Nerd's Eye View blog

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!

The B2C Robo-Advisor Movement Is Dying, But Its #FinTech Legacy Will Live On!

May 2, 2016 07:01 am 54 Comments CATEGORY: Technology & Advisor FinTech

While several of today's leading "robo-advisor" companies were founded in the aftermath of the financial crisis, it wasn't until early 2012 that they finally converged on a common low-cost "automated investment service" model... which, coupled with a surge of media coverage, quickly suggested that they could become the future of financial advice (or at least investment management) for consumers.

However, in the year since established players like Schwab and Vanguard launched ‘competing’ services, a fresh look at the robo-advisor landscape reveals that their growth rates are falling rapidly, to just 1/3^rd their levels of one year ago. Their apparent demise: an inability to scale their marketing to sustain growth rates in the face of increasing competition and challenging client acquisition costs, coupled with a similar inability to grow their average account sizes.

In fact, the combination of rising client acquisition costs and declining average revenue per client may be an outright death knell for the direct-to-consumer robo-advisor movement, as they approach the unsustainable crossover point where the lifetime value of a client, cumulatively, is less than the cost to acquire a single client (given that some have a mere average gross revenue per client of just $50/year!). Accordingly, it's not surprising to see many of the early robo-advisor players pivoting in other directions, using their long runway of available dollars to try to find greater growth traction, with at best one or two that might manage to build a viable brand that survives.

Nonetheless, in the long run we may still look back at this moment as one of significant transition for the industry, not because robo-advisors disrupted human advisors, but because the emergence of robo-advisors was the needed catalyst for the industry to reinvest into the future of financial advisor technology. Already, tech-augmented human advisors are rapidly growing past both their robo-advisor and traditional human advisor peers, and an outright “arms race” of technology is emerging amongst financial advisor custodians and broker-dealers all seeking to be the future platform of choice.

Which means in the end, the direct-to-consumer robo-advisor movement may be dying, with VC funding suggesting Betterment may soon be the last man standing, but the legacy of their technology will continue to be transformative for years to come, just as online brokerage in the late 1990s didn’t disrupt financial advisors but instead became the backbone of how we execute our businesses today!

Weekend Reading for Financial Planners (Apr 30 – May 1)

April 29, 2016 02:46 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a big AdvisorHub expose on the Barron's Top 100 Advisors list, finding that a whopping 60% of the advisors on the list over the past 5 years have had at least one disclosed consumer complaint, regulatory action, or criminal conviction (compared to "just" 7.8% of all brokers who have misconduct records, according to another recent controversial study).

From there, we have a number of technical financial planning articles this week, including a discussion of whether or how the CAPE ratio should be adjusted in today's market environment (and whether reasonable adjustments would show the market isn't as overvalued as the CAPE 10 implies), a new study finding that how stressful a job is may be one of the biggest predictors of whether people keep working well into their 60s, a look at just how ugly the statistics really are for those who play the lottery, and a good reminder that while the data increasingly shows how expensive actively managed funds lag index funds it's still worse to sit on the sidelines and not be invested at all.

There are also several practice management articles this week, including: how the internet made it easier to work virtually, but a surprising number of people still go to the office every day, or are seeking out new "co-working" spaces; the growing pressure on advisory firms to move up the "wealth management pyramid" to provide a greater level of value-add; why the key to success with advisor niches is not just niche marketing but actually crafting niche services; and a look at how the 12(b)-1 fee is in steady decline and being replaced by advisor AUM fees paid directly by the client instead, and how the DoL fiduciary rule may just further accelerate the trend.

We wrap up with three interesting articles: the first looks at how direct-to-consumer FinTech (e.g., robo-advisors) has been the hot area for the past several years, but "InsurTech" may be the next big technology trend (but given the challenges of direct-to-consumer insurance, may be even more likely to go through advisors rather than around them); the second is a look at how even Goldman Sachs is getting into FinTech with a new online bank offering, but that the reasoning may be more about old-world bank liquidity ratios than a next generation consumer push; and the last is a fascinating look at how the entire asset management industry is being disrupted from multiple directions all at once.

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 Redtail CRM's announcements of integrations with both Morningstar and Zapier, the new release of MoneyGuidePro's G4, and highlights of the National Association of Broadcasters (NAB) annual trade show with all the latest (easy-to-use and affordable) audio and video equipment that advisors can use to create their own content.

Enjoy the "light" reading!

Financial Advisor Career Track Options When You’re Bad At Sales And Prospecting

April 28, 2016 01:32 am 9 Comments CATEGORY: Personal/Career Development

Historically, financial advisors were primarily salespeople. Their role was to sell the insurance or investment products of their companies, and later, only after they proved themselves to be good at sales, did they have the opportunity to earn their CFP certification and do financial planning. But with the rise of the AUM model, the financial advisor career track is changing.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at how the financial advisor career track is evolving today, where increasingly financial planners can get hired without sales skills... but have to worry about whether they'll hit a wall in their career progression in the future if they can't learn to prospect for new business.

The good news of the ongoing growth of recurring revenue business models like the AUM model - which should only grow further after the new Department of Labor fiduciary rule drives even more advisory firms towards Level-Fee Fiduciary compensation - is that the opportunities for non-business-development employee advisors are better than ever, with even more opportunity down the road. Simply put, we're seeing the ongoing separation of being the person who gets the clients, versus the one who services them with great financial planning. Just as sales and service are separated in most other industries as well.

Of course, the caveat is that because it's harder to get a new client than to serve and retain an existing one, those who can do business development and get new clients will likely earn better compensation, and have more opportunities to become a partner with their advisory firm (as it's easier to offer a slice of the pie to a potential partner who's helping to make the pie bigger for everyone). Which means there's still a good incentive opportunity to learn to do sales and prospecting. But at worst, it's not a skill that needs to be developed later in the financial advisor career track, and shouldn't prevent you from earning a reasonable living in the meantime!

Performance LTC From John Hancock – The First Participating Long-Term Care Insurance Policy?

April 27, 2016 07:01 am 26 Comments CATEGORY: Insurance

Despite being around for nearly 40 years, and enjoying preferential tax treatment for nearly half that time period, long-term care insurance has struggled to gain momentum in the marketplace. In fact, low interest rates, coupled with low lapse rates, and rising longevity, have come together to drive up long-term care insurance premiums significantly, leading LTC insurance purchases to decline nearly 70% from their peak in 2002.

However, a new approach to long-term care insurance pricing – the Performance LTC policy from John Hancock – is aiming to bring LTCI premiums down. Ironically, the new policies have eliminated any kind of pricing “guarantee” to prevent premiums from rising, but combined that change with an opportunity for policyowners to benefit if investment and claims results are favorable in the future, by accumulating “Flex Credits” that, like dividends from a participating life insurance policy, can be used to reduce future premiums and even allow LTC premiums to vanish, altogether.

The good news of this structure is that it is uniquely suited to benefit if interest rates rise in the future (unlike hybrid life/LTC or annuity/LTC policyowners who may suffer in a higher rate environment). The bad news, however, is that because Hancock is not actually a mutual insurance company, it will still face a fundamental conflict of interest in deciding how much to pay as a Flex Credit to policyowners, versus a dividend to shareholders. Nonetheless, though, the reality is that by allowing LTC insurance premiums more flexibility, Performance LTC may still potentially be less expensive LTCI coverage in the long run!

The 4 Skill Domains For Financial Advisor Mastery

April 25, 2016 07:01 am 8 Comments CATEGORY: Personal/Career Development

In the early years of financial planning, the reality was that most advisors only needed one skill to be “successful”: the ability to sell, and get clients. After all, when advisors are solely compensated by commissions, if you can’t keep finding new prospective clients to sell to – and actually sell something to them – your income will quickly go to zero.

As financial advisors have shifted to the AUM model though, and the recurring revenue it supports, the requisite entry level skillset has shifted. Now for many advisors, the key abilities are technical competency to give the right advice, and empathy skills to form and deepen the client relationship. Sales and business development comes later, if at all.

And as advisory firms have grown, for many the emerging skills gap is in the area of management, from training and developing other staff members, to the overall execution of the business.

From the career track perspective, what this means is that for financial advisors to progress in their own careers, it becomes necessary to expand their expertise across more and more of the domains – generally at least three of the four. And for advisory firms themselves, the four skill domains may provide a helpful roadmap to consider where the firm should invest resources to improve the team for the future!

Weekend Reading for Financial Planners (Apr 23-24)

April 22, 2016 02:44 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the announcement that United Capital is launching a white-label service for advisors called FinLife Partners, intended to offer a form of turnkey financial planning platform that includes United Capital's proprietary financial planning tools, along with a bundled and integrated technology stack of CRM, financial planning software, and more (the solution that United Capital built internally for its own advisors over the past several years!). Also in the news this week was the big release of G4, the newest version of the MoneyGuidePro financial planning software, which has gone through a significant redesign to be able to better facilitate client conversations as an interactive planning tool.

From there, we have several practice management articles this week, including a look at how focusing on "best practices" often leads to just chasing fads and being stuck in the past rather than building towards the future, why it's time for the traditional advisor "elevator pitch" to die (or at least, be substantially reinvented), how the ongoing evolution of advisory firms is making them structure and operate more like large accounting firms, and the emerging battle for the advisor desktop as advisor platforms increasingly position themselves as being first and foremost a technology platform.

We also have a few more technical articles this week, including: the latest research on Millennials, and how they may not actually be risk-averse investors after all (but they do appear to be real-estate and debt averse!); an in-depth look at the growing awareness that the typical risk tolerance questionnaire may be doing a remarkably poor job of actually measuring true client risk tolerance; and a great explainer and analysis on whole life insurance, how it really works, and when it's appropriate (or not) to use.

We wrap up with three interesting articles, all around the theme of a growing focus on consumer spending behaviors: the first is a profile of Peter Adeney, also known as the blogger "Mr. Money Mustache", who has built a tremendous blogging platform around the idea that thrifty living isn't about self-denial but being a better global citizen; the second is a fascinating interview with four men, who have incomes varying from the poverty line to over $1,000,000/year, about their financial challenges and goals (and the fact that all of them, regardless of income, are hoping to double or triple their income to meet their goals in the next 10 years!); and the last is a fascinating "confessional" article from a writer who makes a good middle-class income, but is living from paycheck to paycheck, along with as many as 47% of other Americans who couldn't afford a $400 emergency expense without going into debt, but due to taboos of talking about money and debt are so ashamed it's difficult to even talk about the problem, much less get some help.

Enjoy the "light" reading!

Why The DoL Fiduciary Rule Won’t Kill Annuities, It Will Make Them Stronger!

April 21, 2016 01:09 pm 48 Comments CATEGORY: Annuities

Annuity products have long been the domain of annuity agents who earn substantial commissions, while the adoption of annuity products by fiduciary RIAs has been sluggish at best, ostensibly due to some combination of a dislike of available annuity products, and the lack of any commissions to incentivize their use. Yet now with the DoL fiduciary rule, there are new pressures coming that may compress annuity commissions... raising the question of whether annuity products will even survive in the long run without commission compensation to support them.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at how the DoL fiduciary rule may impact annuity companies and annuity product design in the coming years, and whether it's really the beginning of the end of annuity products.

Yet a deeper look reveals that the changing incentives for annuity companies may not kill annuity products at all, and in fact may actually drive annuity products to get better in the future. After all, when an annuity company can't pay a hefty commission to incentivize agents to sell it, their own remaining choice is to actually design a good product, and then market and educate advisors on how to use it appropriate - in a manner that meets their own fiduciary requirements. In addition, annuity companies will also face new pressures to be more transparent and less "gimmicky" with their product design, as anything less will drive away fiduciary advisors who will fear they can't do sufficient due diligence to manage their own liability exposure.

Of course, the biggest caveat is that the new DoL fiduciary rules only apply to retirement accounts, which means non-qualified annuities won't face any of these pressures. Yet given that the concentration of retirement dollars that would buy annuities are held in retirement accounts, the opportunity for annuity companies is to figure out how to step up and create fiduciary-ready products... which in turn may only further increase the regulatory pressure on the SEC, FINRA, and state insurance regulators to improve the standards for non-qualified annuities to match the new fiduciary world for IRAs!

Who Should File-And-Suspend For Social Security Benefits By The April 29 Deadline?

April 20, 2016 07:01 am 30 Comments CATEGORY: Retirement Planning

Last fall, the Bipartisan Budget Act of 2015 changed the rules to eliminate two popular Social Security claiming strategies for married couples: File-and-Suspend, and Restricted Application.

Fortunately, the new rules didn’t take effect immediately, but the first transition – the elimination of File-and-Suspend – will apply for anyone who first requests for a voluntary suspension of benefits on April 30 or later. As a result, anyone who wants to be “grandfathered” under the old (current, and more favorable) rules has less than two weeks to complete their Social Security application and suspension request by the April 29 deadline!

As a result, anyone who has at least met the full retirement age of 66, and is not yet age 70, should be considering whether to submit a file-and-suspend request by April 29. Notably, the tactic is a moot point for anyone who has already claimed benefits, or who doesn’t plan to delay benefits going forward. Nor is file-and-suspend relevant for widows (who don’t need file-and-suspend to coordinate between retirement and survivor benefits), nor for divorcees (who rely on the Restricted Application strategy instead, which remains available after April 29 for anyone who was born in 1953 or prior).

Nonetheless, for married couples (and some parents with children) who are in the age 66-70 window and have not yet claimed their benefits, but where one person could activate a spousal or dependent child benefit for someone else while delaying their own benefit, only a small time window remains to submit a File-and-Suspend request before the rules are changed forever! And arguably, anyone who is single and doesn’t care about spousal benefits, but simply wants to preserve the right to “undo” and reinstate their delay decision in the next few years, may want to consider submitting a request to File-and-Suspend by April 29 as well!