to eliminate the “bad” emotional choices from consideration.

Of course, it’s still necessary to establish appropriate financial planning policy statements in the first place, linking underlying client values and core beliefs to structured policies that are flexible enough to address future unknowns, yet specific enough to provide clear, actionable guidance when the time comes. Which means the financial planner needs both a means to discover and understand a client’s values and beliefs (not just the financial data), and the tools to formulate and test policies that might be recommended to the client.

Overall, though, this kind of “policy-based financial planning” approach actually has the potential to provide the crucial link between financial life planning and technical financial planning strategies, serving as a means to translate values and beliefs into structured policy statements that can be implemented with the client. At least, if financial planning software is ever improved to the point that such financial planning decision rules can be illustrated in the first place!

The Death Of Referrals And The Future Of Business Development For Financial Advisors

December 12, 2016 07:01 am 29 Comments CATEGORY: Marketing

It is “accepted wisdom” that the best way to grow an advisory firm is through referrals. Of course, that means brand new financial advisors have to hustle harder to get their first few clients – because they don’t have anyone to refer them – but even for those in their early years, once there’s a critical mass of clients on board who can refer, it’s supposed to be smooth sailing from there.

Except that it isn’t anymore. In the latest Investment News 2016 benchmarking study of the Financial Performance of financial advisors, it turns out that referrals aren’t the primary driver of AUM growth for RIAs anymore. Not client referrals, nor professional referrals, nor even both combined. Instead, it’s now all about external business development and marketing strategies instead.

Notably, though, while advisory firms are driving more growth from non-referral strategies, and are indicating plans to ramp up non-referral business development even more in the coming years, there’s little consensus about what the ‘best’ marketing strategies are. From community involvement to participating on non-profit boards and hosting networking events, advisory firms are trying out a wide range of activities. In fact, the only common thread is about what seems least likely to work, which is traditional ‘advertising’ strategies (whether print, radio, or online).

Nonetheless, the shift away from referrals appears to be on, in what may be driven by the underlying challenge that there just aren’t very many “unattached” clients left to be referred in the first place. Because while independent advisors often like to talk about “taking clients away” from large firms like banks and wirehouses, the data shows that 3/4ths of new financial advisor clients are actually self-directed investors who decided for the first time to work with an advisor.

Yet with competition for self-directed investors tougher than ever, not only because there are fewer of them (as more and more have adopted advisor relationships with the growth of the AUM model in the past 15 years), but also because they’re now being solicited by everything from “digital” robo-advisors to the financial planning and wealth management divisions of Schwab, Fidelity, and Vanguard. Which means in the future, financial advisors may have to figure out how to not just bring in referrals, but do outbound marketing to persuade a client already working with an advisor to switch to them instead… a tough challenge, given the ongoing crisis of differentiation amongst most financial advisors today!

Weekend Reading for Financial Planners (Dec 10-11)

December 9, 2016 02:50 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with comments from President-Elect Trump's former campaign manager and now senior advisor Kellyanne Conway that Trump's views on the DoL fiduciary rule "don't necessarily jibe" with the oppositional views of his advisors... and when coupled with Trump's recent selection of Andrew Puzder as his new Labor Secretary, suggest that a Trump repeal the DoL fiduciary rule really may not be coming once he takes office.

From there, we have a number of marketing-related articles this week, including: how to craft your 2017 marketing plan; tips to improve client communications (particularly via email and social media); the marketing advantages (or not) in writing a book to establish your credibility as an expert; how to refine your prospect and new client experience to be of consistent quality (especially when it's delivered by more than just the founding advisor themselves); and the announcement of a new "Mystery Shopper" service that Fidelity is making available to RIAs that will allow them to engage a market research firm to pose as prospects and provide feedback on their marketing and sales process.

We have a few more technical articles this week as well, from a look at the ongoing struggles of traditional LTC insurance (with the recent news that LTC insurer Penn Treaty will have to be liquidated, in what may be the largest insurance insolvency in 25 years), to a recent new study that finds life expectancy actually declined last year in the US (for the first time in over 20 years), and the results of an analysis of the predictive value of Morningstar star ratings which finds they have slightly positive predictive value, but only very slight.

We wrap up with three interesting articles: the first is a look at new economic research quantifying, for the first time, how likely it is someone achieves the "American Dream" by being more financially successful than their parents, and finds that the odds of generational improvement have plummeted since World War II from a high of 92% to what today is no better than a 50/50 coin flip, driven partially by slowing economic growth but even more by rising income inequality; the second is a discussion of the increasingly popular retirement strategy of "retiring at sea", and making a cruise ship your second or even primary home in retirement (with a growing number of large cruise ships offering "residence at sea" apartments to accommodate extended-term travelers, in some cases at prices even lower than a local assisted living facility!); and the last is a good discussion of the ever-present question "how much is enough", which despite being a core focus of financial planning, faces a challenging reality that figuring out the answer to the question has both a quantitative and a highly qualitative component.

Enjoy the "light" reading!

How CFP Board’s New Directors Signal Major New Initiatives

December 8, 2016 10:18 am 6 Comments CATEGORY: Planning Profession

The annual process of selecting new members to a board of directors for a non-profit in the financial planning world is rarely news. But given the size of the CFP Board, and the diversity of their stakeholders, changes to the CFP Board's Board of Directors can be an exception. And in fact, the CFP Board's latest 2017 additions include a number of notable new members, from a (former?) asset management and large broker-dealer, to several media-related executives, to a former state securities regulator.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we explore the background of the new members of the CFP Board's Board of Directors, and what these new additions may signal regarding the CFP Board's upcoming new initiatives in the next few years.

The first noteworthy newcomers are Doug King, CEO of Cetera Advisor Networks, and Jack Brod, head of the Financial Advisor Services Group at Vanguard. These gentleman are significant because they represent the interests of "large firm financial planning" (i.e., firms that are so large that they look nothing like the independent advisory firms that comprise the majority of the CFP Board's current Board of Directors). The increased engagement of this segment of the industry with the CFP Board is particularly relevant to independent advisory firms, and in the case of Vanguard in particular signals that the firm is substantially pivoting from "just" being an asset manager, into a more full-service advisory firm that competes with independent advisors as well.

Also new to the CFP Board's Board of Directors are Susana Duarte de Suarez, who runs a global communications firm called Media Moon Communications, and Dane Snowden, who is the Chief of Staff for the NCTA (which was the National Cable Telecommunications Association, and is now the Internet & Television Association). Coming from the areas of media and communication, the addition of these new members may be a sign that the CFP Board is gearing up for a new stage in their (thus far, very successful) public awareness campaign.

And the final addition to the board is Denise Voigt Crawford, who previously was the Texas State Securities Commissioner for 17 years, and is also a former two-time president of the NASAA (the North American Securities Administrators Association, a membership group for state securities regulators). Given Crawford's connections to state securities regulators, and the CFP Board's limited success in lobbying for Federal regulation of financial planning under Dodd-Frank, her addition to the CFP Board's Board of Directors may be a sign that the next stage of CFP Board and Financial Planning Coalition advocacy is a switch to start lobbying for state regulation of financial planning in the coming years!

End-Of-Year Tax Planning For Trump’s Potential 2017 Income Tax Reform

December 7, 2016 07:01 am 11 Comments CATEGORY: Taxes

December is the season for end-of-year tax planning, and the looming potential for individual income tax reform in 2017 – with proposals from both President-Elect Trump, and the House GOP – makes planning in 2016 more complex, but also potentially more beneficial.

The reason is that the tax reform proposals could enact substantial changes to the tax brackets themselves – with the most likely outcome being lower tax rates for most people – which makes it especially appealing to defer income into next year (when rates may be reduced), and maximize deductions this year (at the currently more favorable rate).

In addition, the House GOP proposal would eliminate many popular itemized deductions (keeping only mortgage and charitable), which further enhances the benefit of claiming any/every deduction possible, before the end of the year (and while it still lasts!)

On the other hand, President Trump has proposed to leave itemized deductions in place, but cap them (at $100,000 for individuals and $200,000 for married couples), which wouldn’t impact most people, but could have profound implications for those making large charitable gifts. Ultimately, it’s possible – and even probable – that a carve-out for charitable giving could be implemented, if the deduction cap really is imposed next year. But just in case, those who are inclined to make large gifts might want to seriously consider contributing to a Donor Advised Fund before the end of 2016, in order to claim the deduction this year without a cap (to the extent otherwise permitted under the current charitable contribution rules), and rely more on Qualified Charitable Distributions from IRAs in the future to navigate the potential deduction cap!

The Latest In Financial Advisor #FinTech (November 2016)

December 5, 2016 07:01 am 2 Comments CATEGORY: Technology & Advisor FinTech

Welcome to the November issue of the latest news in Financial Advisor #FinTech – where we look at the big news announcements, and the underlying trends and developments that are emerging, in the world of technology solutions for financial advisors!

This month's edition kicks off with a slew of news around the shifting "robo" landscape, from yet another ETF provider investing into a robo solution as a distribution channel, to growing competition in the B2B channel about what it really takes to win enterprise robo-advisor-for-advisors contracts, and the ongoing struggles of retail B2C robo-advisors as Wealthfront's founder Andy Rachleff returns to take the reins of the company as it falls behind competitors with lagging growth.

From there, highlights include:

BrightScope is acquired for $35M+ by Strategic Insight (but primarily for its 401(k) data and analytics, not its AdvisorPages solution).
RiXtrema launches FeeComp, a new advisory fee benchmarking solution in anticipation of DoL fiduciary.
Vanguard announces plans to launch a FinTech "Innovation Center" incubator in downtown Philadelphia in 2017.
Quovo's new Account Authentication API could make it the new glue that holds together advisor "robo" solutions.
Is financial planning software about to become a new insurance and annuity distribution channel?

You can view analysis of these announcements, and more trends in advisor technology, in this month's column, including a look at who's winning enterprise "robo" tech deals (SigFig and NextCapital are up, while FutureAdvisor may 'suddenly' be starting to lag), how broker-dealers are trying to reinvent themselves as tech platforms (in an already crowded landscape), and what advisors should watch out for amongst today's popular advisor website design companies!

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 (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!