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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!

IRS Eases Process To Fix IRA 60-Day Rollover Mistakes And Errors

August 31, 2016 07:01 am 8 Comments CATEGORY: Taxes

With its ability to accept a “rollover” from almost all other types of tax-qualified retirement accounts, the IRA has become the most popular type of retirement account, now accounting for a whopping $7.4 trillion of assets (according to ICI). Yet to prevent abuse, IRA rollovers have very specific rules, including only being permitted to do one IRA rollover in a 12 month period, and that any rollover contribution must be completed within 60 days of when the prior account distributed the money.

And unfortunately, the growth in the number of IRA accounts and related rollovers, combined with strict time-based deadlines, has perhaps inevitably led to more and more situations where individuals fail to complete a rollover in a timely manner, which can cause the entire amount of the rollover to become taxable. In turn, this led Congress to grant the IRS the ability to provide individuals a process for requesting a "hardship waiver", via a private letter ruling, to fix a rollover mistake. But the sheer volume of demand for relief has caused the IRS to repeatedly raise the cost of a PLR for a rollover fix, from $95 in 2003 to as much as $3,000 in 2006 and now as high as $10,000 in 2016.

Now, in the new Revenue Procedure 2016-47, the IRS has announced a new and greatly expedited process to receive relief and the ability to fix a botched IRA rollover. If the 60-day deadline was missed for any of 11 different reasons specified in the new guidance – from a natural disaster to an illness or death in the family to an error of the financial institution – the individual can now complete a late rollover contribution as soon as practicable, and simply provide the financial institution a “self-certification” that the rollover was permissible based on one of the specified reasons. And the IRS has even provided a Model Letter for Self-Certification that any individual can use.

Ultimately, the new process won’t resolve every possible scenario where an IRA rollover might be late, most notably where the taxpayer just botches the timing by not paying attention, due to aggressively using the rollover as a temporary personal loan, or due to bad advice from a financial advisor. Nonetheless, for what are likely the overwhelming majority of scenarios, the new self-certification process will make it fast and easy for most individuals to fix legitimately innocent rollover mistakes… though the IRS still reserves the right to evaluate the situation after the fact, and make an adjustment if the individual was not forthright in the process!

Better Advisor Compensation And Other Benefits Of Becoming A CFP Professional

August 29, 2016 07:01 am 7 Comments CATEGORY: Personal/Career Development

Even as the total number of financial advisors is in decline since 2000, the number of CFP certificants has been on the rise, driven by both the rising demand from consumers for financial planning advice, and a need and desire for financial advisors to differentiate themselves by providing financial planning services.

And according to a recent study by Aite Group, it turns out that getting the CFP marks really are good for business, with the average solo CFP certificant generating 40% more revenue, the average experienced solo CFP certificant generating 80% more revenue, and financial advisor teams generating 44% more revenue when they include at least 1 CFP professional. In turn, this results in the average CFP professional generating 14% to 33% more income than non-CFP advisors, even after controlling for years of experience.

Notably, though, the study also finds that while CFP certification is associated with higher income, it’s not necessarily because advisors get new clients simply by showing off their CFP marks. Instead, the positive impact derives primarily from enhanced credibility, improved technical expertise and knowledge (which also leads to better self-confidence as an advisor), and greater client satisfaction with the advisor’s (more comprehensive financial planning) services.

And given that some of the fastest-growing channels for CFP certification are now employee advisor roles at either independent RIAs or “online” brokerage/investment firms with retail advisors (i.e., Schwab, Fidelity, and TD Ameritrade, and now Vanguard), it appears that obtaining the CFP marks are increasingly becoming a key step to climbing the employee ladder as a financial advisor as well.

To say the least, though, with the potential for a 14% to 33% increase in lifetime earnings, at this point the CFP marks continue to more-than-sufficiently-justify the $3,000 - $10,000 required investment into a CFP educational program to obtain the certification!

Weekend Reading for Financial Planners (Aug 27-28)

August 26, 2016 02:53 pm 6 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition leads off with the big news that the Department of Labor's new rule on state-run retirement plans is finalized, and is expected to usher in a new era of states providing for automatic enrollment IRAs for employees who don't have access to employer retirement plans... and raising the question of whether businesses may soon stop offering 401(k) plans themselves, and just allow the state to fill the void instead.

From there, we have several practice management articles this week, from Bob Veres' advice about how to evolve your practice to better adopt technology and start bringing in the next generation of clients, to Ric Edelman's guidance on how to work with the media, a Joel Bruckenstein review of Advicent's new Narrator client portal, and a look at the current dynamics of advisory firm buyers and sellers (and David Grau's new book on advisory firm valuations).

We also have a few more technical articles, including: a new study finding that risk tolerance actually is relatively stable (implying that clients with volatile behavior during times of market stress may be doing it for different reasons); a review of the rules for how the Expected Family Contribution (EFC) is calculated for college financial aid; how the Initial and Special Enrollment Periods work for Medicare; and coverage of newly proposed Treasury Regulations that would severely crack down on the use of valuation discounts for family businesses, and curtail most family limited partnership (FLP) planning strategies.

We wrap up with three interesting articles: the first looks at the looming challenges that FINRA faces in trying to justify its existence and deal with a declining membership base of broker-dealers as CEO and Chairman Richard Ketchum retires, to be replaced with a new split-role CEO and Chairman; the second is a somewhat comic look at the things that some "financial advisors" say that suggests they're really still operating as salespeople (and how you need to really change your way of thinking to fully transition to being an advisor); and the last is an interesting historical look at the roots of the fiduciary duty, which actually traces back more than 1,500 years to Roman times, as even then it was recognized that experts in positions of trust need to be held accountable to a higher standard.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, which this week includes coverage highlighting LPL's technology roadmap after the recent LPL Focus 2016 national conference (including its new "robo"-for-advisors Guided Wealth Portfolios), FutureAdvisor signing a deal with US Bank (the 5th largest commercial bank in the US!), and Betterment's new partnership with Uber that will allow Uber drivers to open an IRA directly from the Uber app!

Enjoy the "light" reading!

Overcoming Age Bias: Tips For Young Financial Advisors

August 25, 2016 09:11 am 10 Comments CATEGORY: Client Trust & Communication

For most of the past several decades, getting started as a financial advisor meant "smiling and dialing", reading cold-calling scripts while sitting in a cubicle, trying to convince the person on the other end of the phone to buy something. The bad news is that cold calling was a brutal numbers game full of rejection. The "good" news was that at least young advisors didn't have to worry about age bias from their prospects, who couldn't see them and had no idea how old they were. But as financial advisors shift to actually giving face-to-face financial advice - and with the rise of the Do Not Call list - it has become an even greater challenge for young financial advisors to get credibility with prospective clients and overcome (young advisor) age bias.

And so in this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at the steps that young advisors can take to overcome the inevitable age bias they will face in meeting with prospects and clients, particularly as the advisory industry increasing focuses on Baby Boomers (who in many cases are old enough to be a new advisor's parent or even grandparent!).

The first key to success is simply building confidence as a young financial advisor. Because if you're not confident that you can deliver value to your (older) clients, they won't be confident in you, either. For some, it might be enough to "fake it until you make it". For others, it's necessary to get certifications like the CFP marks, or even additional post-CFP designations, to really establish their credibility and find their confidence.

Second, recognize the impact of first impressions... and the ability you have to control it. How you dress, and the impression it gives, is something you can control. As is the way you communicate with clients by telephone or email before you meet with them. While you can't eliminate the fact that you're young, you can at least give the impression that you're an especially competency and well put together young man or woman!

Third, consider taking classes to build your skills of active listening and empathy. Because the truth is that clients won't really trust you, until they truly feel that they're being heard and understood. Doing that well is a skill that takes time and effort to develop.

But the bottom line is that if you're a young financial advisor struggling with age bias, it doesn't have to be crippling. Find what it takes for you to be confident in yourself, and do your best to manage the first impression that prospects and clients form of you... and if necessary, ask your mentors and senior financial advisors to support you and your credibility in front of clients as well!

Using Active Share To Evaluate The Reasonableness Of An Investment Management Fee

August 24, 2016 07:01 am 3 Comments CATEGORY: Investments

Financial advisors and investment management consultants have long recognized that different fund managers have different investment styles. Some focus on stock picking, while others rotate amongst sectors or asset classes based on macroeconomic bets. And those who don’t think active managers can do any of those things successfully simply buy index funds.

In recent years, though, Martijn Cremers and Antti Petajisto have published research suggesting that many active managers may be closer to an index fund that their investors realize. These “closet indexer” funds can be identified by their low Active Share – a measure created by Cremers and Petajisto to measure the extent to which a portfolio’s holdings deviate from its underlying benchmark, which appears to do a better job than tracking error at identifying which fund managers are really making active bets (or not).

And the Active Share research finds that closet indexers really do tend to underperform. Of course, the result that isn’t entirely surprising, as in general index funds are expected to underperform their benchmark by the amount of their fees, and an actively managed fund with a higher active management fee that really just holds the benchmark anyway would simply amount to an unusually expensive index fund.

Which means Active Share itself can be an effective way to evaluate the appropriateness of an investment manager’s fee in the first place. Funds that have low Active Share and resemble their benchmark will behave like index funds, and should charge index-fund-like fees. By contrast, funds that have higher Active Share – which are taking a larger portion of active portfolio bets – at least have the potential to outperform their higher active management fees. Though ultimately the jury is still out about whether high Active Share funds really outperform on average, or are simply an indicator of which funds might be able to outperform!

Complying With The Broker Protocol When Changing Firms Or Going Independent

August 22, 2016 07:01 am 4 Comments CATEGORY: Practice Management

While advisors working at broker-dealers typically think of the clients they work with as “their” clients, the legal reality is that they are clients of the broker-dealer, not the broker themselves. As long as the broker continues to work at that broker-dealer, this may be a distinction without a difference. But as soon as a broker wishes to change broker-dealers or break away to an independent RIA, significant issues arise, from violating employment contracts by soliciting clients for a new firm while you still work for a new one, to rules protecting client privacy that prevent a moving broker from taking any client information with them.

In the early 2000s, litigation related to broker-dealer recruiting and changing broker-dealers had reached such a fever pitch, the major wirehouses Smith Barney, Merrill Lynch, and UBS executed a form of “cease fire” treaty, dubbed the “Protocol for Broker Recruiting”, and stipulating the terms under which a broker could depart a broker-dealer, and take (limited) client information, without spurring the litigation and temporary restraining orders that were common at the time.

Since 2004, the Broker Protocol has expanded from 3 founding firms to nearly 1,500, and is the essential roadmap for how a broker can leave their current broker-dealer in the cleanest and most efficient manner possible. The good news is that in the years since the Broker Protocol agreement was first signed, thousands of brokers have made successful transitions away from their original broker-dealer. However, the broker-dealers have still made it clear that any broker who does not fully and perfectly comply with the Broker Protocol may still be the subject of aggressive lawsuits seeking to limit their actions.

In this article, we look at the details of what the Broker Protocol is, what exactly brokers must do to comply with its terms and requirements, and the best practices and issues to consider when preparing for a transition away from a broker-dealer to another firm, or when going independent altogether.

Weekend Reading for Financial Planners (Aug 20-21)

August 19, 2016 02:51 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the news that just two weeks after the Social Security Administration launched a privacy protection initiative that would require seniors to use two-factor authentication via their cell phones to log onto MySocialSecurity, it's backing off the initiative and making it optional, as senior advocacy groups have pointed out a large number of seniors can't even receive a text message. Also in the news this week is a new SEC filing from Vanguard that it's exploring the potential launch of a new series of transparent active ETFs, bucked the trend of competing asset managers who have insisted that active ETFs must be more opaque to prevent front-running.

From there, we have several financial advisor marketing articles this week, from a look at how to find the "perfect" client fit (through specialization), the "must have" elements for a modern financial advisor website, the indirect reasons why many financial advisors are struggling to get new clients (without realizing the turn-offs they're unwitting conveying), and a discussion of whether sponsorship deals really pay off as a form of financial advisor advertising (the short answer: yes, but only if you leverage it for networking purposes).

We also have a few practice management articles this week, including: various types of personality assessment tools you can use when hiring a new financial advisor (from DISC and StrengthsFinder to Caliper and Profile XT); an overview of the marketplace of RIA strategic acquirers and what the different types do (and don't) provide in the deal for those who want to sell; and why an employee "sponsorship" program is even better than just establishing a mentorship relationships for your top employees.

We wrap up with three interesting articles: the first is coverage about a new study that finds it really is detrimental for clients to watch the financial media, as even when we know the quality of the information is low, we still can't help but give a disproportionately high weighting to the "noise"; the second is a critique of FINRA's big push for its BrokerCheck system, suggesting that more promotion of BrokerCheck when FINRA still hasn't resolved issues from expungement of serious complaints to not verifying or giving context to frivolous ones means FINRA's efforts are primarily about helping FINRA show its relevant, rather than actually help consumers; and the last is an striking suggestion from financial advisor Tim Maurer about why it's better to plan to take one long 10-day vacation, rather than splitting up two weeks of vacation throughout the year - most substantively, because with the rapid pace of today's work environment, it takes at least half of a 10 day vacation just to unwind and relax enough to actually enjoy it and harvest its restorative value!

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, which this week includes coverage of two big integration deals that robo-advisor-for-advisors Vanare recently announced (with Redtail CRM and Apex Clearing), and enhanced calendar and contact data gathering features in Salesforce (from its Tempo and RelatedIQ acquisitions).

Enjoy the "light" reading!