Nerd's Eye View blog

Should Advisors Ditch Their Broker-Dealers In Light Of DoL Fiduciary?

May 19, 2016 08:03 am 2 Comments CATEGORY: Practice Management

For much of the past year, the broker-dealer community has lamented that the proposed DoL fiduciary rule would be a significant impediment to their business model, causing additional compliance burdens and greater costs for their brokers and ultimately consumers. Yet with the final DoL fiduciary rule issued, the question now arises about what brokers who work at a broker-dealer should actually do, given the rules that are scheduled to take effect next April of 2017.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at how the DoL fiduciary rule will likely splinter the broker-dealer community into three types of broker-dealers: the level-fee fiduciary broker-dealer, the full-BIC broker-dealer, and the non-qualified-only broker-dealer, each of which will have different compliance obligations, different products and services available, and different limitations on the oversight and scope of advice their brokers can provide.

Notably, the decision of what type of broker-dealer the organization will be in the future is ultimately up to the broker-dealer itself, and advisors will simply have to decide whether they're happy to continue under that broker-dealer structure, or seek out another type instead. Or possibly leave the broker-dealer environment altogether and become an RIA instead.

Which means for an advisor currently at a broker-dealer, there's really no reason to make a change... yet. But it's imperative that advisors at broker-dealers begin to consider what kind of business they want to operate in the future, and whether it's really necessary to continue offering commission-based products and deal with the additional compliance burdens, or choose to focus as a level-fee fiduciary instead. And then when the broker-dealer makes the announcement of what it will be, likely sometime over the next six months, the path of whether to stay or go should become much clearer...

The Problem With Joint Ownership Of Non-Qualified Deferred Annuities

May 18, 2016 07:01 am 19 Comments CATEGORY: Annuities

The opportunity to obtain tax-deferred growth in a non-qualified deferred annuity is a key feature of the contracts, particularly for those who face high tax brackets and have already maxed out other available tax shelters. An added benefit is that non-qualified annuities aren’t even subject to RMD obligations during the lifetime of the annuity owner.

However, a significant complication of annuities is that upon the death of an annuity owner, the beneficiary must begin post-death Required Minimum Distributions from the contract. And notably, the post-death RMD obligation occurs at the death of the first owner with a jointly owned contract, which means that a surviving joint owner can even be forced to liquidate their own asset and trigger a taxable event!

Fortunately, the tax law does allow for “spousal continuation” of an annuity payable to a surviving spouse. But that rule triggers based on whether the spouse is named as the beneficiary, not the joint owner. In fact, once a surviving spouse is properly named as a beneficiary, there’s often no reason at all for the annuity to be jointly owned anymore!

And between non-spouses, the situation can be even more problematic, as the death of one annuity owner can force the surviving owner to begin taking “stretch annuity” payments over his/her life expectancy, even if it was the survivor’s money in the first place and he/she doesn’t want it!

Which means in the end, most situations where an annuity is jointly owned, it probably shouldn’t be, as most of the benefits of joint ownership can be accomplished by other means when using an annuity anyway (unless specifically pursuing contractual living or death benefit guarantees that are designed to apply for both spouses jointly). And in situations where it's not actually necessary to jointly own the contract anyway, by not owning the contract jointly, the risk of unintentionally forcing the contract to be liquidated at an undesirable time is greatly reduced!

Gratitude Marketing And Generating Client Referrals Through The Reciprocity Rule

May 16, 2016 07:01 am 1 Comment CATEGORY: Marketing

Despite our general interest in self-preservation, a growing volume of research is finding that human beings are hard-wired to help each other. Not only can helping others trigger a release of endorphins and create a “helper’s high”, but we have a tendency to want to help those who have helped us – a form of social reciprocity that can be very rewarding in the long run to those who help others.

In a new book entitled “Gratitude Marketing”, financial advisor and coach Michael Sciortino explores how advisors can leverage the principles of helping others, expressing gratitude, and the reciprocity rule, to market themselves and their businesses. Not from the perspective of doing good for selfish reasons, but simply because doing good – in a consistent, systematic way – happens to be remarkably good for business, too.

So whether it’s sending clients cards on their birthday, taking them (and their friends) out for birthday lunches, throwing clients (and their co-workers) a retirement party, or having client appreciation events and making charitable donations as a token of appreciation for those who refer, there are numerous ways to express to clients your appreciation for their business and referrals in a way that can support more of those behaviors in the future. Though notably, in the end expressing gratitude isn’t necessarily about the latest, greatest idea, but simply the consistent expression of thanks… which is why Sciortino notes that for some advisors, the best tactic is also simply to regularly write thank-you notes to express your gratitude to those who have helped you to grow your business!

Weekend Reading for Financial Planners (May 14-15)

May 13, 2016 02:44 pm 3 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a somewhat controversial new industry study, finding that brokers who used their home office's packaged portfolio solutions had better investment results than the advisors who tried to do it themselves, with the latter showing both less due diligence in their investment selection and a greater likelihood to get in and out of the market at the wrong times (either making bad calls themselves, or acquiescing more quickly to nervous clients who insisted on making changes instead of staying the course). And while the study was specific to broker-dealers, it has interesting implications for RIAs that have (or have not) adopted standardized firm-wide model portfolios as well.

From there, we have a number of practice management articles this week, including a look at how doing client surveys can open up additional advisory firm revenue (both by finding new business opportunities, and simply better engaging clients to provide referrals), the importance of doing client appreciation events that really engage clients rather than just passively thank them, the reasons an advisory firm should consider using centralized password management tools, and how to approach a conference to ensure you really get the most out of your time to attend.

There are also several technical planning articles, including: a list of key issues that advisors should watch for when reviewing estate planning documents; the situations where a fund's Net Asset Value (NAV) actually does not accurately reflect its true underlying value (which happens more often than advisors might realize!); how new Form 5498 reporting requirements on IRAs will lead to new scrutiny of hard-to-value alternative assets; and a look at the importance of customizing life expectancy assumptions for clients (rather than just assuming everyone will live to age 100).

We wrap up with three interesting articles: the first is a look at how the rise of tech startups is impacting the legal profession, which is witnessing a flurry of startup activity similar to #FinTech, but where the companies seem to have been quicker to recognize that the future is not the "robo-lawyer" but tech solutions that help to make lawyers more efficient and better at what they do; the second is a look at how the rise of platforms and (digital) networks may be spurring a fourth industrial revolution; and the last is an interview with industry luminary and thought leader Dick Wagner, who suggests that financial planning may be the most important profession that will emerge in the 21st century.

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 highlights of new advisor technology that debuted at the spring #Finovate conference (including a Client Insights tool from IBM and the new Advisor Now platform from Envestnet), what advisors should bear in mind about technology backups given the recent major Salesforce CRM outage, and a look at the future of advisor technology from a recent tech panel at the SSG annual conference.

Enjoy the "light" reading!

How DoL Fiduciary Will Disrupt The Blackrock And Schwab Robo-Advisors

May 12, 2016 11:53 am 17 Comments CATEGORY: Technology & Advisor FinTech

As the Department of Labor's fiduciary rule proposal was being discussed last year, robo-advisors were hailed as a potential solution to bring low-cost fiduciary advice to consumers. Labor Secretary Perez explicitly touted companies like Wealthfront as being a key part of the fiduciary future. However, it turns out that the final fiduciary rule has created a significant problem for several robo-advisors like Schwab and Blackrock's FutureAdvisor, that use the platform to distribute their own proprietary products.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at what the final DoL fiduciary rule really said about robo-advisors, how robo-advice must be delivered to satisfy the Level Fee Fiduciary requirements, and why the use of proprietary products by companies like Schwab and Blackrock - especially when combined with having investment discretion - may present a serious fiduciary problem when the rules take effect next April.

Which means ultimately, some robo-advisors may need to substantially change their business practices and how they operate in the coming months, to ensure they fit within the DoL's fiduciary rules. The most likely outcome may be for the companies to simply raise their fees, and eliminate their proprietary-product-based profitability, to ensure they're operating as Level Fee Fiduciaries. But doing so will throw a significant wrench in the growth of robo-advisors that were being cultivated specifically as a distribution channel for ETFs. On the plus side, though, it means the DoL's fiduciary rule may be more effective at limiting proprietary products than was initially believed!

Grandparent 529 Plans And Gifting Appreciated Assets While Qualifying For FAFSA Financial Aid

May 11, 2016 07:01 am 23 Comments CATEGORY: General Planning

While affording both college and retirement is difficult for many families, some retirees find themselves in the fortunate position of having enough to cover their retirement years and still have something left over to help other family members pay for college.

Yet the challenge is that if not done carefully, using a grandparent-owned 529 plan or gifting assets from a grandparent to grandchild for college can adversely impact the grandchild’s own ability to qualify for financial aid, implicitly diminishing the value of the gift.

For instance, a grandparent-owned 529 plan is not treated as an asset of the grandchild for financial aid purposes, but distributions from a grandparent-owned 529 plan may show up on the grandchild’s FAFSA financial aid form (even if it’s a qualified tax-free distribution!). Similarly, gifts of appreciated assets from a grandparent to a grandchild may be eligible for 0% capital gains tax rates, if able to avoid the kiddie tax, but may still adversely impact the student’s income on the FAFSA. And for grandparents trying to diminish their own estates, often the best tactic is simply to make tuition payments directly to the college institution, which can be done above and beyond the annual gift tax exclusion limits.

Ultimately, the reality is that grandparents actually have numerous opportunities for preferential income and/or estate tax treatment by helping fund college for grandchildren (or other family members). But the financial aid rules – especially when considering the new “prior-prior year” (PPY) rules for which year’s income is reported on the FAFSA – means that coordinating the timing of the various strategies is crucial to avoid adverse financial aid outcomes!

How Webinar Marketing Beats Traditional Seminars For Financial Advisor Prospecting

May 9, 2016 07:01 am 34 Comments CATEGORY: Marketing

Seminar marketing has long been a staple of financial advisor marketing strategies, and while it's more challenging in today's environment given the declining efficiency of direct mail (used to get prospects to show up in the first place), many advisors still use educational seminars as a way to introduce themselves to potential clients. Yet as our world becomes increasingly digital, and we substitute e-mail for snail mail, some financial advisors are experimenting with webinars as the next strategy beyond seminars.

In today's guest post, financial advisor Jeff Rose shares his experience in making the transition from seminar marketing to doing webinars instead - and how the outcome was not only better results in terms of new clients and revenue, but an investment that took less time and effort and had just 1/5th the upfront cost... and was ultimately more scalable as well.

In addition to sharing the success story itself, Jeff also shares his tips and best practices for financial advisors who want to adopt webinar marketing strategies for themselves, from the software and hardware tools he uses to the way he set up the registration process, and how he follows up with them afterward to ask for their business. So whether you've been thinking about switching away from seminar marketing, are looking for a new marketing strategy like webinars, or are already doing webinars and want a few tips for improvement, hopefully, today's guest post will be helpful food for thought!

Weekend Reading for Financial Planners (May 7-8)

May 6, 2016 02:44 pm 5 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with an interesting new Fidelity study, finding that female and Millennial advisors are becoming more and more likely to change firms as they gain experience... and that it's the most successful advisors who are the most likely to switch, raising serious questions about the ability of advisory firms and platforms to retain the best next generation talent. Also in the news this week is a notable lawsuit filed against T. Rowe Price for "excessive fees", claiming that the otherwise-moderately-priced mutual fund company was taking advantage of its retail investors by not doing more to drop the price of its mutual fund expense ratios to match its institutional pricing as its funds grew their AUM.

From there, we have a number of technical financial planning articles this week, including a look at the shifting buying habits of LTC insurance policyowners when it comes to inflation riders (as the use of 5% compound inflation riders has crashed, replaced by 3% compound inflation, guaranteed purchase options, and rising-premium structures), a discussion of whether it's better to "de-risk" a portfolio by owning less in equities or just owning less volatile equities, and a fascinating analysis of whether the shift towards passive investing really risks making the market less efficient or whether it could actually make the economy as a whole more efficient instead.

There are also several practice management articles this week, including: a Pershing Advisor Solutions announcement that it will be launching an open API initiative similar to TD Ameritrade Veo, and is bringing on 3 new "robo" tools to help advisors (SigFig, Vanare, and Jemstep); how Fidelity is building in the exact opposite direction with its coming new Wealthscape platform, designed to make the process simpler for advisors by constructing a single fully integrated solution (while maintaining some open architecture for those who still want to mix and match); tips for why you should hire an intern for your advisory firm and how to do it; and a look at how the ability to connect with people virtually, thanks to the internet and social media, is leading to a rise of "virtual mentors" as well.

We wrap up with three interesting articles: the first is a look at how consumer spending is rising more quickly amongst the top 5% of earners than the other 95%, which is driving rapid growth is a wide range of ultra-elite services to cater to the affluent (even as companies get better than ever at identifying top customers, and figuring out how to better cater to them); the second is a fascinating discussion of "authoritarianism" in American politics, which helps to both explain the sudden rise of Donald Trump's candidacy for President, and suggests that even if Trump loses, the authoritarian voting block may divide the GOP for years to come; and the last is a fantastic reminder than we often remember history as being more modest than it actually is, and that even though the remember with nostalgia the days that the government didn't overspend, markets were less volatile, and everyone had a pension plan, the truth is that the government has run a deficit for most of the past 100 years (except for what turned out to be bubble years in the 1920s and 1990s), monthly market volatility is actually less this decade than any decade for the past century, and even at its peak only 38% of private sector workers were ever covered by a pension (in 1979), compared to a much-larger 64% of people who actively participate in a 401(k) plan today! In other words, even as we lament that times have never been worse, the truth is that they've never been better.

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 Wealthbox CRM's five new integration partners (from TD Ameritrade to Office365 and Zapier), a new Orion Advisor Services feature that sends portfolio information to clients via text message, and the launch of a new client portal from Morningstar's ByAllAccounts!

Enjoy the "light" reading!

How I Differentiate As A Financial Advisor Prospecting For Clients

May 5, 2016 10:17 am 8 Comments CATEGORY: Marketing

As more and more financial advisors offer financial planning services to clients, it's becoming harder and harder to differentiate from the competition. And with the implementation of the Department of Labor fiduciary rule looming, even more advisors will likely be driven towards offering financial planning to substantiate their value proposition, which will just make the situation even worse.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at examples of how I have been able to grow my businesses by clearly differentiating in a crowded marketplace. The essence of the strategy is actually remarkably simple: be more specific than anyone else about who you work with, and what you do for them.

The challenge for most financial advisors is a fear that being more specific about who you work with will render you unable to work with most of the people you meet, who don't fit that description. And it's true, that by being more focused, you will not be able to work with as many potential prospects.

However, the whole point of differentiation and being specific about who you work with is that when you do meet someone who fits the description, an instant connection is made, because you've already identified yourself as the single best expert to solve the identified problem that the prospect is facing. And for those you can't work with, the reality is that by being clear and specific about who you do work with, you actually create more opportunities for referrals in the process as well.

In fact, if you look at the businesses that I've created, from New Planner Recruiting (which does recruiting of new financial planners), to FA Bean Counters (which does 'bean counting' bookkeeping services for financial advisors), to the XY Planning Network (helping financial planners serve Gen X and Gen Y clients through the monthly retainer business model), and more, you'll notice the common thread to all of them is being very clear and specific about who we work with, and what we do. The reality is that by doing so, 99% of you will not likely have any need for our services, because it's not a match. But for the other 1% of you, we're the perfect solution. And that's the point of differentiation!

Finding The Optimal Rebalancing Frequency – Time Horizons Vs Tolerance Bands

May 4, 2016 07:01 am 22 Comments CATEGORY: Investments

Rebalancing plays a crucial role in ongoing portfolio management, both to ensure that the overall risk of the portfolio doesn’t drift higher (as risky investments can outcompound the conservative ones in the long run), and to potentially take advantage of sell-high buy-low opportunities. The caveat: it’s not entirely clear how often a portfolio should be rebalanced, in order to achieve these goals.

The conventional wisdom is to rebalance a portfolio at least once per year, and possibly even more frequently, such as quarterly or monthly. A deeper look, however, reveals that more frequent rebalancing will on average have little impact on risk reduction, even less benefit from a return perspective, and just racks up unnecessary transaction costs along the way.

Instead, the research suggests a superior rebalancing methodology is to allow portfolio allocations to drift slightly, and trigger a rebalancing trade only if a target threshold is reached. If the investments grow in line and the relative weightings don’t change, no rebalancing trade occurs. However, if these “rebalancing tolerance bands” are breached, the investment – and only the investment – that crosses the line, is then bought or sold to bring it back within the bands.

The one caveat to the process of tolerance band rebalancing is that it requires ongoing active monitoring of the portfolio itself, to ensure that you know when a threshold has been reached. Fortunately, though, a growing number of rebalancing software tools are available to help advisors track each investment, its rebalancing thresholds, and even automatically calculate and queue up the rebalancing trades necessary to bring the portfolio in line again!