Nerd's Eye View blog

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.

What It Takes to Make Your Client Advisory Board a Success

November 14, 2016 07:00 am 6 Comments CATEGORY: Practice Management

Financial advisors who start their own firms, like so many other entrepreneurs, are driven by a vision of how clients should be served, and then build a business to deliver those services. If the vision is a good reflection of what people really do want, and is well-executed, the business is rewarded with success and growth.

The caveat, however, is that even successful entrepreneurs aren’t always right in predicting what their clients want and need. Sometimes business owners misjudge what clients really value most in the business, or even lose perspective in how the business is perceived by the clients altogether. In some cases, it’s simply a matter of an idea that seemed great in the business owner’s head but isn’t so appealing to the clients who would actually need to pay for it.

So how can financial advisors avoid these potentially costly missteps? By forming a client advisory board – a group of key clients and influencers who can provide feedback to the firm owner and management, before new initiatives are rolled out or changes are made, to get constructive criticism from the end client about whether it’s really a good idea or not.

And in today’s guest post, client advisory board facilitator Steve Wershing provides some best practices, based on his own years of experience, about how financial advisors should go about creating and implementing an effective client advisory board – from how to identify the right people and ask the right questions, to finding the right way to run the meeting, the right frame of mind to approach it, and the right follow-through to execute it.

So whether you’re an advisory firm that’s already running a client advisory board but wants ideas on how to run it better, or a firm that’s thinking about putting together a client advisory board for the first time, I hope that today’s guest post from Steve Wershing helps you to take the next step forward!

Weekend Reading for Financial Planners (Nov 12-13)

November 11, 2016 02:48 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 the first court decision of the lawsuits against the DoL fiduciary rule (with the ruling against NAFA and entirely in favor of the fiduciary rule!), an announcement that Morningstar is cutting its benchmark fees to zero for investment managers who want to benchmark against them (in an effort to compete more broadly in the world of index benchmarking), and the decision of John Hancock to stop selling traditional long-term care insurance policies to consumers (despite being one of the three biggest companies providing coverage!).

From there, we have several practice management articles, including a glimpse at how broker-dealers are looking to change grid payout systems in 2017 to comply with the recent DoL fiduciary FAQ, the risk of advisory firms acquiring multiple local advisors where the firm gets the cash flow but doesn't truly 'own' the client relationships (a serious problem when the parent firm wants to sell in the future!), and how advisors are increasingly struggling to differentiate themselves in a changing environment (and what they need to do about it).

We also have a few more technical planning articles, including: a fresh look at the tax policy proposals from President-Elect Trump and Speaker Ryan, which provides a glimpse into the kind of tax reform legislation we could see in early 2017; a discussion of how, despite the popular view that we may all live to age 120 and beyond, life expectancy has actually been declining slightly since 2010; and a look at the newly announced Medicare Part B premiums (up just 4% for those eligible for Hold Harmless, but up 10% for higher income individuals who don't qualify!).

We wrap up with three interesting articles: the first is a reminder that differentiating on service is a challenging way to build an advisory firm, given that everyone has a different (and evolving) view of what "good service" even means, and why it's better to build around relationships instead; the second is a look at what's called the "Goal Gradient Hypothesis", and the idea that we tend to work harder on a goal as we approach its end point (which suggests that clients may be more motivated by a series of short-term goals than one giant long-term goal like "retirement"); and the last is a good reminder from Bob Veres that even if the fiduciary rule does see a setback under President Trump and the Republicans, that in the long run the financial planning profession can still emerge victorious by continuing the "ground war" of winning over consumers to the virtues of a fiduciary advisors, one client at a time.

And in honor of Veteran's Day, be certain to check out the video at the end celebrating the delivery of pro bono financial planning for the military (and how it's being supported by the Foundation for Financial Planning)!

Enjoy the "light" reading!

Why President Trump Will More Likely Defang DoL Fiduciary Than Repeal It

November 10, 2016 10:40 am 6 Comments CATEGORY: Regulation & Compliance

With this week's "surprise" presidential election victory of Donald Trump over Hillary Clinton, combined with the success of the Republicans holding both the Senate and the House of Representatives, the question arises as to whether the Republican clean sweep in Washington spells an imminent demise for the Republican-opposed Department of Labor fiduciary rule. What is the likely fate of the fiduciary rule once the change in power occurs next January?

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, I discuss why I actually do not think that the Republican victory is going to lead to an immediate and total repeal of the Department of Labor fiduciary rule.

Because the reality is that while the rule will not be enforced until next April - after President Trump takes office - the regulation itself became official this past April. And the President doesn't have the power to just immediately enact a massive change to an existing regulation. Remember, it took President Obama's Department of Labor nearly 6 years just to get the prior fiduciary rule changed to what it is now becoming! If President Trump tried to halt it immediately, the fiduciary advocates would have their own opportunity to sue the Department of Labor, and would likely be successful!

Of course, the reality is that even if President Trump would have trouble eliminating the rule, he could "defang" it by directing the Department of Labor to only minimally enforce it, akin to the SEC's similar failure to enforce the existing provisions of the Investment Advisers Act of 1940 that already requires brokers who give substantive investment advice to register as fiduciary investment advisers. Which would mean the fiduciary rule is still on the books. But the Department of Labor wouldn't be much of a threat for those who didn't follow it.

On the other hand, the existence of the fiduciary rule's requirement that consumers must retain the right to a class action lawsuit against a financial institution for breaching its fiduciary duty (across a large number of advisors) means the threat of DoL fiduciary enforcement remains, even if the Department of Labor itself isn't funded to do it. Which means perhaps the most likely Republican "fix" to the rule will simply be to pass a law that eliminates the class action provision, which doesn't kill the DoL fiduciary rule but does drastically reduce its threat.

In addition, while President Trump would be limited in just issuing an Executive Order to kill the DoL fiduciary rule, Congress itself could pass a law to end the rule altogether (as opposed to just its class action provision). However, it's not clear how politically feasible this actually is. The Republicans still don't have enough votes to overcome a filibuster in the Senate, and with so many major firms already implementing changes to adjust to the DoL fiduciary rule, some previously anti-fiduciary foes may now become fiduciary advocates to keep the rule (because they believed they're more prepared than their competition to succeed if it sticks around). And with President Trump having already put a lot of other rule changes on his agenda for his first 100 days in office... and the DoL fiduciary rule enforcement beginning just 80 days after the change in power in January... it's entirely possible that by the time Congress is even ready to take the issue up, it will be a moot point because the Department of Labor's fiduciary rule will already be fully implemented and enforced!

Bad Mortgage Prepayment Psychology And The Need For Automatic Recasting

November 9, 2016 07:01 am 19 Comments CATEGORY: Debt & Liabilities

Even in a low interest rate environment, the reality is that prepaying a mortgage is the equivalent of a ‘guaranteed’ bond return, at a yield that is better than cash and arguably even appealing on a risk-adjusted basis in a world of potentially low equity returns. However, the caveat is that while making mortgage prepayments can have long-term benefits, they’re only very long term benefits – as prepaying a mortgage to reduce the cumulative loan interest and term of the loan may not be felt for a decade or two thereafter.

One alternative to more immediately enjoy the “benefits” of prepaying a mortgage, though, is to request a mortgage recast. By recasting the mortgage – re-amortizing the loan balance over the original term – the borrower enjoys immediate relief in the form of lower future mortgage obligations. Of course, the original mortgage payment can still be made. But at least the borrower has the option to pay less if desired… which can be especially helpful if the household has a financial shock, from unemployment to a medical event or short-term disability.

Unfortunately, though, in today’s mortgage environment, recasting is not easy. Most lenders assess a small but not trivial processing fee every time a recast is requested. And it must actually be manually requested, and then manually approved by the loan servicer, and by the investor if the mortgage has been resold since its origination. In addition, not all types of mortgage loans are even eligible in the first place.

Yet the question arises: what if mortgage recasting were not only easier, but automatic, such that a borrower who makes a prepayment automatically and immediately receives the benefit of a reduced future mortgage obligation? With automatic recasting, mortgage prepayments no longer just produce a long-term (but highly intangible) benefit; it also produces immediately tangible relief, in the form of a reduced mortgage obligation. Which in turn improves the household’s financial flexibility, and can even improve the stability of the overall mortgage market by both reducing default risk (since the mortgage payment obligation is smaller and easier to maintain) and also reducing loss exposure for lenders (as ongoing prepayments build more equity for the borrower, reducing the risk of a lender that is compelled to foreclose on a default).

In fact, ironically the potential positive incentives for automatic recasting may be so significant, that the biggest problem could become the tendency for households to become “house rich and cash poor” by systematically paying off their mortgages in advance. Still, given the difficulty that many consumers have in saving by any means except home equity, and the availability of reverse mortgages, perhaps this would not be such a bad outcome after all?