Nerd's Eye View blog

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?

New DoL Fiduciary FAQ Shatters Broker-Dealer Recruiting Deals

November 7, 2016 07:00 am 0 Comments CATEGORY: Practice Management

One of the great “mysteries” to many in the independent RIA community is why more advisors at broker-dealers haven’t been breaking away to start their own independent firms. Yet a look at the recruiting landscape at broker-dealers helps to explain why: because top brokers, particularly at wirehouses, can get paid as much as 3X trailing revenue just to switch broker-dealers, in a world where the going rate for an independent RIA is “only” 2X revenue!

The caveat, however, is that the typical broker-dealer recruiting deal comes with far more strings attached, including an “upfront” payment that is actually a forgivable loan, and back-end bonuses that are paid out over time… all of which are only actually “earned” as the broker continues to hit specified asset and revenue hurdles on the new broker-dealer platform.

However, in a new FAQ regarding the details of the upcoming fiduciary rule, the Department of Labor has now declared that asset and production thresholds to earn recruiting bonuses are considered an “acute conflict of interest” that cannot merely be mitigated and must be avoided. In other words, all the typical contingencies that broker-dealers attach to the back end of recruiting deals will be banned in the future.

As a result of the announcement, broker-dealer recruiting deals have ground to a halt, as broker-dealers need to substantively re-assess what they can realistically pay for recruiting in a world where the broker can’t actually be held accountable for whether or how many clients come along in the switch. And while eventually recruiting deals will likely come back, the inevitable conclusion is that the typical payout rates for broker-dealer recruiting (at least for the retirement portion of the business) must fall below the typical purchase price of an independent RIA, which from the buyer’s perspective will now be a much “safer” purchase.

More broadly, though, the pressure on broker-dealer recruiting deals will also likely become pressure on broker-dealers themselves – particularly the wirehouses who historically have relied the most on recruiting and retention bonuses, but now may increasingly struggle to attract their top, most growth-oriented advisors, who in the future may “need” to become independent RIAs to maximize the value of the advisory business they build. Which in turn will be a boon to the vendors who serve independent RIAs, and those who provide “waypoints” in the transition (like Dynasty and HighTower)… unless the leading broker-dealers can transform themselves into RIA support platforms that retain the value of their business, while simultaneously allowing advisors to retain the value of theirs.

Weekend Reading for Financial Planners (Nov 5-6)

November 4, 2016 10:26 am 3 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the big news announcement that risk tolerance software maker Riskalyze has raised a whopping $20 million Series A round to fuel its continued growth. Also in the news this week was the announcement that Morningstar has formally launched Analyst Ratings on ETFs (to complement its ratings on mutual funds), and that the latest data from the SEC shows it is still struggling to materially improve its examination rate of investment advisers, because the ranks of the RIA community are growing faster than the SEC's ability to scale up its exams!

From there, we have several practice management articles, including: the challenging "walls" that advisory firm owners must clear in order to transition from "small" solo practices into mid-sized businesses; why defining a niche is about more than just stating you work with a certain type of clientele, and instead is about explaining the unique outcomes you can create for those clients; and a look at how the latest DoL fiduciary FAQ could lead to cuts (or at least potential changes) to the typical broker-dealer grid payout system.

We also have a few more technical planning articles, from a look at how to help clients understand their longevity risk (and why typical life expectancy statistics understate their risk of outliving their money), to a discussion of the favorable tax rules for a personal residence (from the mortgage interest deduction to the capital gains exclusion), and why prenup agreements are becoming increasingly popular for young professional couples.

We wrap up with three interesting articles: the first looks at how the focus of financial planning is shifting from helping clients maximize their dollars and their Return On Investment (ROI), and instead is about helping clients live a better life with the dollars they have (improving their "Return On Life"); the second is a reminder that there's a fundamental difference between being a financial advisor salesperson and a client-centric professional (even if you're a salesperson who tries to do the right thing for clients); and the last is a powerful call to the financial planning profession that its time to step away from the broader financial services industry and find our own place in the world... at least, if the industry and its product manufacturers are willing to let go.

And be certain to check out Bill Winterberg's "Bits & Bytes" video at the end, which this week includes coverage of the latest Schwab technology roadmap, Riskalyze's $20M Series A funding, the announcement that SS&C (owner of Black Diamond) has acquired Salentica CRM, and TD Ameritrade's acquisition of Scottrade (including Scottrade Advisor Services) and the rollout of TDA's new "robo" solution Essential Portfolios!

Enjoy the "light" reading!

Who’s More Valuable: Your Top Client Or Your Top Employee?

November 3, 2016 07:44 am 6 Comments CATEGORY: Practice Management

The fundamental purpose of financial planning is to help clients achieve their financial goals, which means ultimately it's all about the client. After all, if there are no clients to pay the bills, there is no business.

Yet in this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, I explore how ultimately, focusing an advisory firm too much on the wants and needs - and whims - of the client can undermine the morale and motivation of employees. Which is a real problem, because while clients pay the bills, there's no business without the people who work in it!

Accordingly, as an advisor/owner, you might consider which is really more valuable for your business: your top client, or your best employee? Many "client-centric" firms immediately state its their top client, even though the reality is that losing a key employee could cost the business 10X more than the impact of "just" losing the best client.

In fact, the reality is that building a successful business is so reliant on developing great people, that in the end you might even consider giving your staff the power to fire the most "pain in the ass" clients - the ones with a high "PITA" factor, whose departure may really only have a small impact on the revenue of the business, but a huge positive impact on the happiness (and productivity, and loyalty) of your team.

So in the end, think carefully about whether you're really a client-centric firm... or whether it's better to be an employee-centric business first, to ensure you have the employees you need to serve your clients best!

Using Age Banding To Estimate How Spending Will Decline In Retirement

November 2, 2016 07:01 am 12 Comments CATEGORY: Retirement Planning

The very essence of saving for retirement is to accumulate a nest egg sufficiently large enough to replace the retiree’s employment income and sustain a stable standard of living throughout retirement. If the prospective retiree doesn’t have enough saved up to maintain his/her lifestyle for the next several decades, it’s not yet time to retire.

Yet a growing volume of research studying the actual spending habits of retirees is revealing that this traditional approach may not be entirely appropriate after all. Because as it turns out, retirees don’t actually maintain a stable lifestyle in retirement; instead, spending levels tend to decline (in real terms), as the retiree goes from the “Go-Go” early years of retirement, to the “Slow-Go” years, and eventually the “No-Go” years.

In addition, not only does retirement spending slow in the later years, but the underlying composition of the retirement spending begins to shift as well as clients cross through these “age bands”, as spending on housing and entertainment activities fall significantly in the later years, while health care expenses are rising. Still, though, discretionary spending tends to fall by more than health care expenses rise – leading to an overall decrease in retiree spending as retirees proceed through the age bands.

Ultimately, this suggests that rather than merely assuming a stable standard of living throughout retirement, a better approach may be to look more directly at not just the composition of the retiree’s spending goals, but also how those particular types of expenses tend to change as the retiree moves through the different age bands. In other words, projecting retirement expenses using an age-banding approach may allow for a more nuanced and accurate representation of how spending will change over time. Which is important, because the data indicating that retiree expenses tend to fall throughout retirement – especially in some categories – implies that retirees may not actually need to be saving as much, or accumulating as large of a nest egg, to retire in the first place!

The Latest In Financial Advisor #FinTech (October 2016)

October 31, 2016 07:01 am 8 Comments CATEGORY: Technology & Advisor FinTech

Welcome to the October 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 look at the ongoing growth of "new" robo-advisors from established financial services firms, all of which are pricing 40% - 80% higher than the founding crop of robo-advisors like Betterment and Wealthfront, raising the question of whether 0.25% really is the new price point for investment management, or if robo-advisors will be the ones proven to have the "wrong" pricing.

From there, highlights include:

Riskalyze raises $20M of Series A funding from FTV Capital.
Yourefolio raises $500k of seed funding for a new estate planning software solution.
Black Diamond parent SS&C buys Salentica CRM.
Envestnet buys Wheelhouse Analytics to launch an advisor price benchmarking service for DoL fiduciary compliance.
Fidelity gives a preview of its new robo-for-advisors, Automated Managed Portfolio (AMP), but it looks more like a traditional TAMP.
Portfolio performance and accounting startup Addepar rolls out a new Open API as it continues to grow amongst advisors serving ultra-HNW clientele.
CapGainsValet reopens for the 2016 tax season, with a new "Pro" service for financial advisors handling end-of-year mutual fund and ETF distributions for clients.

You can view analysis of these announcements, and more trends in advisor technology, in this month's column, including a growing number of broker-dealers offering proprietary CRM (which is both an efficiency improvement, and potential handcuffs on independent advisors), new integrations being built directly into rebalancing software as it becomes a more "core" part of the advisor technology stack, and a look at the rise of "InsurTech" solutions to make it easier (and cheaper) for advisors to help clients with term insurance.

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 (Oct 29-30)

October 28, 2016 02:51 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with several big news announcements, including the release of the first Department of Labor "FAQ" about the fiduciary rule (a series of 34 common-question-and-answer responses about keep aspects of implementing the Best Interest Contract and Level Fee Fiduciary requirements), the announcement that Commonwealth is breaking ranks with other independent broker-dealers and opting to eliminate commissions from IRAs altogether (while Ameriprise and Raymond James announced they will be allowing commissions and implementing all the additional compliance processes necessary to adhere to the Best Interests Contract Exemption), and an indication from FINRA that it is working on new regulatory guidance regarding social media intended to make it easier for brokers to use the platforms with less burdensome compliance going forward.

From there, we have several practice management articles including: a look at the situations where a financial advisor might want to merge their advisory firm into another (rather than simply be acquired); the long-term trade-offs to consider when building a "lifestyle practice" as a financial advisor (particularly if you're still in your 30s or 40s); and a look at how one mega-RIA built a new specialty niche inside the existing RIA without disrupting the existing business (in this case, by rolling out an impact investing solution).

We also have a few more retirement planning articles, from a look at the existing proposals to resolve the projected Social Security shortfall in 2034 (where the levers to adjust to solve it are actually easy to determine, and the only challenge is deciding which ones to pull on to shore up the future cash flow obligations), to a discussion of the mechanics of the "pro rata" rule from IRAs and why it matters (particularly for backdoor Roth contributions), and an examination of the "tenure" option in a reverse mortgage and in what situations it may be a superior "lifetime" income alternative to an immediate annuity.

We wrap up with three interesting articles: the first is a look at how accumulating significant wealth, especially suddenly, can actually be very disruptive socially, often leading the newly wealthy to become surprisingly isolated socially (in part to defend themselves from people who try to attach themselves socially to be a part of the financial gain); the second is an examination of how the dynamic between financial planning academics and practitioners needs to change and improve to bridge the research/practice gap in financial planning; and the last is an incredible anecdotal story to help remind us all that customer/client service interactions that we may repeat over and over, day after day, may be a small part of what we do, but are 100% of the client experience for that particular client... which is why every single moment in the delivery of the client experience really matters.

And be certain to check out Bill Winterberg's "Bits & Bytes" video at the end, which this week includes an interview directly from Schwab IMPACT with VP of Advisor Technology Solutions, Brian Shenson, about the upcoming Schwab technology roadmap, from OpenView Integrated Office and Gateway enhancements, to an update on the OpenView MarketPlace, and the timeline for the new Schwab Portfolio Connect (the replacement for Portfolio Center) to be released in phases throughout 2017 and 2018!

Enjoy the "light" reading!