Nerd's Eye View blog

Weekend Reading for Financial Planners (Oct 22-23)

October 21, 2016 02:01 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the announcement that more than 50% of all Vanguard's growth is now coming not from its 'traditional' direct-to-consumer retail investor but instead from financial advisors, who now have as much with Vanguard as all individual investors in the aggregate (about $1.3 trillion)... a trend that will likely only continue, or even accelerate, as the DoL fiduciary rule rolls out in 2017.

From there, we have several articles on technology solutions for advisors, including: the announcement of Fidelity's new "robo-advisor-for-advisors" solution Fidelity Automated Managed Platform (which will deeply integrated with eMoney Advisor); the latest technology roadmaps at major broker-dealers Commonwealth, Raymond James, LPL, and Lincoln Financial; a review of the digital marketing tool Vestorly; and an interesting profile of the growing number of financial-advisors-turned-tech-entrepreneurs who are creating tech solutions for advisors by solving problems in their own advisory firms and then making the software available to others (sometimes building sizable tech companies in the process).

We also have a few more practice management articles this week, from a review of the latest FA Insight advisory benchmarking study on how the best advisory firms are outperforming on growth and profits, to a good reminder of how important it is to engage employees (and how expensive it is to turn them over), a discussion of key points to consider before breaking away from a broker-dealer to form your own independent RIA, and a reminder of how even a successful advisory firm sale by a founder can be extremely stressful and trigger a lot of soul searching.

We wrap up with three interesting articles: the first is a look at recent research on longevity, which suggests that despite improving life expectancies, we really may not even live much beyond 115 years of age, which appears to be the maximum lifespan based on our underlying biology (and medical advances may simply help us all to get close to age 115 before we die, not extend us past that point); the second examines how despite the tremendous growth of the tech sector, which now comprise most of the largest companies on the US stock exchanges, total employment of the tech sector is actually down over the past 15 years, as are the number of new tech startups, suggesting that perhaps the potential of technology is much more nuanced than previously believed; and the last is a challenging discussion about whether the focus of financial planning on helping clients achieve goals is wrong, because the truth is that most people don't have or even know what their goals are in the first place, and that perhaps our real value is to help clients figure out what goals they want to set and pursue.

And be certain to check out Bill Winterberg's "Bits & Bytes" video at the end, which this week includes cybersecurity tips for advisors from Kevin Mitnick ("World's Most Famous Hacker"), the launch of the new Fidelity Automated Managed Platform (AMP) for advisors, and the latest growth trends in performance reporting software solutions (from new features at Tamarac, to Orion landing a deal with mega-RIA Buckingham/BAM Alliance, and Addepar surpassing $500B of AUM and opening up a new API on its platform)!

Enjoy the "light" reading!

How The Internet & Early #FinTech Destroyed Actively Managed Mutual Funds

October 20, 2016 11:15 am 13 Comments CATEGORY: Investments

The rise of Vanguard and ETFs in the past decade has been nothing short of astonishing, with trillions of inflows to ETF assets, and Vanguard adding more assets in the past 5 years than they did cumulatively in their first 35. Yet the question arises: why was it that made the past decade or two the rise of passive investing. Why didn't it happen sooner? Why did it take Vanguard decades for the idea of the index fund to really gain traction?

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, I offer an 'alternative' explanation for the rise of passive investing, that has little to do with the performance of passive vs active itself. Instead, I think the real catalyst that changed the flows from active to passive funds was the internet.

Because the reality is that before the internet, the average investor didn't have the tools to know that so many actively managed mutual funds underperformed their benchmarks, and how to select which were the few funds that were actually good. Instead, most investors could only look at quarterly statements, or the Wall Street Journal's pages of stock prices, and figure out that they had "made money" because the investment was up. But not actually whether it was up more or less than it should have been, given peer comparisons.

With the rise of the internet, though, the tools suddenly became widely available. Investors could actually do real performance benchmarking and cost comparisons for the first time. The tools were finally available to shine a bright light on relative mutual fund performance, and easily identify the laggards. The technology was a transformative moment for real transparency on performance, and putting it into an easily usable format.

And now the trend only continues, likely to be accelerated by the DoL fiduciary rule, which will require all financial advisors working with retirement accounts to use those kinds of tools to do their own investment due diligence. While DoL fiduciary didn't ban commissions, it does require a recommendation that non-commissioned prudent expert would have also suggested, which means advisors who sell commissioned products have a substantial burden to prove why they're that good.

In fact, the ultimately conclusion of this trend may actually be a tremendous consolidation of the entire ETF and index fund world. Because the reality is that with transparent tools to make it easier than ever to find the best - which when it comes to commoditized index funds, is often nothing more than a comparison of which is the cheapest - there's no longer a need for 100 ETFs to track an index, nor 10, nor even three. Instead, these are "winner takes all" markets - which is exactly why the ETF price wars are underway, and are likely to continue for the foreseeable future.

All caused by the transparency that good technology brings!

Do Clients Hire Advisors For Their Expertise, Or Simply To Pass The Buck On Blame?

October 19, 2016 07:01 am 8 Comments CATEGORY: Client Trust & Communication

For most financial advisors, the “ideal” client is one who simply delegates all decisions to the financial advisor. Delegator clients tend to allow the advisor to manage everything, and do so in a manner that lets the advisor’s expertise really shape the client’s financial outcomes.

Yet a new research study on delegation suggests that in reality, clients may not be delegating to advisors simply to let them deliver their expertise as efficiently as possible. Nor is it simply about delegating to save the time it would otherwise take to manage their own financial affairs. Instead, it turns out that the primary reason we delegate is so that we can absolve ourselves of the guilt and responsibility for a bad outcome. In other words, it’s all about having someone else to blame – i.e., the advisor.

However, from the advisor’s perspective, this is not necessarily a good thing. Because especially when it comes to managing a portfolio – or aiding clients with a goal that relies on market returns – the reality is that market outcomes, and the inevitable bear market that arises from time to time, is entirely outside the advisor’s control. And woe to the advisor who takes responsibility for bear markets they can’t necessarily avoid.

Of course, the reality is that the buck doesn’t have to stop with the financial advisor. In fact, whether it’s adopting a passive approach and blaming “the markets” themselves for the outcome, or hiring a third-party asset manager (whether as a mutual fund manager or a separately managed account) who can then be fired if results are poor, financial advisors have already adopted a wide range of approaches to avoid – or at least diffuse – the responsibility and blame for an unfortunate financial outcome.

Nonetheless, the reality remains that delegation may be less about finding expertise, and more about simply finding someone with the authority to accept blame and responsibility. Which suggests that financial advisors might even consider refining their marketing message, if the goal is to appeal to delegators, and recognizing the role we play in taking on at least some of the weight of responsibility. As long as the advisor remains cognizant of where to draw the line, to avoid being outright blamed, fired, or even sued, when the next bear market comes along!

The Transformation Of The 1% AUM Fee – From Levelized Commission To Fee For Advice

October 17, 2016 07:01 am 13 Comments CATEGORY: Practice Management

With the rise of the robo-advisor – and FinTech more generally – all aiming to drive down the cost of investing for consumers, more and more have questioned whether the ‘traditional’ 1% AUM fee will even survive much longer.

Yet a deeper look at the history of the AUM fee reveals that not all costs based on assets-under-management are the same. While investment companies (i.e., mutual funds) typically have an expense ratio calculated as a percentage of AUM, and (registered) investment advisors have long charged AUM fees for investment advice, it’s only in recent decades that brokers have begun to earn AUM-like fees, either in the form of 12b-1 fees (an upfront sales commission paid out over time) or wrap fees (a AUM-based alternative to transactional trading commissions). In other words, some AUM fees are actually for advice, while others are really just a form of levelized commission for product sales or brokerage transactions.

The impetus for this shift does appear to be technology – not robo-advisors necessarily, but the ongoing impact of technology that has, for the past 40 years, brought down transaction costs and sales commissions, from the rise of discount brokerage to the availability of online brokerage accounts that allow consumers to buy no-load funds directly. Which means it’s increasingly difficult for brokers to get paid to broker transactions or sell products, driving them towards AUM alternatives instead.

The caveat, though, is that while there is a “great convergence” of brokers getting paid levelized commissions akin to AUM fees, and investment advisers that continue to receive AUM fees, the regulatory standards for the two are different. Accordingly, it is perhaps no surprise that the regulatory battleground for the past two decades has been about the distinction between brokers and investment advisers (and their suitability vs fiduciary standards) – because the two really are converging around a substantively similar business model.

From the perspective of the advisor, though, the significance of this trend is that the so-called “fee pressure” on the 1% AUM fee is primarily on the 1% distribution charge, not the 1% AUM fee for actual advice. In fact, brokers that struggle to justify their value proposition are increasingly getting their CFP marks and trying to add more value through financial advice, while investment advisers who already gave advice feel the pressure to step up and differentiate in an increasingly crowded marketplace. Which means overall, the real pressure is not on the 1% AUM fee for advice – at least, not at this point – but instead on how salespeople can shift the value proposition of the AUM fee from distribution to actual advice.

Weekend Reading for Financial Planners (Oct 15-16)

October 14, 2016 02:45 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with two interesting studies on advisor trends: the first finds that advisors who outsource investment management are growing substantially larger businesses than those who continue to manage investments in house, and that the result appears to be driven primarily by the direct time constraints that occur when the owner-advisor spends time on portfolio construction instead of meeting with prospects and clients and doing business development; and the second study finds that social media adoption amongst financial advisors is now widespread, with a growing number reporting a material amount of new business development stemming directly from their digital marketing efforts.

From there, we have several articles on practice management and career development, including: a look at how most advisory firms aren't even tracking the volume of new client leads coming in, making it impossible to evaluate whether they're doing a good job with their marketing and sales processes; strategies on how to reach out and develop deeper relationships with Centers of Influence (COIs) to generate referrals; issues to consider when deciding whether it's time to hire another financial planner in the office; and the most common leadership mistakes that financial advisors make in growing firms (all of which are related to the "thinking mistakes" we unwittingly unleash upon ourselves with our own mental attitudes).

We also have a few more technical articles this week, from key talking points with clients about the new money market fund rules that have just taken effect, to the way you can get a 3.5% yield on a government bond (by buying Series EE Savings Bonds!), and tips for finding an alternative to a big national bank if you've decided its time for something different (especially given the recent controversial news about Wells Fargo).

We wrap up with three interesting articles: the first is a fascinating introspective look from Stephanie Bogan, a consultant to advisors who built up a successful business and sold it for seven figures while she was still in her mid-30s, and reflects on how important it is not to confuse achievement and business success with truly finding your passion and purpose; the second is a fantastic reminder from Julie Littlechild of the importance of taking time off to renew, supported by her own research that finds the advisors who are most effectively engaged in their businesses really do tend to be the ones that take the most time off from the business as well; and the last is a discussion of a recent research study finding that the whole concept of "work-life balance" may be the wrong way to view the issue, as it implies a painful zero-sum trade-off, and that pursuing "work-life harmony" is a better way to approach the competing demands of business and life/family.

And be certain to check out Bill Winterberg's "Bits & Bytes" video at the end, which this week includes coverage of a financial advisor who got fired after falling for a cyberthief's "spoofing" attack (where the advisor accidentally processed fake email wire transfer requests), the news that Envestnet has acquired Wheelhouse Analytics (likely in preparation for DoL fiduciary price benchmarking), and the announcement of two new robo-advisor platforms, from Zacks Investment Management (which launched Zacks Advantage) to Merrill Lynch and its new Merrill Edge Guided Investing solution.

Enjoy the "light" reading!

Why “Paying Your Dues” Is Necessary For New Financial Advisors

October 13, 2016 12:29 pm 13 Comments CATEGORY: Personal/Career Development

In the past, learning to be a financial planner was something that you only did after spending years successfully selling financial services products. If you couldn't "pay your dues" by doing the marketing and business development to get enough clients in the first place, you didn't get to go take CFP classes and become a financial planner. You lost your job by failing to validate your (sales) contract.

In today's environment, the tables have turned. Now, increasingly, new financial advisors arrive having already completed their financial planning education and passed the CFP exam. And not surprisingly, they're looking for jobs where they can implement that financial planning knowledge with clients. Only to be told that they, too, must still spend time "paying their dues" in a back-office job before they get the opportunity to work directly with clients.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we dig into the whole concept of "paying your dues", and why it actually is still relevant for financial planners today, even for those who studying financial planning before seeking out their first job.

Because the reality is that doing financial planning well is more than just having the technical financial planning knowledge. It's also about having the skills to communicate with and interact clients - to show empathy - and find and bring on new clients as well. And if you don't understand the inner operations of how the advisory firm works in the first place, you will also struggle to be successful as an advisor, as the reality is that a successful advisory career still means successfully working within, or creating, a business that serves clients, not just sitting across from the clients in meetings.

And in this context, "paying your dues" is no longer just about doing busy work for the sake of busy work, but actually learning what it takes to be a successful financial advisor, and practicing those skills (which takes time, even for the best of us). Just as Michael Phelps trained 6 hours a day for 6 days a week throughout his career - not to pay his dues but because that's what training is - so too should new financial advisors be prepared to put in the time. Not because they're paying dues, but because that's how you really practice and develop and ultimately master your skills as a professional!

Accordingly, new financial advisors should embrace the opportunity for any kind of real job in an advisory firm, even if it's not client-facing. Because anything, from helping with trading to doing operations paperwork, is relevant knowledge when you're getting started and have so much to learn and experience.

Of course, once a skill is mastered, it's time to find a new opportunity - which means moving up in the current firm, or finding a new job at a new firm if necessary. Failing to do so can turn a learning experience into a dead-end career track. But ultimately, that still doesn't mean it's bad to "pay your dues" - it's simply an acknowledge that once you've taken a few years to learn the tasks, do what it takes to move forward and continue to advance your career to the next stage!

How The IDGT Strategy Turns Business Stock Into A Bond For Estate Tax Purposes

October 12, 2016 07:01 am 14 Comments CATEGORY: Estate Planning

For high-net-worth individuals who built their wealth through entrepreneurship and creating a business with substantial value, a significant challenge is not only that the business will someday be subject to estate taxes, but that the continued growth and success of the business just compounds the problem further.

Accordingly, an increasingly popular strategy in recent years to manage this issue is the Intentionally Defective Grantor Trust (IDGT), a unique type of trust structure where the income of the trust is still the grantor’s for income tax purposes, but the assets of the trust are excluded from his/her estate for estate tax purposes. In other words, the trust is “effective” for estate taxes, but “defective” for income taxes.

The benefit of this arrangement is that the value of the trust, and any growth thereon, are excluded from the grantor’s estate. But the fact that the trust is “defective” for income tax purposes is also a good thing, as it means the grantor can pay all of the IDGT’s income tax bills (without being deemed a gift), and can sell the family business to the IDGT in exchange for an interest-only installment note, without triggering capital gains taxes (since the grantor is effectively just selling the business to themselves).

Which means in essence, establishing an IDGT and then selling the grantor’s business to it, in exchange for a promissory note, means the grantor has transmuted his/her assets from a potentially high-return high-growth family business into a low-yield bond (given today’s low Applicable Federal Rates that are used to determine the interest rate for the installment note sale).

And in the long run, this can produce a substantial estate tax savings, to the extent that the business inside the IDGT outgrows the relatively low hurdle rate associated with the installment note. In fact, the strategy can be further leveraged by obtaining valuation discounts on the sale of the family business as well, though notably a recent proposed Treasury Regulation would crack down on such discounts, potentially as early as 2017. Nonetheless, even without a potential valuation discount, the opportunity for estate tax savings in using an IDGT is significant in the long run, simply for the ability of a successful family business to outearn and outgrow today’s ultra-low interest rate environment!

Creating Advisory Firm Processes And Workflows – Tips and Best Practices

October 10, 2016 07:00 am 8 Comments CATEGORY: Practice Management

When you first get started as a financial advisor, the reality is that there is a lot of time, and not a lot of clients. Which is good, because you're the only one available to get anything and everything done!

As the business grows, though, and especially once other staff members are added to the picture, the situation gets more complicated. Suddenly the things that need to get done involve multiple people, who have to coordinate. And there's a greater risk that tasks start to slip through the cracks, because there's a lot to do for existing clients, and prospective new clients, and running the business itself. It's time to begin introducing some process and structure to the business.

In this guest post, Teresa Riccobuono of Simply Organized (a professional organizer who consults with financial advisors about how to get more organized by creating systems and process!) shares some of her own tips and best practices about why creating processes and workflows are important, and how to go about actually getting started at it. Whether it's creating processes in the business itself, or processes for yourself to better manage your time, or processes that can turn into habits that make you more productive... the reality is that as any advisory firm grows, it becomes more and more necessary to systematize what you do, to ensure that your clients get the consistent high-quality service they expect!

So whether you're an advisor who has just hired your first staff member or two (or already have them and are struggling with the coordination to ensure that everything gets done by the right people at the right time), or you're looking for ways to improve your own time management and personal productivity by introducing a little more structure to your daily routine, I hope that you find this guest post from Teresa to be helpful!

Weekend Reading for Financial Planners (Oct 8-9)

October 7, 2016 02:53 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the huge news that Merrill Lynch is fully pivoting its retirement advisors to become level fee fiduciaries, eschewing commission-based retirement accounts entirely by April of 2017, and redirecting self-directed investors who still wish to trade to its Merrill Edge online brokerage platform or a new "robo" platform called Merrill Edge Guided Investing (though notably Merrill Lynch taxable brokerage accounts may still remain commission-based and are not subject to the new fiduciary rules). Also in the news this week was a decision from the DC Court of Appeals that has made a final ruling in favor of the CFP Board over the Camardas, which should end the ongoing lawsuit once and for all... and with the CFP Board's recent change to require mandatory arbitration, will likely be the last dispute any CFP certificant ever has with the organization that sees the inside of a courtroom.

From there, we have a few practice management articles specifically on the topic of hiring and retention, including: tips for hiring and retaining Millennial advisors; how to find the "right" team members by focusing first on cultural fit and passion (as long as the minimum technical skills are there); the importance of managing expectations for new employees to retain them going forward; and how "client-centric" firms aiming for high retention may be too client-centric, driving away their best employees (and ultimately damaging the firm's retention) in the process.

We also have several more technical articles, from a look at how to set "retirement guardrails" to determine when retirees may be spending too much (due to higher spending or poor market returns), to a discussion of how the community property rules interact with retirement accounts (and how a spouse's community property interest doesn't automatically ensure he/she can do a spousal rollover after death!), and an overview of how to use the IRS' Data Retrieval Tool (DRT) now that the 2017 FAFSA season is open.

We wrap up with three interesting articles: the first is a call-to-action for younger planners that despite being the "next generation" of financial planners, the time to lead is now (allowing for more time to build a foundation and enjoy the fruits of their labor!); the second is a look at the idea of practicing "radical generosity", giving especially deep and thoughtful gifts to clients, prospects, and referral sources, as a way to enhance the relationship; and the last is a look at how despite all the ongoing technological progress, the next 20 years may actually be far less disruptive than the past decades have been, as even "innovative" technology in recent years has actually been more incremental than truly revolutionary, and could actually drive consumers even more towards health care, education, and financial advising sectors, that remain uniquely human in their needs.

Enjoy the "light" reading!

The Problem With Trying To Be The Lowest Cost Financial Advisor

October 6, 2016 08:02 am 1 Comment CATEGORY: Practice Management

In an increasingly competitive environment for financial advisors, from the rise of robo-advisors and Vanguard Personal Advisor Services, there are more pressures than ever on us to justify our cost to clients. Leading many financial advisors to question whether it's time to cut AUM fees - or even abandon the AUM model altogether.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, I look at when and whether it ever makes sense to cut AUM fees in an effort to grow the business and bring in more clients.

Clearly, for advisors who are far more expensive than their competition, cutting fees to at least be "reasonably competitive" may be inevitable. But for those whose AUM fees are already reasonable, beware the strategy of trying to attract clients by being the lowest cost financial advisor. Because ultimately, that may attract the most cost-conscious and price-sensitive clients - who may come to you for being the lowest cost, but will just as quickly leave you for another advisors who is just a basis point or few lower... because that's the behavior of clients who seek out the lowest cost solutions!

More generally, though, the real challenge of trying to compete by being the lowest cost provider is that it sets the focus to competing on price, instead of competing on value instead. In fact, for financial advisors who find their prospective clients challenge their pricing, usually the biggest issue is not their pricing at all - it's a lack of differentiation, and the perception from clients that your services are no different than any other financial advisor... which means price is the only comparison left.

In other words, most "price" conversation are actually value and differentiation (or lack thereof) conversations. Which means the real solution is not to adjust your prices - or change your entire business model (e.g., from AUM fees to retainer fees) - but instead to try to improve your differentiation by focusing on a niche or specialization, such that clients will focus on your unique value instead of comparing you to others on price alone! Because for advisors who are truly differentiated with a unique value, clients don't often ask very many questions about price and cost in the first place - because there's nothing to compare you to anyway!