Nerd's Eye View blog

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!

Dollar Cost Averaging May Help To Manage Risk But On Average It Just Reduces Returns

March 9, 2016 07:01 am 23 Comments CATEGORY: Investments

Conventional investment wisdom suggests that dollar cost averaging is a good approach to allocating investment dollars over time. By always investing a constant dollar amount, the strategy ensures that fewer shares will be bought as prices rise, while more shares are purchased if prices decline, bringing down the average cost per share in the long run. The only question is over what time horizon it’s best to average in.

Yet as it turns out, the answer is “none”. In reality, a dollar cost averaging investment strategy doesn’t actually enhance returns in volatile markets that have similar upside gains and downside losses on a percentage basis. And given that on average, markets go up more often than they go down, choosing to dollar cost average is more likely to just leave gains on the table (and the longer the time period, the greater the risk of foregone returns).

However, while dollar cost averaging may not be likely to enhance returns in the long run, it is still a risk management technique. Over the dollar cost averaging time period itself, the diversification of the “new” investment and “old” investment may actually produce superior risk-adjusted returns. And given that the pain of losses is more severe than the joy of gains, risk-averse investors may prefer to dollar cost average simply to minimize the potential regret of not doing so and seeing markets decline shortly thereafter.

Nonetheless, for investors who are comfortable with the risk of their portfolios, and aren’t specifically seeking a “regret aversion” (or at least, regret minimization) strategy, in the long run the best time horizon for dollar cost averaging is simply to invest all the money immediately – at least, presuming the investment was desirable to own in the first place!

A Hierarchy Of The Value A Financial Advisor Provides

March 8, 2016 07:01 am 7 Comments CATEGORY: Practice Management

With the ongoing commoditization of investment management services, and ever-increasing pressure on active investment managers to demonstrate their value, many have raised the question of whether financial advisors will eventually succumb to the pricing pressures of low-cost robo-advisors.

In today's guest post, Bob Seawright from Above The Market makes a compelling case for the long-term value of a financial advisor beyond just security selection and portfolio management, and highlights a "hierarchy of financial advisor value" that starts with the areas where financial advisors have the most impact - on savings and investment behavior, and providing financial planning advice - beyond which the actual implementation of an investment portfolio is just a small slice.

So whether you're a financial advisor who finds it difficult to articulate your value beyond just portfolio management services, or are simply looking for a new take and some fresh inspiration on how to describe your value to current and prospective clients, I hope that you find this hierarchy of financial advisor value to be beneficial in your practice!

Broker Misconduct Study Highlights Importance Of FINRA BrokerCheck Due Diligence

March 7, 2016 07:01 am 6 Comments CATEGORY: Planning Profession

Given the intangible nature of financial advice, the reality is that financial advisors and their advisory firms rely heavily on perceived trust and their reputation in order to get clients. As a result, both advisors and their firms have a strong incentive to distance themselves from the “bad apples” of the industry.

Yet a newly released study entitled “The Market For Financial Adviser Misconduct” finds that market forces and the industry’s self-regulatory mechanisms are failing to cleanse the bad apples. As a result, 73% of "financial advisors" (though the study actually analyzed FINRA-registered brokers, not fiduciary financial advisors!) who disclose a material misconduct event on FINRA BrokerCheck are still employed a year later, despite the fact that such brokers are a whopping 5x more likely to engage in misconduct again in the future.

On the one hand, the results of the research emphasize the importance of consumers doing effective due diligence using tools like FINRA BrokerCheck or seeking out services that “vet” advisors on their behalf (i.e., find advisors and brokers with clean regulatory records), and cast a positive light on FINRA’s recent efforts (including overhauling the FINRA BrokerCheck interface, and soon requiring all brokers to include a hyperlink back to their BrokerCheck record on their professional pages/profiles).

At the same time, though, the fact that bad brokers have been able to persist so long, and find safe haven in a subset of brokerage firms that appear to have cultures that are ‘unusually’ permissive of broker misconduct - combined with the fact that the SEC improperly allows those brokers to hold out as "financial advisors" in the first place - raises the question of whether the industry’s self-regulatory mechanisms are failing altogether. To the point that, similar to another "advisor sting" study from NBER several years ago, even researchers studying financial advisors and brokers can't tell them apart. As a result, is it any surprise that the President and the Department of Labor are pushing for fiduciary regulatory change?

Weekend Reading for Financial Planners (Mar 5-6)

March 4, 2016 02:29 pm 4 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a controversial new industry study finding that not only do 7% of all "financial advisors" (those registered in FINRA BrokerCheck) have a serious misconduct event in their records, but the overwhelming majority of them remain in the industry even after committing their infractions, with some firms reported to have as many as 1-in-5 advisors with a misconduct disclosure. Also in the news this week is the launch of Morningstar's new ESG sustainability ratings for 20,000+ mutual funds and ETFs, as the rise of impact and socially responsible investing continues.

From there, we have a slew of articles related to business development and growing an advisory firm, including: a discussion from Mark Tibergien about whether advisors are paying too much in using solicitor agreements to get referrals; how some advisors have had great success hosting a radio show to build their clientele (but that many advisors have found radio to be an expensive failure, too); what surveys of clients who refer tells us about why they refer and how to increase referrals (hint: asking them for referrals is not the way to do it!); how to develop strategic alliances to try to generate more high-quality high-net-worth referrals; the importance of letting your own personality and "style" shine through in your marketing and business development; and how one 26-year-old woman succeeded in getting ultra-high-net-worth clients after joining Goldman Sachs by embracing a business development attitude across both her professional and personal life.

We wrap up with three interesting articles: the first is a look at how people who feel powerful and confidence are more creative, process information better, and focus more effectively... until they're put in a group with other powerful people, where the results get worse as the leaders jockey for leadership status and lose focus on the purpose of the group; the second is a Journal of Financial Planning study showing how some people have a naturally high propensity to plan, while others will struggle to engage with a financial planner until/unless they are better trained on how to plan for themselves; and the last is the review of a survey study of financial advisors and their own tendencies towards financial planning, which finds that fewer than half of all financial advisors even have a financial plan of their own, and a mere 4% engage an outside financial planning professional to assist them, suggesting at the best that advisors are like the proverbial "cobbler's children with no shoes" neglecting their personal situation (and at worst may be hypocrites about the value of financial planning itself?).

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 rise of "ransomware" cyberattacks on financial advisors, LPL Financial's coming robo-advisor tool, and the new Morningstar ESG sustainability ratings tool!

Enjoy the "light" reading!

Google’s Nascent #FinTech Robo-Advisor – Google Compare – Bites The Dust

March 3, 2016 09:18 am 6 Comments CATEGORY: Technology & Advisor FinTech

While there have been a number of small robo-advisor start-ups in since the financial crisis, and a few traditional financial services firms have thrown their hats into the ring, the looming question of the robo-advisor space is whether, someday, a "mega" web business like Google would want to someday get in on the action. Which, given the sheer scope of the company, could cause some real disruption of financial advisors.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at the recent announcement that Google has decided to shut down its Google Compare service, which provided consumers an opportunity to compare and then purchase a wide range of financial services products, from CDs and savings accounts to mortgages and car insurance. Some had speculated that it was only a matter of time before Google used the service - which was once actually named Google Advisor - as the launch platform for their own robo-advisor service.

Ultimately, Google declared that its decision to shut down Google Compare was driven by the simple fact that while people might be gathering information online to evaluate financial services products, they weren't necessarily buying online. In other words, at the end of the day, it takes more than just a website to buy a complex financial services product. A challenge that Google learned from its Google Compare experiment, and that the direct-to-consumer robo-advisor platforms and their slowing growth rates are revealing as well.

Of course, none of this is meant to say that technology isn't important and won't change the way that financial advisors do business. But just as online brokerage platforms of the 1990s and the rise of the internet didn't replace financial advisors, it appears less and less likely that robo-advisors will, either. Still, just as the leading advisory firms ultimately adopted the internet technology of the 1990s to run successful advisory firms today, the cycle is playing out again with Blackrock buying FutureAdvisor and Invesco buying Jemstep. Which means in the end once again it won't be the technology firms that replace advisors, but the technology-augmented advisors who beat out the rest that lag behind!

The Age-100 Tax Problem With Outliving The End Of Life Insurance Mortality Tables

March 2, 2016 07:01 am 17 Comments CATEGORY: Insurance

The conventional view of “whole life” and other forms of “permanent” insurance coverage is that the policies are designed to last for your entire life, however long you may live. As long as you keep paying the premiums, you can keep your coverage, until it pays out as a tax-free death benefit.

However, the reality is that the underlying structure of permanent insurance, and the key characteristic that makes it affordable to have coverage – even in the later years of life – is that a “permanent” insurance policy actually has an ultimate maturity date, such as age 100. Which means if you live beyond that point, the policy “matures” and pays out its face value!

And the problem with outliving life insurance is not merely that the policy matures and pays out its benefit, but the fact that it was paid while alive – and not as an actual death benefit – meaning the payout is a taxable gain to the policyowner! In other words, outliving the life insurance maturity date not only marks the end of life insurance coverage itself, but a taxable event!

Fortunately, policies issued in the past 10 years or so primarily use the newest 2001 CSO mortality tables, which were extended to a maximum life span of age 121, to reduce the risk of the insured outliving the end of life insurance mortality tables. However, most existing permanent life insurance was issued under “old” mortality tables with a maximum age of 100 (or even age 96), which means most permanent life insurance owners still have to contend with the possibility that they can actually outlive their life insurance… and face the tax consequences that come with it!

Announcing IMCA CE Credits For CPWA, CIMA, and CIMC On The Nerd’s Eye View Blog!

March 1, 2016 07:01 am 0 Comments CATEGORY: Nerd's Eye View

At Kitces.com, we’re always listening to your feedback about how to make this blog and our Members Section a more valuable resource for you. Over the years, reader feedback has shaped everything from our visual design, to the frequency of the articles, suggested topics, and even the size of the reading font!

And with your continued feedback, we’re excited to announce today the launch of a new feature: the ability to earn IMCA CE credits for reading Nerd’s Eye View blog posts, as well as receiving additional IMCA continuing education credit for The Kitces Report newsletter and the exclusive webinars in our Members Section.

In the coming weeks, you’ll also see our upcoming 2016 Reader Survey, in which we’ll be asking you more questions about ways we can continue to make this site more useful (including other types of CE credit you may want to receive for our content!).

Thanks for your continued feedback, and for all of you who have your CIMC, CIMA, or CPWA certifications, I hope you enjoy the new opportunity to earn IMCA CE credits!

Getting New Clients By Building A Narrowcasting Platform On Your Financial Advisor Website

February 29, 2016 07:01 am 15 Comments CATEGORY: Marketing

In today’s increasingly competitive financial planning landscape, it’s becoming harder and harder for advisors to differentiate. Yet as the world of financial advisors gets more crowded, arguably the biggest problem is simply being seen in the first place. After all, if a prospective client doesn’t even know you exist, there’s never an opportunity to even try to differentiate yourself!

In his recent book entitled “Platform”, author Michael Hyatt makes the case that the rise of the internet has created a unique new way to try to stand out from the crowd and be seen – not by trying to network and get referred to one potential new client at a time, but by building an entire “platform” that can showcase your expertise, and create opportunities for prospective clients to find their way to you. In other words, don’t just wait for referrals to come in (or ask for them); instead, build a platform that makes your expertise referable and attracts potential clients to you.

Notably, though, the biggest caveat to building a successful financial advisor platform is simply to be certain it’s built upon a solid foundation in the first place. Which means owning your own domain name, the site itself, and all the content that’s on it – your digital real estate. And whatever you do, don’t just share your expertise on other websites – from LinkedIn Publishing to third-party Q&A sites – which ultimately just build the value of their platform, rather than your own!

Weekend Reading for Financial Planners (Feb 27-28)

February 26, 2016 02:49 pm 1 Comment 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 PIABA that finds a whopping 1/3rd of all FINRA arbitration settlements went unpaid, often because the related brokerage firms were undercapitalized and underinsured to be able to make good on any client harm that might have been caused (which is, notably, an issue for many RIAs as well!). Also in the news this week is a recap on the total merger and acquisition (M&A) activity for independent RIAs in 2015, which found a 37% jump in deals and a veritable 'explosion' of mega-RIA ($5B+ AUM) transactions (as well as a growing number of small-to-mid-sized advisory firm acquisitions).

From there, we have several practice management articles this week, including: a discussion of the slowly growing trend of compensating employees in advisory firms with equity as compensation; how to grow an RIA firm with formal paid-solicitor referral agreements (and the applicable compliance rules to consider); the importance of considering not just what your advisory firm value proposition is, but whether you're effectively demonstrating and reminding clients that you're actually delivering on it; and a look at the growing issue of advisory firms struggling to deal with their clients impacted by dementia (and how ultimately the advisor may be in the best position to help clients and their families through such situations).

We also have a couple of technical articles this week, from a discussion of how many Social Security Administration offices are mishandling or outright refusing to process file-and-suspend requests ahead of the looming April 29 deadline before the rules change (such that the SSA had to issue an "Emergency Release" last week to provide guidance for its field offices), to a deep dive into Fidelity's Health Care Cost Estimate for retirees, and how the growing demand for securities lending for hedge fund short sellers is becoming so profitable that a number of small-cap ETFs are now beating their indices and effectively have a negative expense ratio (where the short-sellers "pay" the investor a positive fee just to invest in the index fund!).

We wrap up with three interesting articles: the first looks at a time management strategy of deliberately scheduling meetings and conference calls to last 30 minutes (where possible), as the compressed time can actually force people to be more productive and focused; the second is a look at the growing volume of research suggesting that "dressing up" for work can actually help you be more successful (as it both increases our self-confidence, and may positively impact others' perceptions of us); and the last is a nice remidner that just as many of us have morning rituals to get our days started, it's equally important to have an evening wind-down ritual to wrap up the end of your day in a positive way!

Enjoy the "light" reading!