Nerd's Eye View blog

Tax-Efficient Spending Strategies From Retirement Portfolios

June 22, 2016 07:01 am 56 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!

Financing A Financial Advisor Acquisition Or Succession Plan With Live Oak Bank

June 9, 2016 03:01 pm 13 Comments CATEGORY: Practice Management

With a large number of financial advisors approaching retirement in the next 10 years, there has been a growing interest in advisor mergers, acquisitions, and succession plans. In many cases, though, deals don't get done because it's difficult to find a buyer and a seller who are a good match. And in some cases, the probably is simply that it's too difficult to get financing for the transaction.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we interview Jason Carroll of Live Oak Bank, a new lender that has begun to work directly with financial advisors to finance mergers, acquisitions, and internal succession plans... and has already funded a whopping $300M in financial advisor loans in just the last 3 years!

And the good news is that the growing availability of loan financing is making it easier than ever to fund acquisitions, whether internal or external. In fact, with available loan interest rates at 6.0% or lower (prime plus 2.5%), and repayment terms as long as 10 years, acquiring a financial advisory firm can be cash flow positive from year 1, if purchased at a reasonable valuation in the first place.

For some, the potential for favorable loan terms - collateralized by the future cash flows of the business if clients retain through the transition - will make succession planning and acquisitions more appealing than ever. Especially because for the most favorable acquisitions - where the likelihood of client retention is very high - it's even feasible to finance 100% of the purchase price!

The 4 Phases Of Saving And Investing For Retirement

June 8, 2016 07:01 am 14 Comments CATEGORY: Retirement Planning

The traditional approach to saving for retirement is all about starting early, saving consistently, and letting compounding growth do most of the heavy lifting over time.

Yet the reality is that for those who are still early in their careers, there really may not be enough income coming in to save in the first place. It’s only as income rises that savings behaviors really start to matter. And for those who have saved long enough, eventually the impact of savings is muted by the sheer size of the portfolio, as compounding growth becomes the driving factor in reaching retirement success. Until the retirement date actually looms close, and then preserving the portfolio for the retirement transition is more important than just trying to maximize growth.

In fact, this framework of Earn, Save, Grow, and Preserve can be a helpful way to think about the progression of accumulating for retirement. Each phase has its own unique issues to be navigated, and success in one phase leads to the challenges of the next.

Most importantly, though, considering the four phases of saving and investing for retirement is crucial to ensuring that the retirement advice being delivered is relevant in the first place. After all, focusing on strategies to maximize portfolio growth are irrelevant for those who can’t afford to save yet, and for those with a large retirement portfolio, ongoing contributions become irrelevant and the focus must be on growing and preserving the nest egg instead!

How To Turn Your Financial Advisor Website Visitors Into Prospect Leads

June 6, 2016 07:01 am 12 Comments CATEGORY: Marketing

In the early years of the internet, a website was like a digital business card or a marketing brochure – a place for consumers to look up basic information to contact a business, including a financial advisor.

In today’s world, however, consumers use websites in a far more sophisticated manner – gathering information and ‘studying’ a number of businesses for an extended period of time, before ever being ready to contact the advisor with the intent to do business.

The question, then, is how to take casual visitors to an advisor’s website, and engage them in a manner where they will come back when they’re ready. The answer: to use the digital visit as an opportunity to make a “digital connection” by persuading the visitor to opt into joining your mailing list... which gives you the opportunity to stay connected with them, until they're actually ready to do business.

In fact, notwithstanding the massive growth of social media in recent years, marketing studies find that email still drives business 40X more effectively than social media. And a proliferation of new tools from companies like SumoMe, OptInMonster, and LeadPages have made it easier than ever for advisors to use such solutions in their own marketing process.

Ultimately, the reality is that such marketing strategies are really no different than the drip marketing strategies that many financial advisors have engaged in for years, simply delivered – and leveraged – with the power of the internet!