Nerd's Eye View blog

Is Financial Life Management (FinLife) Going To Replace Financial Planning and Wealth Management?

April 18, 2016 07:01 am 18 Comments CATEGORY: Marketing

As the world of financial advice continues to evolve, so too does everything from the services we provide to clients, the business models by which we operate, and the labels that we use to describe ourselves. The past 50 years alone we witnessed transitions from insurance agents and stockbrokers, to financial advisors and financial consultants, to financial planners, and now wealth managers.

And now the ongoing crisis of differentiation appears to be spurring the next evolution for financial advisors, towards an ever-more-holistic model that United Capital’s Joe Duran has dubbed “Financial Life Management” instead. In this ‘new’ approach, advisors would be increasingly focused around client advice in regards to work and employment, and spending behaviors – which research finds is, from the consumer’s perspective, the real focus of their “financial life story” (and not their savings and investment portfolios!).

Of course, the caveat is that most financial advisors have limited skills and even fewer tools to support clients when it comes to areas like managing their human capital and providing guidance on spending and household cash flow. Yet in this gap is the very opportunity for firms to differentiate themselves by going deeper into a new type of service model. Including firms like United Capital that may offer a platform (e.g., FinLife Partners) to deliver on the FinLife value proposition.

Ultimately, it remains to be seen if “Financial Life Management” really becomes the new term du jour that supplants financial planning and wealth management, but arguably the time really has come for the next stage of advisor evolution. And “FinLife” seems as good a label as any to capture the ever-more-holistic focus for the future of financial advice!

Weekend Reading for Financial Planners (Apr 16-17)

April 15, 2016 02:52 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the interesting announcement that LPL (the country's largest independent broker-dealer and 5th largest RIA custodian) is going to partner with BlackRock to offer its FutureAdvisor "robo" platform to advisors (but, notably, using LPL's model portfolios!). Also in the 'recent news' this week is a good recap of where the DoL fiduciary rule stands, now that it's been issued, and the experts are starting to digest and interpret its finer points.

From there, we have a number of technical financial planning articles this week, including a discussion of the looming "final countdown" for the Social Security file-and-suspend strategy, a research study suggesting that "low vol" equities can improve safe withdrawal rates, an analysis of whether it's better to use fixed or inflation-adjusting annuities for guaranteed retirement income, a look at how the IRA prohibited transaction rules work and what to avoid, an examination of how even "buy-and-hold" investors can take advantage of basic momentum strategies, and a discussion of why the popular "stock buybacks are propping up the stock market" view isn't an accurate reflection of how markets set stock prices.

We wrap up with three interesting articles: the first looks at how you need to handle team meetings a bit differently if you're working with your team "virtually" and not in-person; the second takes a dive into the growing recognition that differences in income are associated with significant differences in life expectancy, but why income inequality itself may not be the direct cause; and the last is a good reminder that being able to generate alpha in a portfolio is about more than "just" being able to predict future trends (as difficult as that already is), but also being able to know what expectations are about those trends (which is even harder), and also predicting what the attitudes about those future trends will be in the future (which is nearly impossible)!

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 the LPL deal with BlackRock's FutureAdvisor platform, a new integration between risk tolerance software Riskalyze and financial planning software Advizr, and the Facebook announcement of "messenger bots" and how they may ultimately impact the world of financial advisors.

Enjoy the "light" reading!

Can You Outsource Business Development To Generate More Financial Advisor Leads?

April 14, 2016 08:10 am 7 Comments CATEGORY: Practice Management

Business development and lead generation is a challenge for most financial advisors. After all, even though we've (thankfully!) left the days of cold calling scripts behind, the reality is that you can't get paid to give advice until you convince someone to pay your for that advice! And you can't convince them to pay you until you find prospects to get in front of in the first place!

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at the question of whether it's possible to outsource business development to someone else. Is it feasible to hire a business development person, or otherwise pay a third party to bring in clients for you?

The good news it that there are some options out there, from third-party websites that provide financial advisor lead generation (not necessarily a ton, but a few they do bring in some clients!), to forming an RIA solicitor agreement to pay an accounting firm or other center of influence for business development referrals.

Of course, an RIA solicitor agreement could be formed with an individual business development person as well, but the irony is that the small firms that need the most help with business development probably won't be able to afford the best business developers, who instead will get hired by a larger firm, or simply go to form their own. In fact, many of today's most successful advisory firms were built by a partnership with one person who was especially good at business development, and another who was better at delivering planning, managing investments, and/or operating the business.

And in the end, if the problem is that you just want to provide financial planning advice but not be responsible for finding your own clients, you may want to look at merger or tucking into a larger firm that does have its own organic business development process. Your upside may be more limited as an employee instead of an owner, but it also can give you more time to do the financial planning work with clients you enjoy the most anyway, if that's really what you want to do!

How DO You Measure Which Retirement Income Strategy Is Best?

April 13, 2016 07:01 am 19 Comments CATEGORY: Retirement Planning

Given the myriad of products and services available to today’s prospective retirees, there are a lot of choices to consider about which retirement income strategy to pursue, from portfolio-based withdrawal strategies to annuities with income guarantees and more.

Yet as it turns out, what seems like a relatively simple question – which retirement income strategy is the best – is actually remarkably difficult to determine. Because as it turns out, which is “best” depends heavily on how you measure what “best” really means in the first place.

For instance, when evaluating by what produces the most wealth, the best retirement strategy is generally to just not spend very much (and ideally invest for growth along the way, too)! If the goal is to maximize retirement spending, then the “best” strategy is to invest as aggressively as possible in order to maximize the portfolio growth that will substantiate that spending. Yet portfolios with maximal growth can also produce the greatest catastrophes, which means a risk-averse retiree may not want that approach, even if it would otherwise have increased retirement spending!

What all of this ultimately means is that in framing different retirement income strategies – and the trade-offs they might entail – it’s important to give serious consideration to the measuring stick that will be used to evaluate the potential retirement outcomes. Because the “best” retirement income strategy may be very different depending on whether you measure based on wealth, spending, probabilities of success, magnitudes of failure, or utility functions that weigh both the upside and downside risks!

Advisor’s Guide To DoL Fiduciary And The New Best Interests Contract (BIC) Requirement

April 11, 2016 07:01 am 52 Comments CATEGORY: Regulation & Compliance

On April 6 of 2016, the world of professional financial advice took its first step into the future with the issuance of a Department of Labor (DoL) fiduciary rule, declaring that brokers can no longer earn commissions and other forms of conflicted advice compensation from consumers, unless they agree to do so pursuant to a Best Interests Contract (BIC) agreement with the client, which commits the advice-provider to a fiduciary standard of giving advice in the “best interests” of the client, earning “reasonable compensation”, and providing appropriate disclosure and transparency about the products and compensation involved.

Fiduciary advocates have lamented that the Department of Labor conceded several major points in its final DoL fiduciary rule, including shifting a number of key disclosures to be provided “upon request” or via the Financial Institution’s website (but not outright to the client), incorporating the Best Interests Contract into existing advisory and new account agreements (rather than as a separate fiduciary agreement), and not adopting a “restricted asset list” and instead keeping the door open to everything from controversial illiquid products like non-traded REITs, high-commission products like some variable and equity-indexed annuities, and companies that implement their own proprietary products as the “recommendation” at the end of every financial plan.

However, it appears that in reality the DoL fiduciary rule concessions were a brilliantly executed strategy of conceding to the financial services industry the exact parts that didn’t actually matter in the long run (while still reducing the risk of a legal challenge), yet keeping the key components that mattered the most: a requirement for Financial Institutions to adopt policies and procedures to mitigate material conflicts of interest and eliminate incentives that could compromise the objectivity of their advisors (or risk losing their Best Interests Contract Exemption and cause all their advisory compensation to be a Prohibited Transaction), and a second requirement that clients can no longer be forced to waive 100% of their legal rights and accept mandatory arbitration, instead stipulating that while an individual client dispute may be required to go to arbitration, consumers must retain the right to pursue a class action lawsuit against a Financial Institution that fails to honor its aggregate fiduciary obligations.

In essence, then, financial services product companies claimed that they can offer often illiquid and opaque, commission-based, and sometimes even proprietary products to consumers, while also receiving revenue-sharing agreements, and simultaneously still act in the client’s best interests as a fiduciary. And so the Department of Labor’s response became: “Fine. If and when consumers disagree, you’ll have a chance to prove it to the judge when the time comes.” In other words, while the DoL fiduciary rule didn’t outright regulate what Wall Street can and cannot do, it did change the legal standard by which all of Wall Street’s actions will be judged, and ensure that eventually the courts will have the opportunity to rule on these fiduciary conflicts. And in the long run, that will be a world of difference.

In the meantime, though, the clock is ticking for the onset of an incredibly far-reaching new fiduciary rule, and one that will impact not just broker-dealers, but RIAs as well (albeit to a lesser extent), insurance companies and annuity marketing organizations that sell variable and equity-indexed annuities, and more. The key provisions of the rule will take effect on April 10, 2017, with a transition period through January 1, 2018, by which time the last of the detailed disclosure and other policies and procedures must be put in place.

In this article, we provide an in-depth look at the keystone of the new fiduciary rule as it pertains to advisors working with individual retirement accounts: the new “Best Interests Contract Exemption”, which most broker-dealers and insurance companies will rely upon in their future attempts to provide conflicted advice to IRAs for commission compensation, and the creation of the new “Level Fee Fiduciary” safe harbor, that may (and I strongly suspect, will) eventually become the standard by which all retirement advice is delivered.

Of course, the biggest caveat is that all the new fiduciary rules apply only to retirement accounts, and not any form of taxable investment account or other investment purchased with after-tax dollars… which means the new DoL fiduciary rule will likely ultimately drive the SEC to step up on its fiduciary rule as well, as it’s clearly untenable in the long run for advice to retirement accounts to be held to a fiduciary standard, while everything else remains the domain of suitability and caveat emptor!

Weekend Reading for Financial Planners (Apr 9-10)

April 8, 2016 02:44 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the huge news this week: that the Department of Labor issued its final fiduciary rule, with some final concessions to Wall Street firms but the substantive core remaining intact... although we may not know for years, until the attorneys get involved, whether or how much more protective the rule will really be.

From there, we have several practice management articles this week, from a look at how to engage in data-driven (digital) marketing tactics, to what you should consider in getting started with digital SEO (Search Engine Optimization) tactics, along with how to edit your advisory firm's bio page, who to recruit to your client advisory board, and why it's increasingly necessary for advisors to check their technology stack for duplicative services they might trim (and whether it's time to start pressuring technology providers to better unbundle their services).

We also have a few more technical articles this week, including: the difference in tax treatment between ETNs versus ETFs (and why ETNs are more favorable in some circumstances); how to use Roth conversions to protect clients from higher future tax rates; and the latest research from Wade Pfau on how best to incorporate a reverse mortgage as part of the retirement income picture.

We wrap up with three interesting articles: the first is a look at how sometimes the greatest blocking points to growing an advisory business and being successful come from our own personal challenges that get expressed in the business; the second is a great reminder that an advisory business isn't a business because you earn a living by working in it... it's only a business when it has value beyond the work that you do yourself; and the last looks at the rising phenomenon of the 'workaholic' and why many seem to feel so compelled to work so hard, and can't seem to escape our jobs as a prison, even as the reality is that more than ever we find our sense of identity and purpose in our work (and not merely the activities we do in our off-work hours, as was the case just a generation ago)!

Enjoy the "light" reading!

Do You Need To Improve Your Client Referral Process?

April 7, 2016 08:28 am 0 Comments CATEGORY: Practice Management

For most advisors, referrals are the number one way to grow an advisory firm. In some cases that may simply be because advisors rarely do any other marketing (so referrals are all that's left). Nonetheless, as a relationship-based business, referrals are clearly going to be a material driver.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at the question of what a "good" client referral rate and closing ratio is. What percentage of client referrals should you close? How low is too low, where you might really have a sales problem?

The first key in evaluating your close ratios is simply to reflect on how many of those prospects were actually qualified leads that could do business with you in the first place. If your close rate is low because most of the prospects you talk to aren't qualified, you don't have a sales problem. You have a screening problem!

On the other hand, if you're meeting with qualified prospects, there really might be a true "sales" problem. Perhaps you're not truly differentiated enough. Perhaps your marketing materials aren't effectively communicating your value. Or maybe you're just failing to actually ask for the business when the time comes?

Ultimately, the fact that so many advisors have such a different sales process, it's hard to benchmark a clear number. But as a rough rule of thumb, if fewer than 1/3rd of your qualified referral leads are doing business with you, it's time to look at your sales process. On the other hand, if more than 80% of your clients are saying yes, perhaps the real problem is that you're not charging enough!?

The Importance Of Creating Small Financial Planning Goals

April 6, 2016 07:01 am 4 Comments CATEGORY: General Planning

Financial planning is focused heavily on establishing and working towards very big long-term goals, from saving for a child’s education to accumulating the assets to fund a multi-decade retirement.

Yet the fundamental problem of “big” goals – financial planning or otherwise – is that they can seem so big and overwhelming that it’s actually demotivating. In the extreme, the goal may feel so distant and unachievable that it simply leads the person to give up on pursuing the goal at all!

Accordingly, the reality is that to really make long-term financial planning goals achievable, the key is to break them down into smaller pieces first. As the saying goes, the way to eat an elephant is one bite at a time. And the research of behavior change and motivation is increasingly finding that the “small wins” of successfully achieving small goals may actually be the key to helping us rewire our brains to stick with the new behavior in the long-run!

Unfortunately, though, financial planning education provides little in the way of training on how to break down big goals into small ones, and most financial planning software does a poor job of helping clients to track short-term goals!

Nonetheless, in the world where the actual implementation of goals – i.e., into saving and investment accounts – is becoming increasingly commoditized, arguably it will be the process of helping clients break down big financial planning goals into smaller SMART goals that are Specific, Measurable, Achievable, Relevant, and Time-bound, and then providing them the tools to track progress and serving as an accountability partner to ensure follow-through, that may be the greatest financial planning value-add of all!
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How Financial Planning Retainer Fees Are Going Beyond AUM Fees Rather Than Replacing Them

April 4, 2016 07:01 am 27 Comments CATEGORY: Practice Management

With the ongoing rise of technology commoditizing pure investment management, a growing chorus of critics are raising the question of whether the AUM model is “toast”, or at the least that financial planning fees may soon need to be unbundled from AUM fees.

Yet a look at the most recent Investment News and FA Insight benchmarking studies reveals the exact opposite trend: the most profitable and highest growth firms continue to be those that embrace the AUM fee, and are not adopting financial planning fees en masse. And in fact, the larger the advisory firm, the more likely the top performers are to focus solely on the AUM model!

In fact, the benchmarking data reveals that the only firms successfully implementing standalone financial planning fees are the smallest “solo” advisor firms who tend to serve the least affluent clientele – for whom planning fees may be effective simply because their clients don’t have the assets to fit an AUM model in the first place (and also because they don't have the overhead demands of large firms).

More broadly, what this data suggests is that to the extent there is any rise in the use of standalone planning fees by advisory firms, it is primarily being done by firms serving clients who can’t even be reached as effectively by the AUM model anyway (i.e., they don’t have a large amount of assets available to be managed), rather than competing head-to-head with the largest AUM firms that continue to be more profitable and capable of reinvesting more to outgrow their non-AUM competitors!

Weekend Reading for Financial Planners (Apr 2-3)

April 1, 2016 01:01 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a slew of notable "robo-advisor" news, including Betterment raising a whopping new $100M round of venture capital as the company positions itself as the 'leading' robo-advisor, the announcement that Wealthfront is launched the "3.0" version of its platform with an increasing focus on using artificial intelligence to power advice, and the news that Fidelity is expanding its new robo-advisor "Fidelity Go" to a wider group of beta users with the plan to roll out to the broader public later this year.

Also in the advisor technology news this week was the 'surprise' announcement that Schwab would be discontinuing its own custom version of Salesforce that was bundled into its OpenView Integrated Office platform (in what is being dubbed a failure of bundled proprietary software over open architecture solutions), and the rollout of LinkedIn's new "ProFinder" service where financial advisors can list themselves (amongst other types of freelancers) for other LinkedIn users to find.

From there, we have several technical articles, including: a look at whether we've gone "too far" in using Monte Carlo analysis for retirement planning (from an early Monte Carlo analysis champion, Moshe Milevsky); a discussion from Wade Pfau about his 'guiding principles' in his own retirement planning research; an analysis of whether deferred income annuities (DIAs) are actually better than single premium immediate annuities for retirement planning (or not); the rise of a "no-gift" loan strategy for funding an Irrevocable Life Insurance Trust (ILIT) to avoid dealing with Crummey powers; and an analysis of whether actively managed small-cap funds really add long-term alpha or not.

We wrap up with three interesting articles: the first is a look at how the Exchange-Traded Fund (ETF) came into being, a solution indirectly proposed by the SEC in its post-mortem analysis of how the crash of 1987 could have been avoided (an ironic origin, given that the SEC is now concerned about the mini-ETF-crash from last August!); the second is a great overview of the leading research on the links between money and happiness, which finds that money really does have a role in increasing our life satisfaction, but with less and less impact as income rises, and with less benefit than other non-money changes we can make in our lives (e.g., improving our health and relationships); and the last is a powerful reminder of how self-improvement is not something that happens all at once (even if we want it to and try to mentally commit to it), but instead is a process of gradual improvement, where getting just 5% better every year, compounded, can make us 400% wiser and better over the next 30 years!

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, which this week includes a discussion of Betterment raising $100M of venture capital at a $700M valuation, Fidelity's testing of Fidelity Go, and the Schwab Advisor Services decision to discontinue its OpenView Integrated Office custom version of Salesforce.

Enjoy the "light" reading!