Nerd's Eye View blog

Weekend Reading for Financial Planners (Sep 17-18)

September 16, 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 the big news that State Farm is pulling the ability of over 12,000 of its insurance agents to sell securities products (mutual funds and variable annuities) next April when the Department of Labor's fiduciary rule takes effect, implicitly acknowledging their agents are not providing (fiduciary) advice, and redirecting customers to a "self-directed" customer call center instead... a precedent that may or may not be repeated in the coming months as more major firms reveal their DoL fiduciary plans as the April 2017 effective date looms. Also in the news this week was an announcement the Financial Engines, the massive provider of 401(k) managed accounts and retirement investment advice, is pivoting fully into financial planning as it rebrands its 125 Mutual Fund Store branch locations into "Financial Engines Advisor Centers" to provide personal financial advice.

From there, we have several technical articles this week, including a reminder that with open enrollment coming on October 15th it's a good time to review retirees' Medicare Part C and Part D plans, a discussion of why it's so important to ensure that retirement account beneficiary designation forms are up to date (and how it may be impossible to fix a botched stretch IRA after the fact), and a look at all the different ways that long-term care insurance can potentially be deducted for tax purposes (depending on whether it's purchased directly as an individual, or under various types of business entities).

We also have a series of articles on retirement trends around spending and (continuing to) work, from one study that found we're materially happier when we have a substantial account balance in a checking or savings account (even if the cash is 'idle' and not invested), to another that notes new research studies are finding the 'traditional' even spending plan throughout retirement is actually a terrible way to maximize our happiness, how more and more advisors are talking about at least part-time work in "retirement" to help handle today's low-return environment and the uncertainties of a long retirement time horizon, and a look at whether the growing number of retirees choosing to continue work suggests that perhaps a multi-decade retirement shouldn't be the goal in the first place and that instead it's better to simply plan for a series of "Acts" punctuated by "Work Intermissions" instead.

We wrap up with three interesting articles: the first is an article by John Bogle about how the DoL fiduciary rule is here, it's time to get used to it, and its arrival was really just the inevitable culmination of growing consumerism as businesses increasingly have to respond to consumer demands; the second is a fascinating profile of Robert Moses, who was arguably the most powerful figure in the history of New York City, responsible for building many of its most famous bridges, parkways, and landmarks, and who simultaneously exhibited an incredible Competence to achieve results and terrible personal behaviors that made him widely hated (yet still incredibly successful); and the last is a look at the rising role of technology in financial planning, and how artificial intelligence may be able to help advisors have better conversations and create more engagement with clients... an inevitable future that we'll eventually get used to, despite the fact that now it still seems a bit "creepy"!

And be certain to check out Bill Winterberg's "Bits & Bytes" video showing the awards announcements for all the Best In Show winners of the 2016 Orion Fuse hackathon, including Best Work Saving Development from Orchestrate, Best Business Intelligence from industry newcomer Sisense, and the overall Best In Show winner from compliance provider RIA In A Box!

Enjoy the "light" reading!

Managing “Reverse Age Bias” Against “Older” Financial Advisors

September 15, 2016 08:11 am 1 Comment CATEGORY: Practice Management

A major challenge for new financial advisors is gaining the trust of clients who are typically much older than them... as it can be hard to gain the trust of clients who look at you like one of their children (or grandchildren!).

However, the reality is that age bias isn't unique to newer and younger advisors. A form of "reverse" age bias also exists from younger clients towards "older" and more experienced advisors, where the client may fear that the advisor is going to retire (or even pass away) before the advisor can fulfill their long-term relationship to serve their client!

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at some strategies that experienced advisors can pursue to address this client fear. After all, it is legitimate for clients to be concerned about being repeatedly forced to go through the work of finding a new advisor over and over again if their existing "older" advisors keep retiring before they do!

In fact, given this fear, the best way to address age bias against experienced advisors is to have a solution that ensures continuity for clients. This could be establishing a succession plan, such that the business will outlive the founding advisor (which means clients can continue to be served by the business, even if it's not the original advisor who's servicing them). Or the approach could be to simply sign an "exit planning" agreement that contractually obligates another (larger) firm to buy the practice and continue to serve the clients, again ensuring from the client's perspective that they won't have to search for a new advisor as soon as their current advisor retires.

Alternatively, it may be more appealing to simply shift the nature and focus of the business itself, away from "long-term" relationship-based financial planning (that's hard to deliver on with a limited time horizon), and instead focus on hourly or project financial planning work, which is more "transactional" in nature and doesn't have the same high stakes for clients.

In any event, though, the bottom line is that it really is reasonable for clients to raise the concern: "I don't want to have to start over finding a new financial advisor by working with an experienced one who may retire soon (or that I may outlive altogether)." But that's not an insurmountable challenge for an experienced advisor. It simply means limiting and narrowing the scope of the financial planning engagement, or ensuring that ultimately the client's relationship is really with the advisory firm, and that they can continue to be clients of the business long after the original founding advisor has moved on!

The Sorry State Of Risk Tolerance Questionnaires For Financial Advisors

September 14, 2016 07:01 am 27 Comments CATEGORY: Investments

The requirement that a financial advisor must “Know Your Client”, including his/her tolerance for taking risks, is a universal requirement amongst investment regulators around the world.

Yet a recent survey of the global landscape for best practices in risk profiling by Canadian financial planning software provider PlanPlus reveals a disturbing lack of quality risk tolerance questionnaires (RTQ) and support tools for financial advisors. In part, this appears to be driven by the fact that regulators articulate the principle of “know your client’s risk tolerance” but provide little guidance on how it should be done to ensure that it’s right. And to a large extent, the problem stems from the reality that neither regulators, academics, nor advisors themselves, even have agreement on exactly what key factors of a client’s “risk profile” should be evaluated in the first place.

Nonetheless, a growing base of academic research is beginning to articulate a clear risk profiling framework, from recognizing the separation of risk tolerance from risk capacity, the role of risk perception (and misperceptions) on client behavior, and how “risk composure” (the stability of a client’s perceptions of risk) itself can vary from one cline to the next. Of course, just because these factors can be identified doesn’t make them easy to measure with a questionnaire, especially when it comes to “subjective” abstract traits like risk tolerance. On the other hand, the research suggests that financial advisors just trying to interview clients about risk may not be doing a better job, either.

In the end, the optimal approach may eventually be a combination of both, where psychometrically designed risk tolerance questionnaires assess a client’s willingness to pursue risky trade-offs, and the financial advisor can then assess the client’s risk capacity, financial goals, and ability to achieve their objectives given the constraint of their tolerance. And ultimately, an effective risk tolerance questionnaire may not only make it easier to properly match investment solutions to a client’s needs, but also make it easier to manage client risk perceptions and investment expectations on an ongoing basis. Or at least identify which clients are most likely to be challenged when the next bear market comes along!

How To Set Your Financial Planning Fees Based On Advisor Cost, Value, And Affordability

September 12, 2016 07:01 am 12 Comments CATEGORY: Practice Management

For most of its history, financial planning was compensated through commissions paid on the products that were implemented, or the portfolio that was managed on an ongoing basis, after the initial plan was presented. While unfortunately this framework for financial planning created some conflicts of interest, and limited its reach (to only those who needed a portfolio to be managed or a product to be purchased), it made the pricing of financial planning services rather simple – because the pricing was tied to the existing compensation of existing business models (commissions or AUM).

However, with the ongoing rise of financial planning as a standalone service, so too comes the opportunity to charge standalone financial planning fees, entirely separate from the need to implement financial services products or portfolio management. The good news of this flexibility is that it opens up new segments of consumers to receive financial planning. The bad news is that there’s virtually no existing framework for financial advisors to determine how much they should charge in a world where they can potentially try to charge “anything” they want.

Of course, in the end a financial planning business is only viable if it correctly offers a service that consumers value, can afford, and that can be delivered profitably given its costs. Yet in the context of financial planning fees, each of those mechanisms – the cost (in terms of time) to deliver the service, its affordability for clients, and its perceive value – are each mechanisms that can be used to set a price on financial planning.

For instance, some financial planners might set their pricing based on the cost of their time; financial planning services that take 10 hours per year to deliver, where the financial advisor cost of time is $150/hour, would be a $1,500/year (or $125/month) service. Alternatively, clients might pay based on what they can “afford” to pay, such as a retainer pricing formula based on 1% of income, or 0.5% of net worth (or 1% of investable assets). Or financial planners can price their services based on the perceived value to the client; after all, if high-income clients value their time at $1,000/hour, then they may be willing to pay anything up to that hourly rate, regardless of the cost of the financial planner’s time directly, because that’s what it is worth to the client.

Of course, in the end, setting a proper pricing structure for financial planning services also requires identifying a clear target clientele who will receive the service, to ensure the proper fit of relevant services, with a high perceived value, an affordable cost, that the financial advisor can deliver profitably. Still, even once a target clientele has been identified, the cost of a financial advisor’s time, the value of the financial planning services, and the client’s ability to afford them, are all relevant mechanisms for setting a proper price on financial planning.

Weekend Reading for Financial Planners (Sep 10-11)

September 9, 2016 02:45 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 the FPA is forming a new Member Advocacy Council, intended to poll its CFP professional members and advocate on their behalf when there are concerns regarding the activities of the CFP Board and other regulators. Also in the news this week was the decision of Morningstar to expand its five-pillar qualitative Analyst Ratings to ETFs, which will be evaluated together with mutual funds in the same investment category... and further blurring the already disappearing dividing line between mutual funds and ETFs (which may only accelerate further with the looming DoL fiduciary rule).

From there, we have several financial advisor marketing articles this week, from tips on how to use content marketing to attract referrals, how financial advisors can write and promote a book, the importance of having a formal structure in how you respond to a prospect inquiry (especially via email), and how to better manage situations when a client refers you to a prospect who isn't actually a good fit (given that it can be very awkward to say "no").

We also have a few more technical articles, including: a look at the ever-growing range of retirement income strategies using reverse mortgages; the problem with some liquid alternative mutual funds, that are using swap arrangements to mask their true expense ratio costs; how aggressive allocations to volatile small cap stocks can actually enhance a client's sustainable withdrawal rate (often quite materially); and the key details that advisors must know about the new once-per-year IRA rollover rule (which just took effect in 2015).

We wrap up with three interesting articles: the first looks at how getting more physically active with exercise can not only help to improve physical health, but can improve mood and stir creativity and a cognitive spark; the second is a good reminder that the challenge where some clients don't even know their goals (which makes it hard to plan for them!) is not unique to clients, and that in reality financial advisors often get stuck in their own ruts of not being able to clearly articulate their goals and vision (which makes it hard to build the right business); and the last is a fascinating exploration of the idea that the very nature of setting goals may be fundamentally flawed, and that the real focus should be on continuous improvement and growth without actually setting goals (which just make you feel like you're failing until you reach them, only to usually be unsatisfied upon achieving the goal anyway!).

And be certain to check out Bill Winterberg's "Bits & Bytes" video showing the highlights of Fuse 2016, a hackathon coding event hosted by Orion Advisor Services that brings together the developers from a wide range of advisor FinTech companies to spend three days coding newer and better integrations for advisors to use!

Enjoy the "light" reading!

What Does A Paraplanner Do To Support A Financial Advisor?

September 8, 2016 07:15 am 10 Comments CATEGORY: Practice Management

Given the in-depth nature of the financial planning relationship between an advisor and client, the reality is that any particular financial advisor can only handle so many real clients. It might be 50, or 75, or 100, but ultimately every financial advisor hits a wall, where there's just no more time to do financial planning work for all the existing and new clients. At that point, it's time to hire a paraplanner.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at what a paraplanner actually does for a financial advisor, the average salary a paraplanner earns, and how to decide when it's time to hire a paraplanner and where to look.

Ultimately, the value of hiring a paraplanner comes down to the ability of the financial advisor to delegate the work of constructing financial plans, the deliverables that are provided to upfront and ongoing clients, and support on the wide array of financial planning questions that clients ask. Because the financial advisor will run out of time trying to do all that work and answer all those questions directly, which eventually limits the income and growth potential of the business.

In the long run, though, the real value of a paraplanner is not just the ability to delegate financial planning work so the advisor has more time to serve clients, but the opportunity to delegate client relationships in their entirety, so that the financial advisor can focus on new (and typically, larger) clients. At that point, the advisory firm transitions from a practice - based on the ability of one advisor to serve their clients - into a bona fide business, where clients are clients of the firm (and not just the founder advisor) and the business earns a profit by having other financial advisors who serve clients.

In fact, given the growth potential for an advisory business by hiring a paraplanner, it's generally not a good idea to hire one if you don't plan to grow. Because in the long run, if the business isn't going to grow, eventually the aspirational paraplanner is going to leave and go somewhere else where there are better opportunities. Or they'll go out and launch their own advisory firm instead. Which means if the goal is simply to run a profitable solo practice, the best hire may be administrative support staff, not an upwardly mobile paraplanner.

Because in the end, with the average paraplanner salary hovering from the high $40k to $60k range (depending on geography and competitiveness in the area), it's probably not a good idea to invest into talent for the business, unless the business is really ready to grow and develop the talent. For those firms that do want to hire, though, there are a number of job sites where you can list the opportunity to find a paraplanner, as well as firms that are dedicated to helping find the right paraplanner for your advisory business!

Could The New Morningstar Sustainability Ratings Actually Change Corporate Responsibility?

September 7, 2016 07:01 am 4 Comments CATEGORY: Investments

The idea of having investments be influenced by one’s values and a desire to advance the social good (in addition to personal profits) is not new, but in recent decades there has been substantial growth in various forms of socially responsible investing (SRI) strategies. However, given the relatively limited number of SRI funds in the marketplace, investors haven’t had a lot to choose from, and the nature of buying an SRI fund or not means the investor is either all-in or all-out for the strategy (at least with that particular portion of the allocation).

Yet with the recent launch of Morningstar Sustainability Ratings, in partnership with Sustainalytics, it now becomes feasible to not just “buy an SRI fund” (or not), but to tilt any portfolio towards sustainable investing, simply by choosing the most sustainable of the available choices in any investment category. With Morningstar’s Sustainability Rating applied to upwards of 20,000 different funds (both mutual funds and ETFs), the investor (or advisor) can screen out the lowest-rated 1- and 2-globe funds, or focus exclusively on the 4- or 5-globe funds (given the 1-to-5 globe rating system).

In fact, the raw Morningstar Sustainability Scores actually reveal that some non-SRI funds are just as sustainably invested as their SRI counterparts, when drilling down to look at the underlying holdings. Despite the explicit sustainability mandate, the funds are nonetheless buying companies that align to relevant environment, social, and governance (ESG) factors anyway – ostensibly because some fund managers (directly or indirectly) find those to be good investment criteria, anyway.

Yet with more investors seeking out sustainable investing – particularly amongst the rising Millennial generation – and the potential to use Morningstar Sustainability Ratings to tilt any portfolio towards sustainable investing simply by using the number of globes as a screen, it suddenly becomes possible for sustainable investing to actually begin to influence markets in the aggregate. After all, as the growth of Morningstar style boxes and their supporting benchmarks have shown, a common “scoring system” for investors to assess outcomes can have a significant impact on fund manager behavior. In turn, if dollars shift more towards sustainable investing strategies – even by just tilting at the margin – it gives fund managers more capital to deploy to companies that score well on ESG factors, and draws capital away from the rest, which means corporate leadership may finally have the incentive it needs to truly behave in a more socially responsible manner?

The Latest In Financial Advisor #FinTech (August 2016)

September 5, 2016 07:01 am 1 Comment CATEGORY: Technology & Advisor FinTech

Welcome to the August 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 growing volume of new integrations from independent advisor CRM solutions like Redtail and Wealthbox, which are not only expanding their connections to "traditional" partners like portfolio management and financial planning software solutions, but also "non-traditional" partnerships like Redtail connecting to advisor content marketing platform FMeX and Wealthbox offering a new Slack integration - along with a growing volume of integrations that both companies are creating via Zapier to connect to third-party solutions like the Calendly and ScheduleOnce appointment-setting apps.

Also in the news over the past month is: a looming resurgence from financial planning software provider inStream, as they sign away several key members of the Jefferson National distribution team; the latest V3 version of the WealthAccess PFM portal for clients; the shutdown of competing client PFM portal Guide Financial (as their underlying data provider Intuit shuts down its own Financial Data API this fall); the rebranding of Social Security Timing and Tax Clarity into Covisum; whether FutureAdvisor is about to run away with the B2B "robo" marketplace for banks and broker-dealers as it signs a mega deal with US Bank; how Betterment is opening up a new distribution channel for (smaller) asset managers with a new managed account deal with Cambria ETFs; the buzz around newcomer AdvisorStream and whether they were marketing to financial advisors using fake testimonials; and how the "risk tolerance software" category has become a hot new area for advisor technology, driven less by a demand from advisors and more by a desire for newcomers to emulate the success of Riskalyze, but with the door to new opportunities opening to all as the DoL fiduciary rule drives everyone to step up their process for prospective client due diligence.

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 (Sep 3-4)

September 2, 2016 02:51 pm 6 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a celebration of the index fund, which turned 40 years old this week, as "Bogle's folly" of launching an index fund in the era of stock-picking "gunslingers" is now decimating the very same world of actively managed mutual funds and stockpickers several decades later, as Vanguard passes $3 trillion in AUM and shows no signs of slowing!

From there, we have several technical planning articles this week, including: the newly announced process from the IRS to fix a botched IRA rollover, where individuals can "self-certify" that a rollover should still be eligible, as long as the reason for missing the deadline is one of 11 specified reasons; the trends in long-term care insurance policies, which have become significantly more restrictive in recent years as LTC insurance companies struggle for profitability; how variable annuity companies trying to manage their own risk by requiring "managed volatility" funds and conservative asset allocations are leading to a decline in annuity sales as investors bristle at the restrictions; and how Millennials are introducing a new stage to the traditional investing lifecycle, which isn't just about Growth, Stability, and Distribution, but now also includes a "Recovery" phase where Millennials spend years digging out of long-term debt just to be able to start to save and grow in the first place!

We also have a few articles about the Department of Labor fiduciary rule, from a look at how tech providers are trying to step up to help advisors solve their fiduciary challenges even though advisors aren't asking for new technology solutions (outside of the independent broker-dealer community), to a look at the myths and misconceptions that still surround the fiduciary rule, how large firms are starting to hire third-party independent research firms to help substantiate their investment recommendations (and defend against potential fiduciary liability in the future), and why advisors need to review their E&O coverage to ensure that it will actually cover their potential fiduciary liability once the rule kicks in next April.

We wrap up with three interesting articles: the first provides a fascinating look at the history of financial planning itself, and the origins of the associations and institutions that support financial planning and financial planners today; the second is a new research study on how we decide what to delegate, finding that we're most likely to delegate decisions where we want someone else to take the blame and responsibility for a potential bad outcome (which is great for the delegator, but not so great if you're the financial advisor to whom the client's decision was delegated!); and the last is a review of the new book "Success and Luck: Good Fortune and the Myth of Meritocracy" by economist Robert Frank, which notes that while being talented and hard working still matters to have a chance to succeed, it's increasingly the role of luck to determine who the top winners actually turn out to be (though because "luck favors the prepared", your best chances still come from trying as hard as you can!).

Also, be certain to check out the video at the end, a speech by philosopher Alan Watts about how life isn't like travelling - where it's about the journey and the destination at which you arrive - but is more like music, where the whole point is not to get anywhere, but simply to enjoy the composition itself. Which has profound implications for financial planning, which in today's world is all about treating life goals as a journey to a destination...

Enjoy the "light" reading!

Tips For Getting Your Series 65 License To Become An RIA

September 1, 2016 07:54 am 17 Comments CATEGORY: Client Trust & Communication

With the Department of Labor's fiduciary rule creating a push towards more levelized compensation, many insurance and investment product manufacturers are re-evaluating their commission structures, and a number of broker-dealers are re-evaluating their entire compensation structure as well. And a growing number of financial advisors are deciding that if the regulatory push is towards AUM (or retainer) fees, that they may as well just become (or join) a Registered Investment Adviser (RIA) directly. Which means in the coming year, there may be a surge of Series 65 exam takers.

And so in this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss tips for financial advisors to get their Series 65 license, and what to expect when going to sit for the Series 65 exam.

The good news is that because the Series 65 exam is heavily focused on knowing the underlying laws and regulations that apply to investment advice, it is primarily an exam of memorizing and recalling information. Which means people who are "good at test taking" will find it relatively easy, and for everyone else, it's still a manageable challenge, as long as you put in the hours to study.

In fact, because the Series 65 exam is so popular, there are a number of providers who offer Series 65 study guide materials, practice exams, and other educational content to help pass the Series 65 exam. In practice, the most popular providers appear to be Kaplan's Series 65 live review and practice exams, along with TesTeachers, and for those looking for the most affordable option, consider Robert Walker's "Pass The 65" book (and supporting practice exam questions as well).

Notably, though, the reality is that the Series 65 ultimately qualifies investment advisers to give advice about how to invest a household's cumulative life savings... which arguably means a 3-hour licensing exam alone shouldn't really be sufficient in the first place, and that advisors who are serious about helping their clients should go further, pursuing professional designations like the CFP certification as well. Fortunately, those who do pursue a professional designation, including the CFP marks, the ChFC, and the CPA/PFS, along with the CIC or the CFA, can actually get a waiver to skip the Series 65 exam altogether (though it's still necessary to complete the rest of the requirements to join an RIA as an IAR!).

But the bottom line is that the Series 65 exam isn't really much harder than other common industry licensing exams, like the Series 6 or the state Life and Health license. Most will take 2-4 weeks to study, spending about 20-30 hours, and pass the exam with its required 72% passing grade. Just be certain to spend the time it takes to study and really learn the material!