Nerd's Eye View blog

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?!

Weekend Reading for Financial Planners (Mar 26-27)

March 25, 2016 02:29 pm 7 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the big industry news that the CFP Board is modifying its Terms and Conditions, and beginning in May will require all CFP certificants that have a dispute with the CFP Board to go through mandatory arbitration, forever ending the possibility that the CFP Board will have to defend another case like Camarda in court. Also in the news this week is the continued escalation of life insurance companies changing internal costs to make up for losses due to low interest rates, which has now triggered a class action lawsuit being filed against Transamerica (though it's certainly not the only company engaging in the practice!).

From there, we have a couple of technical articles this week, from a discussion of the importance of Active Share (the more unique the portfolio, the greater its upside and also downside potential), to a look at how to read through a Financial Aid Award letter (as many have just started going out to college students matriculating in the fall), as well as a look at the practical challenges of using an HSA as a supplemental retiree medical savings account, and the growing concern from the "father of Smart Beta" Rob Arnott that parts of the Smart Beta universe may be in a self-induced bubble that could lead to a Smart Beta crash (even if the underlying concept remains structurally valid when done properly).

We also have a couple of financial technology articles this week, including the launch of a new portfolio design and risk analytics tool called Totum Wealth, some helpful reminders about how to stay on guard against potential cyberattacks, and a discussion of the big #FinTech news that Intuit is going to be shutting down its APIs, potentially leaving a number of account aggregation and client portal services in search of a new partner (and while there are alternatives to choose from, including Intuit's suggested replacement Finicity, advisors using software relying on Mint APIs may still find their clients soon have to reconnect all their accounts just to get up-and-running again!).

We wrap up with three interesting articles: the first looks at how "99%" of networking events are a waste of time, and the real ways to leverage networking value and opportunities (first hint: when it's time for sessions, take a nap, so you can be awake and refreshed for the actual social time for relationship-building!); the second is an interesting hypothetical letter from a Millennial to her parents' advisor, providing a great reminder of the ways that advisors could (and often fail to) engage the children of their clients; and the last is a discussion of the challenge in figuring out, when you're raising children, how to define what is "Enough", particularly for a family that is affluent enough to afford whatever their kids want, and have to introduce an "arbitrary" line to tell them no, create some financial discpline, and hopefully instill values of fiscal responsibility.

Enjoy the "light" reading!

Investopedia Advisor Insights: Why Most Financial Advisors Should Skip It

March 24, 2016 12:06 pm 13 Comments CATEGORY: Marketing

In the vast ocean of the internet, financial advisors often struggle to figure out how to get noticed and gain digital exposure. The gap has led to a growing number of "Ask An Advisor" Q&A sites, from NerdWallet to the recently announced Investopedia Advisor Insights, all of which promise "digital exposure" in exchange for answering questions on their websites.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at why participating on platforms like Investopedia Advisor Insights is a bad idea for most financial advisors, and that the only one likely to make money in the long run is Investopedia, not the advisor.

The reason, simply put, is that content sites are in the content business, which means selling advertising, or other lead generation activities. Which means at best, advisors who are successful on third-party sites will find the companies serving up ads to their competition right next to their own answers. Assuming that information-seekers who ask questions online are even likely to hire an advisor in the first place, which they're probably not. And at worst, the effort actually will be successful in driving business to the advisor... so successful that the site will change its model and begin to charge advisors to get access to their own leads!

The fundamental challenge in the entire approach is that giving away content and expertise to someone else's site is the equivalent of building someone else's business for free, in the hopes that some of their success rubs off for you too. It's a dangerous marketing strategy at best.

So what's the alternative? If you want to demonstrate your expertise to prospects by answering questions, then take the questions your clients ask you, put them up on your own website, and answer them. Make a blog, or a Frequently Asked Questions section, or something similar. But when you create content, create it for yourself, so you can build your own business in the long run, not someone else's!

Stress Testing To Ensure You Really Have A “Diversified” Portfolio?

March 23, 2016 07:02 am 14 Comments CATEGORY: Investments

While it’s commonplace for investors to hold multiple investments in a portfolio – often comprised of mutual funds or ETFs that in turn hold dozens or even hundreds of underlying positions – the reality is that even multi-asset-class portfolios aren’t always really diversified.

The fundamental problem is that holding many different investments that are all aligned to the same “base case” market scenario – and all go up together – may be equally at risk to decline together if an adverse event happens instead.

For instance, a “well diversified” portfolio holding US stocks, emerging markets, commodities, and corporate bonds, may be invested into multiple asset classes – but they would all be expected to go up in a growth environment, and all would likely decline severely in a recession!

Of course, the investments that don’t go down in a recession, from “defensive” stocks to government bonds, are also the investments likely to perform the worst if markets continue to rise. But in the end, that’s the whole point of diversification – to own investments that will defend in the risky events, even if it means giving up some upside in the process. Or viewed another way, being well diversified means always having to say you’re sorry about some investment that’s not moving in the same direction as the rest!

And given the complexity of today’s investment environment, and the typical multi-asset-class portfolio, a growing range of tools are becoming available to “stress test” various risky scenarios, to help determine whether a portfolio is truly diversified, or just holds a large number of investments that are all expected to go up – and down – in an undiversified manner!

Financial Advisor’s Guide To Choosing The Best Financial Planning Software (For You)

March 21, 2016 07:01 am 77 Comments CATEGORY: Technology & Advisor FinTech

Good financial planning software is an essential tool for today's financial advisor. Yet the reality is that it's incredibly difficult to determine what is the best financial planning software... in part because advisors vary in how they use financial planning software in the first place, which means what is the "best" software for one advisor may be a terrible match for another.

In this financial advisor's guide to the best financial planning software, we attempt to clarify what the important criteria are in choosing financial planning software in the first place, in recognition that what might be a crucial "deal-killer" required feature for one advisor may not even matter to another. Whether it's the distinction between goals-based and cash-flow-based retirement projections, to the ease of input, the depth of the output (especially in technical areas like detailed income and estate tax projections), available integrations to other components of the financial advisor technology stack, or the availability of account aggregation and "PFM" tools... the reality is that no financial planning software is the "best" at everything, so trade-offs must be considered.

In addition, as someone who's seen virtually every financial planning software company in the landscape - including some that aren't even around anymore - the end of this guide includes my own brief high-level review of each of the leading financial planning software packages (including some of the newest players, too), to give further context to each software package's strengths and potential weaknesses. Also included are the pricing details of the various financial planning software packages, which still have a remarkably amount of variance for what are nominally "similar" financial planning software tools!

I hope this guide is helpful to you in considering whether you're got the "right" financial planning software, or whether there may be an alternative solution out there that's a better fit for your business and client needs!

Weekend Reading for Financial Planners (Mar 19-20)

March 18, 2016 02:42 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a new industry study from Fidelity, finding that the looming Department of Labor fiduciary rule isn't just stressing out broker-dealers, but is making RIA firms nervous too, as more and more wonder exactly what the new burdens of compliance will be, and whether new investments in technology will be necessary to bridge the gap. At the same time, also in the news this week was a fresh warning from FINRA that it is beginning to scrutinize how firms are adopting "robo-advisor" tools, pointing out that automated technology doesn't eliminate a firm's due diligence obligations to understand the algorithms being used, how solutions are recommended, and whether they are really suitable for the investor.

From there, we have several practice management articles this week, including: a look at the different types of advisor leadership styles, which matters more and more as an advisory firm grows and the role of the founder shifts from advisor and business developer to true CEO and leader; a discussion of the recent regulatory change that some RIAs are no longer required to issue annual privacy notices to clients (but why it's so easy to do they should continue to provide them anyway); a look at the new Investopedia Advisor Insights platform that aims to pair financial advisors up to answer consumer questions (and whether it is really likely to generate any business for advisors or not); and a handy checklist of what you should have in the "introductory package" of marketing materials that you provide to prospects and centers of influence.

We also have a couple of technical articles this week, from a discussion of which clients will be impacted by the coming changes to Social Security claiming strategies (with the first deadline kicking in on April 29th), to an analysis of how the line of credit is calculated for a reverse mortgage (and why it's better to establish one sooner rather than later, especially if you think interest rates will rise), and also a look at how the way advisors are using Monte Carlo analysis may be inappropriately biasing the results in an overly favorable manner (by failing to consider the potential sampling error of using historical data in the first place).

We wrap up with three interesting articles: the first raises the question of whether the real robo-advisor "unicorn" (a startup that achieves a $1B valuation) may not be the popular startups of Wealthfront or Betterment, but the lesser-discussed Acorns that may has a paltry $73.6M of AUM but is currently on track for a whopping 2 million users by the end of 2016; the second looks at the popular "mandatory arbitration" clause in advisory firm agreements, and raises the question about whether this is really a valid consumer protection (or in the case of an RIA, an outright breach of fiduciary duty but not allowing clients at least the option to go to court); and the last is a look at how, even as critics suggest the Department of Labor has acted "too fast" in its fiduciary proposal, the movement towards a fiduciary duty for financial advisors is actually a global phenomenon, already enacted in the U.K. and Australia, and pending in Canada, for which the current fiduciary proposals in the U.S. are actually "mild" by comparison (which in turn suggests that the DoL's fiduciary rulemaking may just be the beginning of the changes to come!).

Enjoy the "light" reading!

What’s An Hour Of A Financial Advisor’s Time Worth… To The Client?

March 17, 2016 10:15 am 17 Comments CATEGORY: Personal/Career Development

Determining the value of your time as a financial advisor is crucial to setting an appropriate price for your services. After all, if you don't know what an hour of your time is worth, you won't know what you need to charge to reach your income or revenue goals for the business.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at the thought process in how you should think about valuing your time as a professional - and the key mental shift from valuing your time based on what it's worth to you, to valuing your time based on what it's worth to your client instead.

In fact, the reality is that if you're really providing valuable services to your clients - especially if they have a significant income or net worth - the value to them could actually be significantly higher than how you price the time for yourself. In other words, you may unwittingly end out significant under-charging for your services by solely focusing on the value to you, instead of considering how much value you're really creating for the client.

Of course, the reality is that early on as a financial advisor, the goal may be just to get any clients and bring in any revenue. But as the business grows, recognize that at some point, viewing the value of what your time is worth to you may limit your own growth and success!