Nerd's Eye View blog

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!

How Life Insurance Loans Really Work And Why It’s Problematic To “Bank On Yourself”

March 16, 2016 07:01 am 126 Comments CATEGORY: Insurance

A popular feature of permanent life insurance is that it accumulates cash value that can grow over time – ensuring that if the policy is surrendered, the policyowner will still have something to show for it that cannot be forfeited. However, this “non-forfeiture value” of a life insurance policy has an important secondary benefit as well – it gives an insurance company the means to provide policyowners a personal loan at favorable interest rates, because the cash value provides collateral for the loan.

Yet even as cash value life insurance operates as collateral for a life insurance policy loan, it also remains invested, earning a rate of return that slows the erosion of the net equity in the policy and allows a policy loan to remain in place for an extended period of time. And with some insurance policy loan strategies – such as the popular “Bank On Yourself” approach, there’s even a possibility that the cash value can out-earn the stated interest rate of the loan, allowing the loan to compound ‘indefinitely’.

The caveat, however, is that in the end a life insurance policy loan is still really nothing more than a personal loan from an insurance company, using the life insurance cash value as collateral. Which means even if the net borrowing cost is low because the cash value continues to appreciate, that’s still growth that the investor might have enjoyed for personal use, if the loan was never taken out in the first place. Or viewed another way, trying to bank on yourself doesn’t work very well when ultimately the loan interest isn’t actually something you pay back to yourself, it simply repays the life insurance company instead!

Replacing The Data Gathering Meeting With A “Get Organized” Client Experience

March 14, 2016 07:01 am 14 Comments CATEGORY: Practice Management

Creating a financial plan starts with gathering the client data, which many advisors request by providing clients with a “data gathering form”, typically structured in a manner that makes it easy to input the data into their financial planning software.

The caveat, however, is that in practice clients often don’t fill out the data gathering form. For some, they feel it’s too much work. For most, the problem is simply that they aren’t organized enough to provide all the requisite information. And may even feel guilty or embarrassed about the fact that they’re “failing” in the very first step of the financial planning process.

So what’s the alternative? Ditch the data gathering meeting, and have a “Get Organized” meeting instead. In other words, make the first meeting with the client about getting them financially organized in the first place. Have them bring in their jumbled files, and give them a file box with sorted folders to organize the information. Scan the key documents and statements and put them into a newly created client vault. Set up a client PFM portal, show them how to use it, and help them to begin connecting their accounts on the spot.

By having the Get Organized meeting, the financial planner still has the opportunity to collect all the data that’s needed to move forward with the financial planning process – but done in a client-centric manner that recognizes the client’s challenges and provides them an immediate, tangible benefit. In fact, for some people, a “Get [Financially] Organized” service might be so valuable, advisors could even charge for it separately and get paid to market and demonstrate their value to prospective clients!

Weekend Reading for Financial Planners (Mar 12-13)

March 11, 2016 02:29 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the big announcement of Salesforce Financial Services Cloud, a new contender in the world of advisor CRM as Salesforce looks to build on its success in financial services by building its own proprietary customized solution for financial advisors.

From there, we have several technical articles, including some good reminder tips for those doing "last-minute" IRA contributions in the coming weeks, and a review of the issues to consider for early retirees who want/need access to health insurance after work and before being eligible for Medicare at age 65 (now more feasible than ever, thanks to the new health insurance exchanges). We also have two investment-related articles, one discussing the launch of Eaton Vance's new "exchange-traded mutual fund" (the ETMF) and how it's similar-but-different to an ETF, and the other looking at how high-dividend strategies may have strong performance but value-oriented strategies (regardless of the dividend) appear to perform even better.

There are also a few technology-related articles this week, including software reviews of a new digital content marketing service called Financial Media Exchange (FMeX), a new platform for advisors to engage in options trading called Vest Financial, and the looming emergence of facial recognition software that advisors might use to help understand their prospects and clients better (and how they emotionally react to money and financial issues). There's also a good review of the technology offerings of the "smaller" and start-up-friendly RIA custodians, including TradePMR, SSG, and Scottrade Advisor Services.

We wrap up with three interesting articles: the first is a look at why investors tend to stray from their investment principles (hint: they convince themselves it's "close enough" to their principles that it's ok to fudge a little, even though it's often quite a material divergence); the second is a look at how our world is becoming so abundant, from free media and entertainment to excesses in many commodities, and how it may be driving malinvestment (and that a 'healthy' recession to purge the excesses would be good, before the real economy is harmed!); and the last is a discussion of whether the explosive rise of indexing over the past decade may be approaching the point that it's starting to distort the market prices for stocks and commodities, and what we might need to do in the future to correct the situation if we want to preserve cost-effective investment strategies but ensure healthy markets.

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 about the new release of Salesforce Financial Services Cloud (and his skepticism of its significance!), and the announcement that Betterment is adding account aggregation to its retail and institutional platform.

Enjoy the "light" reading!

Using Psychological Profiling Tools To Better Communicate With Clients

March 10, 2016 10:37 am 3 Comments CATEGORY: Personal/Career Development

Being able to communicate effectively with clients is an essential skill for a financial advisor. Yet the reality is that few of us are really trained in how to communicate effectively. Instead, most of us simply have our own natural style, and clients either connect with you, or they don't.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at some psychological profiling tools that financial advisors can use to better understand their clients' communication styles, which makes it easier for the advisor to figure out whether or how to adapt the way information is presented to clients.

From financial industry tools like Financial DNA, to general profiling tools like ProScan PDP, and even work style tools like Kolbe, there are a number of solutions available that can help advisors understand how to better communicate with a wider range of clients.

Of course, the reality is that in the early years, often the focus for new financial advisors is simply on mastering their technical competency and skills, and trying to focus on communication at the same time can be overwhelming. But for more experienced and established advisors, adopting psychological profiling tools may be an appealing path to deepen client relationships and grow the business!