Nerd's Eye View blog

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!

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!