Nerd's Eye View blog

The Coming #FinTech Divide Between Investment And Financial Planning Firms

June 27, 2016 07:01 am 8 Comments CATEGORY: Technology & Advisor FinTech

While there are an ever-growing number of advisory firms operating on the AUM model and offering “wealth management” services, there is still a significant gap between those that are ultimately still investment-centric, and the firms that are truly focused on financial planning first.

The significance of this difference in the culture of an advisory firm is that it impacts not only the depth of its investment vs financial planning services, but that it also shapes the technology decisions of the firm. Because the investment-centric firm is typically built around its portfolio accounting software as its core, while the financial-planning-centric firm uses its financial planning and CRM software as the hub of the business.

Yet despite the substantively different technology needs of the two firms, the overwhelming majority of advisor technology is still being developed for investment-centric firms, with at best only a token nod towards financial planning goals – even though, ironically, the financial-planning-centric software solutions often command a premium price in the marketplace!

Nonetheless, as the commoditization of investment management continues to drive more firms towards offering comprehensive financial planning services, the technology shift is beginning, from the rise of Turnkey Financial Planning Platform (TFPP) technology solutions, to the rising demand of planning-centric firms for a more financial-planning-centric client experience. Will advisor technology solutions step up to fill the void?

Weekend Reading for Financial Planners (Jun 25-26)

June 24, 2016 02:51 pm 4 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a few articles on today's big #Brexit news, including a look from the Economist at what the economic ramifications really are (and why the early market decline may be more of a response to the uncertainty caused by the "Leave" vote than the actual economic impact), and a discussion from Vox about how the establishment framed the Brexit Remain vote as being about the economy but the Leave decision appears to have been primarily about immigration - specifically, a backlash against the explosive rise of immigration into Britain over the past 20 years (and especially the past 10) in the European Union.

Also in the news this week was an eye-popping $415 million fine from the SEC against Merrill Lynch, which found that Merrill had used derivatives trades to mask what was actually using the cash in customer brokerage accounts for its own trading purposes... and although it doesn't appear any customers were actually harmed, they could have been severely impacted if Merrill Lynch had experienced financial distress, and the SEC indicated that this punishment against Merrill Lynch for violating the Customer Protection Rule may just be the start of a sweep to investigate if any other brokerage firms were doing the same thing (and the SEC has even offered "cooperation credit and favorable settlement terms" for firms that quickly turn themselves in).

From there, we have several notable news stories regarding the Department of Labor's fiduciary rule, as it's becoming increasingly clear how companies are positioning themselves for a new fiduciary world. It turns out that major wirehouses have so shifted in favor of fee-based accounts that many actually opposed the SIFMA and FSI lawsuit against the Department of Labor (with Wells Fargo at one point threatening to quit SIFMA altogether), indexed annuity providers have discovered they may need to create a broker-dealer to sign the Best Interests Contract when their annuity agents sell into IRAs (as annuity companies don't want to sign on for fiduciary liability for independent annuity agents they can't even oversee), and Jackson National (the country's largest annuity provider) announced it is creating its first low-cost fee-based variable annuity that will include a wide range of living and death benefit guarantees.

We also have a few practice management articles this week, including: how to evaluate whether your advisory firm is growing sustainably or may be understaffed (or overstaffed), a good reminder (especially for young advisors) about how weighty of a decision it really is to become an owner/partner of an advisory firm, and a good framework to think through how to explain your value proposition as an advisory firm and differentiate yourself.

We wrap up with three interesting articles: the first looks at how the rise of machine learning algorithms mean that in the future we may no longer "code" computers but instead just "train" them like animals (which makes the process more efficient than crafting complex code, but may make computer programs so complex that even as humans we can't figure out how they work anymore); the second is an interesting discussion of how clients having a "scarcity" vs "abundance" mindset can significant impact their financial behaviors; and the last is a fascinating look at how the focus of the "income inequality" discussion has centered on the top 1%, but it turns out the "upper middle class" (incomes of $100,000 to $350,000 in today's dollars) is actually the segment with the most explosive growth in the past 35 years (from 12% in 1979 to nearly 30% today), which both helps to explain why there's so much stress about income inequality in the middle class (which is splitting into a "lower" and "upper" middle class with increasingly unequal incomes), and perhaps the rise of financial planning itself (given that advisors today disproportionately serve that upper middle class segment).

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 3 days of video highlights from the recent 2016 Morningstar Investment Conference!

Enjoy the "light" reading!

Where Do You Find Financial Advisory Firms For Sale?

June 23, 2016 02:01 pm 14 Comments CATEGORY: Practice Management

Most advisors initially build their businesses organically, one prospective client at a time, through networking to establish personal relationships that lead to referrals (and then getting clients who can provide even more referrals). And as the number of clients grows, so too does the staffing of the firm to support and service them. Until eventually, the firm has enough infrastructure that it becomes appealing to not just get new clients one at a time, but to grow inorganically by acquiring an(other) advisor's entire client base.

Accordingly, in this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at how advisors who want to buy can actually find an advisory firm available for sale. From the buyer's perspective, where do you go to find the sellers?

Unfortunately, the reality is that finding sellers is difficult, because there actually aren't very many. One advisor marketplace estimates there are as many as 50 buyers for every seller, as growing firms have grown a hunger to acquire far faster than the number of baby boomer advisors have decided they're ready to sell.

As a result, advisors looking to acquire can check out "marketplaces" like FP Transitions, RIA Match, and Succession Link, but must face a significant amount of competition from other buyers. For some, the more appealing alternative is to look for potential sellers amongst an existing group of colleagues, such as fellow advisors in your association membership group, broker-dealer, or custodian.

In fact, because an advisory firm acquisition won't go well (or won't happen at all) unless there is a good philosophical and cultural alignment between the buyer and seller - crucial to ensuring clients get the service they expect in order to retain - often the best place to look for potential acquisitions is amongst a group of existing colleagues, whether that's via a common broker-dealer, custodian, or association. On the other hand, for those looking to acquire locally, the best option is often just to do the leg work necessary to aggressively network locally, where there may be far less competition with other buyers!

Tax-Efficient Spending Strategies From Retirement Portfolios

June 22, 2016 07:01 am 55 Comments CATEGORY: Retirement Planning

For most retirees, the tax efficient liquidation of a retirement portfolio requires coordinating between both taxable brokerage accounts and pre-tax retirement accounts like an IRA or 401(k).

The conventional view is that taxable investment accounts should be liquidated first, while tax-deferred accounts are allowed to continue to compound. Except in practice, it’s possible to be “too good” at tax deferral, where the IRA grows so large that future withdrawals (or even just RMD obligations) actually drive the retiree into higher tax brackets!

As a result, a more tax-efficient liquidation strategy is to tap IRA accounts earlier rather than later. Not so much that the tax bracket is driven up now, but enough to reduce exposure to higher tax brackets in the future.

However, the optimal approach is actually to preserve the tax-preferenced value of retirement accounts and to fill the tax brackets early on, by funding retirement spending from taxable investment accounts but doing systematic partial Roth conversions of the pre-tax IRA to fill tax brackets in the early years.

The result is that the retiree will tap investment accounts for retirement cash flows in the early years, a combination of taxable IRA and tax-free Roth accounts in the later years, and in the process avoid ever being pushed into top tax brackets, now or in the future!

Networking 3.0: Get Referrals FOR Your (Business Owner) Clients, Not From Them!

June 20, 2016 07:01 am 2 Comments CATEGORY: Marketing

The traditional view of networking is to go to a meeting with lots of other professionals to see if anyone might be interested in doing business with you. Of course, in a world where most of us are tired of being sold to, this "me me me" approach is less and less effective... leading to the recent "pay it forward" form of networking, where you first try to help out every stranger/professional you meet, in the hopes that karma (and social reciprocity) will result in clients coming back your direction soon enough.

In this guest post, Derek Coburn lays out his vision of "Networking 3.0" where it's not about selling yourself, or doing someone else a favor first so they'll feel morally obligated to sell on your behalf in return, and instead is about trying to understand the business needs of your current clients and who they need referred to them in order to become more successful themselves.

After all, the reality is that for many clients, giving them new clients for their business will improve their financial situation more than any portfolio recommendation could have possibly achieved anyway. And clients who have had that much financial success in their own businesses - thanks to your referrals - will not only become "stickier" than ever and more likely to retain, but will also become your advocate for future referrals.

But the key shift is that if the goal is to help your clients' businesses first, then the fundamental purpose of networking is not to find clients yourself, nor to find strangers to do favors for in the hopes that they'll want to get to know you better and refer you, but instead to find opportunities to refer your existing clients some new business opportunities, in a manner that creates truly satisfied clients... and maybe even engenders a new and better relationship with the person whose problem you just solved as well!

Weekend Reading for Financial Planners (Jun 18-19)

June 17, 2016 02:51 pm 16 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with an interesting recent interview from Vanguard CEO Bill McNabb at the Morningstar Investment Conference, as he describes Vanguard not as an asset manager or investment company but as a "technology company" instead, possibly implying that Vanguard will be rolling out even more technology innovation or more "robo" tools of its own in the coming years.

From there, we have a few technical articles this week, from another reminder/warning that ETFs cannot be any more liquid than the liquidity of their underlying investments (at least not during times of market distress), to a look at the current Social Security "redo" rules for those who wish to withdraw or voluntarily suspend their benefits, and a discussion of the growing momentum for changes to the retirement laws that would make it easier to enroll more/all workers in automatic enrollment retirement plans with automatic escalation clauses, and possibly the advent of open multiple employer plan (MEP) options in the coming years.

We also have several practice management articles, including: a look at how the new DoL fiduciary rules may bring fresh attention to the issue of "reverse churning" in advisory accounts; a review of 'lesser-known' RIA custodians RBC Advisor Services, Trust Company of America (TCA), and Shareholder Services Group (SSG); a review of the new MoneyGuidePro G4 release and its new "Conversations" feature; a look at the iRebal rebalancing software from TD Ameritrade; and a look at the latest version of Junxure Cloud CRM for financial advisors.

We wrap up with three interesting articles: the first is a look at how improvements in health are leading to a growing number of people retiring "early" in their 60s even as they could work into their 70s, which raises difficult questions about whether our current Social Security and Medicare systems are subsidizing "early" retirement more than they were originally intended (and if they're going to be changed, how to do so in a way that doesn't adversely impact less educated workers in physically demanding jobs who really can't work later); the second explores how the traditional mutual fund wholesaler is being made irrelevant by the availability of online information and how wholesalers are shifting to become value-added relationship managers to survive and thrive (an interesting parallel for financial advisors themselves; and the last is a fascinating look at how the rollout of ATMs impacted the jobs of bank tellers over the past 30 years, as it turns out that ATMs made bank branches so much more efficient that banks opened up more branches, resulting in a net increase in bank teller jobs over the past several decades... which implies that, similarly, the end point of "robo-advisors" may not be the death of financial advisor jobs, but an improvement in financial advisor efficiency that allows for more financial planning jobs to be created in the coming years!

Also, be certain to check out the video at the end, a clip from the popular HBO late-night comedy show with John Oliver, supporting the Department of Labor's fiduciary rule and sharply criticizing the financial services industry's lawsuits against it... an entertaining segment, punctuated by Oliver's usual comedic wit.

Enjoy the "light" reading!

Do Advisors Need To Live Where They Prospect For Clients?

June 16, 2016 02:30 pm 4 Comments CATEGORY: Marketing

Historically, most financial advisors have gained new clients by networking with local peers and centers of influence, and generating referrals from existing also-local clients. The end result was that most advisors had a base of clients who all lived in their immediate geographic area.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at whether this strategy of living where you prospect for clients is really still necessary, particular for new advisors who come into the industry with a plan to buy an existing advisor's practice. If you buy an advisory firm in a town, does that commit you as the new advisor to be there as well?

While working with clients locally is still comfortable for many, the reality is that the increasingly availability of digital tools is arguably making it less necessary than ever to live where your clients are. For many advisors, this already happens naturally, either because clients who originally lived in the area move away (and now become distance-based clients), or because the advisor moves (due to other life circumstances) and leaves a client base behind, who are then serviced from a distance (or perhaps with occasional in-person trips back to the area).

Of course, if the goal as an advisor is to build a niche as "the local advisor" in town - especially popular for many advisors living in a small town environment - living where your clients and prospects are is crucial to the networking and prospecting process itself. But with the growing potential to build a niche-based practice beyond your local geographic area, ironically being local to clients may only be necessary if you niche is being the local advisor in the first place!

For new advisors, though, the reality is that worry about where to prospect shouldn't necessarily be of paramount concern to begin with. The first priority is simply to learn the technical competency skills of being a financial advisor, completing the CFP educational requirement and passing the exam, completing the experience requirement, and learning the relationship management skills necessary to retain and service clients effectively. When it comes time to hone the business development skill, you can decide then whether you want your niche to be as a local advisor, or to work with distance-based clients, or to pursue another path altogether once you see how your career evolves!

Rules And Requirements For Doing A Qualified Charitable Distribution (QCD) From An IRA

June 15, 2016 07:01 am 94 Comments CATEGORY: Taxes

For nearly a decade, the rules allowing for a tax-free Qualified Charitable Distribution (QCD) directly from an IRA to a charity has been on-again, off-again, a part of the infamous Tax Extenders that would lapse and be reinstated every other year.

With the Protecting Americans from Tax Hikes (PATH) Act of 2015, though, the QCD rules have finally been made permanent, making it easier to engage in proactive charitable giving strategies that help to minimize the tax bite of an IRA’s Required Minimum Distribution (RMD) obligations.

However, obtaining the tax benefits for doing a QCD from an IRA to a charity requires meeting very specific requirements, including a minimum age limitation, a maximum dollar amount limitation, and contributing to only certain types of eligible (public) charities (rendering private foundations, donor-advised funds, and split-interest charitable trusts all ineligible).

In addition, there is the most stringent requirement – though also the easiest to satisfy – that for an IRA distribution to qualify as a QCD, the check cannot be made payable to the IRA owner and instead must be made payable directly to the charitable entity (though the check payable to the charity can be sent to the IRA owner and forwarded on to the charity).

Fortunately, though, with QCDs made permanent under current law, at least IRA owners have the entire year to strategize and decide whether to engage in charitable giving – but remember that once an RMD has been distributed, there’s no way to undo it and turn it into a QCD later!

Why Revenue-Sharing Referral Agreements Are Bad Financial Advisor Marketing

June 13, 2016 07:01 am 7 Comments CATEGORY: Marketing

For most financial advisors, the single hardest part of growing the advisory business is simply getting new clients in the first place. Especially since most financial advisors have very limited capital to invest into the business and its marketing efforts early on.

As a result, most financial advisor marketing strategies involve approaches that have little or no upfront cost, such as partnering in formal RIA solicitor referral agreements that share a percentage of the revenue from the client.

The upside of this approach is that the advisor has an opportunity to incentivize a marketing partner, with no upfront marketing costs. The downside, however, is that given the high client retention rates of most advisory firms, revenue-sharing agreements can actually be an astonishingly expensive form of marketing.

In fact, for advisory firms with 95%+ client retention rates, it would be more profitable in the long run to spend a year’s worth of client revenue just to obtain the next new client – a strategy that can produce an incredible 400% Return On Investment for the marketing dollars… with the caveat that few advisors can afford a marketing approach that might take years to recover the initial investment.

Nonetheless, when looking to the marketing practices of leading independent advisory firms – and even some of the more successful robo-advisors – it appears that the firms most focused on scaling their advisory businesses are beginning to eschew revenue-sharing agreements, and instead are shifting their spending to scale far-more-profitable upfront marketing investments!

Weekend Reading for Financial Planners (Jun 11-12)

June 10, 2016 02:01 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a deeper look at the SIFMA lawsuit against the Department of Labor's fiduciary rule, which is looking more and more like an Alamo-style futile last stand, as the details of their legal complaint appear to be little more than rehashing the same arguments they have already presented and lost at each prior step of the rulemaking process.

We also have a few technical planning articles this week, from strategies to plan around maximizing step-up in basis (and especially avoiding a step-down in basis) at death and the new Form 8971 cost basis reporting rules, to tactics that advisors should consider when helping younger clients make good student loan decisions, and a review of a newer company called Vest Financial that is providing an outsourced options overlay service to help design risk management strategies for client portfolios.

From there, we also have several practice management articles, including: looming anti-money-laundering (AML) rules that could hit later this year and put significant new compliance burdens on SEC-registered investment advisers; a list of 13 "true" differentiators that advisors can use to think about what really differentiates their own client services; how to reframe your value proposition to clients by shifting from just talking about your job title and what you do to helping clients understand how you'll actually improve their situation; a review of "startup friendly" RIA custodians TradePMR and Scottrade Advisor Services, which have actually been cracking down a bit on the smallest "hobbyist" RIA firms; and a look at how you can improve your engagement with clients over the next 2 months by taking a one-week-at-a-time fresh look at key aspects of your advisory firm and how your clients experience it.

We wrap up with three interesting articles: the first raises the question of whether our current 'obsession' with the philosophy of "always be your authentic self" may be going too far, because in the end people may care more than we're sincere and do what we say, than whether we authentically share every last thought in our heads; the second is a great reminder that while we're often told to "follow our passion", most of us aren't actually sure what our "passion" really is, and in most cases really understanding that takes years or even decades of a career to find, so the better approach is to try to "foster your passion" and just keep moving in the direction of the work that most inspires you; and the last is an interesting look at how the media views financial advisors and recommends that consumers find an advisor, where consumers are recommended to look at everything from how the advisor is compensated, to whether the advisor has "humility in large doses" when it comes to describing their own abilities.

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 interviews from the recent Envestnet Advisor Summit on the latest Envestnet Advisor Portal technology developments with Tamarac and Yodlee, along with the new Open ENV initiative!

Enjoy the "light" reading!