Nerd's Eye View blog

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!

Improving Your Financial Advisor Business IQ (Implementation Quotient)

March 31, 2016 10:01 am 0 Comments CATEGORY: Personal/Career Development

Successfully growing a business - as a financial advisor or in any other industry - requires a delicate balance between having the right vision of what you want to do that serves your clients and provides value, and actually being able to implement it. A vision without implementation doesn't succeed, and a business that blindly implements without a cohesive vision eventually collapses in on itself.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at the concept of your business IQ - your Implementation Quotient - as set forth in the recent new book "The Sustainable Edge" for financial advisors by Ron Carson and Scott Ford. The Implementation Quotient is simply a measure of how many of your ideas you actually implement... and The Sustainable Edge aims to provide guidance about how to improve that business IQ, for those advisors who have hit the growth wall.

Ultimately, the key to moving forward is actually quite simple: it's all about focus, and recognizing that we all have the same limited time every day and every week, so it's essential to properly focus where you spend your time to maximize your success and the success of your business. Of course, that's easier said than done... because gaining focus requires saying "no" to a lot of opportunities, and even if it's done in order to say "yes" to the things that matter most, it's a challenge for us financial advisors who often chose this profession because we want to help people and not say no to them!

Nonetheless, the reality remains that time is an unforgiving and inflexible constraint. So decided what you will say "no" to, and figuring out what the filter is that you will use to determine what to say "no" to, becomes essential. And in fact, it's also possible to use the constraints of time to your advantage - because once you've decided what you're going to say "yes" to, there's nothing like having a time deadline to impose the necessary accountability on yourself to be certain it actually gets implemented!

IRS Will Now Require Executors To Report Cost Basis To Beneficiaries For Inherited Assets

March 30, 2016 07:01 am 3 Comments CATEGORY: Estate Planning

When a beneficiary inherits property from a decedent, the asset receives a step-up in basis to its value on the date of death – which is both a tax perk for inheritors, and a form of tax simplification (as beneficiaries otherwise may not know what the decedent’s original cost basis was anyway).

However, with hard-to-value assets, there may be a disagreement between the valuation for estate tax purposes, and the value used by the beneficiary for cost basis reporting. After all, the estate prefers a small value (to minimize estate taxes) while the beneficiary ideally wants the highest possible value reported (to get a higher basis step up). And in the past, it was even possible for the executor and beneficiary to report different amounts, each to their own benefit (and the detriment of the IRS!).

To close this perceived “loophole”, in 2015 Congress created the new IRC Section 1014(f) that requires beneficiaries to use a date-of-death valuation for cost basis purposes that is no larger than the amount reported on the estate tax return, curbing the abuse. In addition, Congress also established the new IRC Section 6035, which requires executors to file a new Form 8971 to notify the IRS who the beneficiaries are, along with a Schedule A that informs both the IRS and the beneficiaries what their inherited cost basis will be.

The good news of the new reporting form is that it should actually ease the burden for beneficiaries who need to determine cost basis for their inherited assets. However, the requirement is a new burden for executors, who may struggle to follow the 30-days-after-Form-706 deadline for filing the new Form 8971 and supporting Schedule A, especially in situations where it takes a long time to identify all the beneficiaries and determine which property will be distributed to them. In fact, ironically the rules have been so complex to roll out, that the IRS has had to repeatedly delay its implementation as well, though the new Form 8971 reporting requirements are now scheduled to take effect by June 30 of 2016, and will apply retroactively back to any estate tax returns filed since last July 31 of 2015!

Nerd’s Eye View 2016 Reader Survey – Your Input Is Requested!

March 29, 2016 07:01 am 1 Comment CATEGORY: Nerd's Eye View

At Nerd’s Eye View, the goal is always to make this an ever-more-valuable resource for all of you, the readers. And over the years, reader feedback has shaped everything from the visual design of the blog (right down to the default font size!) and the comment system we use, to the expansion of our Members section to offer CFP CE credit (and more recently, also IMCA CE credit) for Nerd's Eye View blog posts, and more.

And while I'm happy with the progress we've made, I'm sure there's still more than we could do differently to serve you better. Accordingly, every year I try to survey all of you who read this blog, to get your thoughts and feedback about the features we're offering, some ideas we're considering, and whatever other input you're willing to share about what we could do to make this a more valuable site and a better user experience for you.

So regardless of whether you're an advisor, an individual consumer who reads this blog for your own benefit, a related professional that works with financial advisors, or you're associated with a vendor who serves advisors, I hope you'll take a few minutes to answer this year's survey. It's only 10 questions, should take no more than a few minutes, and will remain open until the end of next week (April 8th).

Thanks in advance for clicking through to today's blog post to share your feedback! 🙂
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Is The CFP Board’s New Mandatory Arbitration Requirement Really Fair?

March 28, 2016 07:01 am 17 Comments CATEGORY: Planning Profession

The right to use the CFP marks entails signing an agreement with the CFP Board, which commits the CFP certificant to abide by the CFP Board Terms and Conditions of Certification. These Terms Of Use cover essential details, from the CFP Board’s rights over the CFP marks, to the certificant’s use of them, and the ability of the CFP Board to discipline the certificant or revoke the marks entirely in cases of misconduct.

Last week, the CFP Board announced major updates to the Terms and Conditions of Certification, for the first time in nearly eight years. And, while several of the changes are simple clarifications to the legal language, the CFP Board did introduce a new provision that would require all disputes between CFP certificants and the organization to be taken to mandatory arbitration, rather than a court of law.

Arguably, arbitration will be a less expensive and more expedient path in many (or even most) cases, but the CFP Board’s arbitration requirement that keeps the outcome confidential (even if ruled against the CFP Board), coupled with a separate (and already existing) rule that limits any CFP Board liability to no more than $1,000 (plus legal fees), effectively means the CFP Board has remarkably little accountability or transparency whatsoever in any dispute (or worse, a series of disputes) with CFP certificants.

And perhaps most concerning is simply the fact that the CFP Board is changing its Terms and Conditions unilaterally. Technically, this is the organization’s right, as it controls the CFP marks and CFP certificants always have the right to not sign and choose to walk away. Yet the growth of the CFP marks in public prominence, and the CFP Board’s success in outdistancing virtually all other designations for financial advisors, means that even if CFP certificants would prefer that arbitration simply be an option rather than mandatory, they have very little choice but to accept the unilateral changes being handed to them... or risk being disparaged when the CFP Board's "Certified = Qualified" public awareness campaign questions their competency for having walked away from the marks?

So with the FPA unable to effectively advocate on behalf of CFP certificants, will the CFP Board consider some means to allow CFP certificants as stakeholders to weigh in on the decision before we are forced to waive our legal rights... or at least, will the CFP Board's Board of Directors modify its mandatory arbitration proposal to limit its scope to its publicly stated purpose, and provide some public information regarding arbitration outcomes to at least step up to being as "transparent" as FINRA?!