Nerd's Eye View blog

Weekend Reading for Financial Planners (Aug 13-14)

August 12, 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 the big news that 7 major universities, including Duke, Yale, and MIT, were all sued this week in class action lawsuits over the investment and record-keeper expenses of their 403(b) plans, opening a new chapter in the ongoing ERISA backlash against large employer retirement plans for failing in their fiduciary duty to manage their costs for employees. Also in the news this week was discussion of the ongoing shifts in money market funds, in preparation for new rules rolling out in 2 months that could introduce redemption fees and even floating NAVs for some money market funds.

From there, we have a few practice management articles, including: a review of upstart RIA custodians Equity Advisor Solutions and Folio Institutional; how TD Ameritrade continues to maintain its lead as the RIA custodian with the widest breadth of integrations thanks to its open architecture VEO platform; how the rising tide of ERISA fiduciary lawsuits may be shifting 401(k) plans to prefer 3(38) outsourcing providers over 3(21) plan consultants; and how advisory firms should consider measuring not only the productivity and efficiency of their financial advisors, but also their operations staff.

We also have a several more technical articles, from a look at what questions and issues to consider when selecting a donor-advised fund, to how shifts in the working habits of women and mothers have decreased the relevance of Social Security's "family" benefits (and whether a new caregiver credit should be introduced for working mothers), and whether retirement income strategies that combine portfolio withdrawals and laddered annuity purchases may be more effective than either is alone.

We wrap up with three interesting articles: the first looks at how financial advisors need to burnish their public perception by showcasing the best of what financial advice can provide (to combat the slew of negative perceptions about the broader financial services industry); the second urges financial advisors to be more careful about the language they use to describe themselves, noting that if we can't appropriately distinguish between the profession and the industry, between advisors and salespeople, and between clients and customers, then what chance do consumers and the media have; and the last calls on professional financial advisors to adopt and embrace the DoL fiduciary rule, noting that all true and bona fide professions have a fiduciary duty to clients, and that the implementation of a fiduciary rule for financial advice could mark the starting point for the true emergence of the financial planning profession.

Enjoy the "light" reading!

Should Paraplanners Get Time Off To Study For CFP Certification?

August 11, 2016 08:14 am 14 Comments CATEGORY: Personal/Career Development

It takes a substantial investment to earn the CFP certification. The financial cost can be significant, between signing up for the educational classes, potentially take a live exam review course, and enrolling for the CFP exam itself. And the cost in terms of time is significant, too - for many, the entire process often takes 12-18 months of putting in the hours it takes to learn the material. Fortunately, at least some advisory firms are willing to help share in some of the costs.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at the question of how much should an advisory firm be expected to invest for a paraplanner to get the CFP marks? And in particular, if an advisory firm is willing to help cover the financial cost, is it appropriate to ask for time off to study as well?

The short answer: No. While a growing number of firms will at least support the financial cost of CFP coursework - in part, because it may be outright too expensive for many entry level paraplanners to afford on their own - most firms will still reasonably expect the paraplanner to make an investment, too. Which means if the paraplanner can't put in the dollars, at a minimum he/she can put in the time it takes to study.

Given the commitment, that may well mean that a paraplanner who wants to earn their CFP marks and get promoted will have to carve out from their personal time in the evenings and on the weekends to study. But the reality is simply that sometimes, that's what it takes to get ahead. You always have the choice to not make the investment, and remain in the job you're currently in. But if you want to take your career to the next level, you have to find a way to make the investment in yourself, and not just expect the firm to give you the dollars and the time!

Most FLP Valuation Discounts Would End Under Proposed Treasury Regulations

August 10, 2016 07:01 am 17 Comments CATEGORY: Estate Planning

Using a Family Limited Partnership (FLP) or Family LLC to obtain favorable valuation discounts on gifts or bequests has been a staple of high-net-worth estate planning for the past 15 years. While IRC Section 2704, passed in 1990, was intended to limit the aggressive use of valuation discounts, over the decades since a number of Tax Court cases, along with evolving state laws, have undermined the IRS’ ability to enforce those rules.

Accordingly, after years of failed attempts to get Congress to update the rules, the Treasury department has decided to pursue its own crackdown, in the form of newly proposed 25.2704 Treasury Regulations. In fact, the proposed Regulations under Section 2704 are so expansive, that they would severely limit the use of valuation discounts for any type of family limited partnership or other family business transfer, where the family will retain control before and after the gift or bequest occurs.

The new rules would include the imposition of a new 3-year lookback to determine whether a minority valuation discount should apply (limiting deathbed transfers used to create a minority interest), the introduction of new “disregarded restrictions” that go beyond the already-ignored “applicable restrictions” in situations where the family will retain control after the transfer (and effectively create an implied put right for any recipients of a transfer, which significantly curtails most valuation discounts), and a shift away from only looking at restrictions that are “more restrictive” than available state law (given that many states have already shifted their laws to become more restrictive in recent decades).

Fortunately, the proposed Treasury Regulations must go through a 90-day public comment period through November, following by a public hearing in December, and must then be re-evaluated before final issuance (which in turn wouldn’t take effect until 30 days thereafter). And of course, the more restrictive rules are a moot point for the overwhelming majority of families – including family businesses – that still don’t have a value high enough to trigger estate taxes given an exemption of $5.45M for individuals and $10.9M for most couples.

Nonetheless, for those high-net-worth families who are over the estate tax thresholds, just a few months remain to engage in transfer planning to maximize current valuation discounts before the new rules take effect!

Will There Ever Be A #FinTech Advisor Platform Business Like Uber Or Airbnb?

August 8, 2016 07:01 am 20 Comments CATEGORY: Technology & Advisor FinTech

In the span of barely 10 years, companies like Uber, Airbnb, Facebook, and Alibaba have experienced explosive growth, far surpassing the growth rate of their respective industries, and despite the fact they don’t actually produce anything themselves.

Yet in fact, that’s the whole point; they are platform businesses, and their role in facilitating a marketplace between consumers and producers is the primary form of value creation, not the production of goods and services themselves. In the process, these platform businesses have been out-competing or outright disrupting their respective industries, raising the question of whether – or when – the platform model will come to financial services as well.

In point of fact, though, the financial services industry is already filled with platform businesses. Arguably, stock market exchanges are one of the oldest and original types of platforms to connect buyers and sellers. And custodians and broker-dealers constitute a form of platform business as well, connecting advisors and the asset managers who want to reach them. Envestnet is quite possibly an even purer form of platform business, avoiding the hassles of actually being the custodian or doing the clearing, and instead just serving as technology that facilitates the matchmaking process between advisors and asset managers.

Still, this means the door remains open for an actual financial advisor matchmaking platform, that connects consumers directly to financial advisors themselves. Prior attempts at this model have largely failed, likely due to the fact that most advisors are such generalists that it’s not really feasible to match them effectively with consumers in the first place. In turn, this suggests that a successful platform in the future will need to focus not on pairing consumers with advisors, but on helping consumers find an advisor who can answer their particular question – which forces advisors to actually choose a niche specialization by which they can be matched. Which means in the end, the real platform opportunity of the future is not a financial advisor platform, but a financial advice platform instead!

Weekend Reading for Financial Planners (Aug 6-7)

August 5, 2016 02:51 pm 3 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the news that FINRA is beginning an exam sweep of Business Development Companies, raising questions of whether nontraded BDCs may have similar issues to nontraded REITs, which is concerning given how sales plummeted for nontraded REITs after regulators last year applied new rules requiring greater transparency and disclosure. Also in the news this week is a discussion of Andy Millard, a CFP certificant and Democrat from North Carolina who is running for the House of Representatives, who is a long shot running in a district that hasn't voted for a Democrat in the House since 1960, but could become the first CFP professional elected to Congress (which would be very important given the potential for additional regulatory scrutiny of financial advisors in the coming years).

From there, we have a few practice management articles, including: how profession-based niches may be too narrow for some, and whether life-stage-based niches that are a bit broader may be better; how the rise of independent advisor platforms and aggregators may have done much to accelerate the breakaway broker trend, but may be asking too much of a breakaway's revenue or profits to be sustainable; tips for attracting and retaining Millennial financial advisors; and the importance of understanding exactly how "Assets Under Management" is defined for regulatory purposes (and how just giving financial planning advice about a client's whole portfolio doesn't necessarily constitute Regulatory AUM).

We also have a several more technical articles, from a look at how traditional long-term care insurance sales continue to decline (now down a whopping 85% in policies sold since the year 2000) even as hybrid life/LTC policies are on the rise (though they have problems of their own), to an analysis of whether those claiming Social Security at age 62 are making a mistake (or if in reality early claimants are primarily those who have to claim early due to an unexpected employment or health shock), and a good primer on the various types of student loan forgiveness programs (for Millennials with student loan debts who are willing to work in the teaching, government, or non-profit sectors).

We wrap up with three interesting articles: the first looks at how willingness to delay financial gratification, even amongst seniors, is a good predictor of how effective they were at being savers and accumulating wealth (though it remains unclear whether such 'financial patience' is learned or genetic); the second provides a great reminder about how finding a job you love not only can make you happier and more satisfied, even if it pays less, but may be so motivating that it helps you to reinvest in your training and education and become an expert, which can lead to higher income as well; and the last looks at the research on why it's important to set not just goals that guide how you must incrementally change to improve, but to set Big Goals that force you to recognize the substantive changes you may need to make to achieve sustained and large improvements in your business (or personal life) over time.

Enjoy the "light" reading!

Why Reverse Churning Is About To Become A Big Advisor Problem

August 4, 2016 07:54 am 14 Comments CATEGORY: Investments

Historically, churning - where a broker encourages excessive trading in a client's account in order to generate a large volume of trading commissions - has been a significant regulatory concern. In fact, the rise of fee-based brokerage and wrap accounts, and the ongoing shift to advisory accounts, has been driven heavily by regulators encouraging the switch, specifically because brokers who aren't paid based on the number and frequency of transactions don't have any incentive to churn accounts. However, it now appears that the efforts to stamp out churning may have been "too successful" - giving rise to an emerging new problem: reverse churning.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at the concept of "reverse churning", where an advisor charges an ongoing investment management fee, and how it is likely to be a growing regulatory concern in the coming years, as the DoL fiduciary rule spurs a massive shift towards various forms of fee-based brokerage and advisory accounts.

Arguably, the regulatory concern about reverse churning - where advisors charge an ongoing investment fee but fail to provide any substantive ongoing investment services - is appropriate. However, the scrutiny on reverse churning raises troubling concerns when paired with the growing popularity of using index funds, ETFs, and passive investment approaches. How is an advisor supposed to justify an ongoing advisory fee when the right thing for the client to do might really be to do nothing? And what if the bulk of the advisor's AUM fee is actually for other non-investment (i.e., financial planning) services, paired together with an otherwise passive investment portfolio?

Ultimately, the regulators may be pressured in the coming years to more clearly delineate the difference between true reverse churning, and a prudent passive investment approach. But in the meantime, advisors that charge AUM fees - especially those who espouse a passive investment philosophy - would be well served to clearly and rigorously document exactly what they do for clients on an ongoing basis, to avoid the risk of a reverse churning allegation in the coming years!

The Tax Risk Of Too-Tax-Efficient Investment Strategies

August 3, 2016 07:01 am 13 Comments CATEGORY: Investments

Judge Learned Hand once famously stated that “Any one may so arrange his affairs that his taxes shall be as low as possible” and that there’s no duty to pay any more in taxes than is absolutely necessary. And the corollary when it comes to an investment portfolio might be “Any one may so manage a portfolio to defer taxes as long as possible,” given that if the investor ever intends to use the money, eventually the tax bill must still come due, but it still pays to minimize tax drag along the way.

Yet while it’s appealing to manage investments in a tax-efficient manner – or buy “tax-managed” mutual funds to do it for you – in today’s tax environment, there actually is such thing as being too tax efficient and deferring too much in taxes for too long.

The reason is that since the beginning of 2013, investors effectively face four different capital gains tax brackets (including the 3.8% Medicare surtax on net investment income), with higher rates applying to higher levels of income and larger capital gains. Which introduces the possibility that an investor is so tax efficient, and defers their tax liability for so long, that when the taxable event finally occurs, the sheer size of the gains propel the investor into higher tax brackets, who then ends out finishing with less wealth!

Which means ultimately, while “tax drag” is bad, and strategies to minimize it – such as tax loss harvesting – are valuable, doing too much tax minimization now can just cause even more harm later. Instead, for some investors, the best approach is to recognize that in low tax rate years it’s better to harvest the gains instead of the losses. And in other situations, the best way to minimize tax drag is not to buy a tax-managed mutual fund at all, and instead leverage the asset location opportunity of sheltering growth investments that generate capital gains inside of an IRA (or ideally a Roth IRA) instead.

The Latest In Financial Advisor #FinTech (July 2016)

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

As technology plays an increasingly central role in the business of financial advice, the pace of change is accelerating. After years of limited development and progress – from 2002 to 2012, the biggest “news” for most advisor technology providers was simply that they had finally moved from server-based to a cloud-based platform – the arrival of “robo-advisors” highlighted how far financial services technology had fallen behind. The end result: while robo-advisors aren’t competing much with financial advisors directly, they have set off an arms race of technology firms aiming to serve financial advisors.

To help my fellow financial advisor community keep up with the most important developments, I’m launching what will become a new regular column on the first Monday of every month: the latest in Financial #AdvisorTech.

The goal here will be to highlight the significant news and developments in advisor-related technology over the past month, from major software releases, to big news on new integrations, companies raising capital (or shutting down), and highlighting new #AdvisorTech providers coming to the forefront with new solutions that advisors might want to check out.

In this month’s inaugural issue, we look at the news that RightCapital (a new financial planning software provider) has raised $1M in seed funding to grow their tax-savvy planning solution for advisors, the announcement from EverPlans (an estate planning document value that advisors offer as a perk to their clients) that they have raised $6M in their Series A round (even as some other new estate planning tools like Yourefolio and EstateGen have appeared on the scene), Microsoft’s launch of a new online scheduling tool called “Bookings”, the merger of Citrix and LogMeIn (which may eventually combine together the popular advisor video meeting apps GoToMeeting and Join.Me), how we may truly be past the “peak robo” moment as several more robo-advisors have either shut down or are struggling to retain talent, and a quick look at whether Apex Clearing may be trying to get their foot in the door as a new RIA alternative to Schwab, Fidelity, and especially TD Ameritrade.

I hope you find this new column 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 (July 30-31)

July 29, 2016 02:45 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with news on the Department of Labor's proposal that would clear the way for state-based automatic enrollment into IRAs for employees of small business, which has been sent as a final proposal to the Office of Budget and Management (OMB) and is expected to be approved within a month or two, ushering in a new era of accessibility for automatic-enrollment retirement savings.

From there, we have several additional articles on the ever-shifting regulatory landscape for advisors, including a look at what RIAs will have to do to comply with the Department of Labor's fiduciary rule (which will have less impact on RIAs than broker-dealers, but still introduces new compliance obligations), how the DoL's "grandfathering" rule allowing existing commission trails to continue may have the unintended consequence of limiting the ability for registered reps to change broker-dealers next year, and a discussion of the SEC's looming push for an initiative that would start using third-party examiners to increase oversight of RIAs or whether the agency should wait and study current RIA practices to understand which ones really do (or do not) need greater oversight in the first place given the modern role of independent custodians that RIAs work with.

We also have a few practice management articles this week, including: how advisors can improve their marketing by being more transparent about their services and pricing; tips for dealing with introverted vs extroverted prospective clients, and how to frame questions differently to better engage them; and how connecting with and providing even basic advice services for clients' children is associated with a higher likelihood of getting referrals (though it's not clear if that's because helping the children drives referrals, or if clients who refer are more likely to push their advisor to work with their children, too).

There are a couple of investment-related articles as well, from a look at how FinaMetrica (known for its academically rigorous risk tolerance questionnaire) is pairing with both RiXtrema and Macro Risk Analytics to provide more robust tools to analyze a client's current portfolio and compare it to their risk tolerance, a discussion of whether near-zero or negative yields could actually be a sign of prosperity and not looming global deflation, and a look at how asset managers are still struggling to gain traction with actively managed ETFs.

We wrap up with three interesting articles: the first is a discussion of how the media's focus on "newsworthy" events, combined with ever-improving access to information about what's happening in the world, may be causing us to mistakenly believe the world is getting worse, when in reality it's never been better (we're just more aware of a smaller number of bad events than we were in the past); the second is an interesting study from the Journal of Financial Planning finding that advice on savings/investments and tax planning really do lead to higher financial satisfaction, but advice regarding debt, mortgages, and insurance does not (unless it's all paired together holistically); and the last is a fascinating look at how those who enjoy their work the most tend to have the best career progress, the most retirement readiness, yet are the least interested in retiring (because they enjoy their work!), while those who are most miserable in their jobs are the ones who most want to retire but may struggle with earning enough to achieve that retirement, suggesting that the real key is not in doing better "retirement planning" but in helping to guide clients to more fulfilling careers in the first place.

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 a flurry of "robo-advisor" news (from the launch of Fidelity Go to announcements that TD Ameritrade and Wells Fargo are working on "robo" tools), along with news from Envestnet/Tamarac on the roll-out of its "Client Portal 2.0", and MoneyGuidePro releasing a new DoL fiduciary software tool called "Best Interest Scout".

Enjoy the "light" reading!

Financial Advisor Practice Vs Business: What Are You Trying To Build?

July 28, 2016 01:33 pm 14 Comments CATEGORY: Personal/Career Development

The path of becoming a financial advisor is viewed as a very entrepreneurial one, starting from scratch and building a client base who pay you for services, growing over time into a business that can generate substantial income for the advisor/owner/founder. The growing trend of independent advisors, whether in RIA or broker-dealer form, just further emphasizes the entrepreneurial spirit of the financial advisor community, and their desire to build businesses of value... or at least, a practice that can generate substantial ongoing income throughout their working years.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at the key distinction between building a business versus a practice. Because while the terms are often used interchangeably, the reality is that they're actually very different roles.

Building a successful practice means getting clients who will pay you for your services, and leveraging your personal productivity to serve them effectively. By contrast, building a successful financial advisory business is about hiring other advisors who will be paid for their advice, and building the infrastructure necessary to support them, and ensure that clients are served well. In other words, it's the difference between delivering financial advice yourself, versus building a business to deliver financial advice.

And the difference matters, because the reality is that a practice can generate substantial income for successful advisors, but will only ever have very limited enterprise value. On the other hand, a bona fide advisory business can become an extraordinarily large financial asset, but comes at a cost of what could be years or decades of lower income as dollars (and a lot of sweat equity) are reinvested back into the business to continue to grow it. One benchmarking study recently found that it takes growing an advisory firm to more than $1B of AUM, just to get the partner/owners back to the same take-home pay that the most successful solo advisors can generate.

Ultimately, the choice is the advisor's about which to build - a business vs a practice - but it's crucial to recognize the difference, to ensure that you're building what you really want!