Nerd's Eye View blog

Are Robo-Advisors Actually An Unregistered Investment Company… Along With Some Human RIAs, Too?

February 22, 2016 07:01 am 10 Comments CATEGORY: Practice Management

Traditionally, a registered investment adviser is in the business of providing investment advice to others, while a registered investment company – such as a mutual fund – exists primarily to invest in securities, often by pooling together the collective dollars of multiple investors.

Yet as technology makes it increasingly feasible for investment advisers to operate “efficiently” by formulating standardized model portfolios and implementing them uniformly for all clients, the question arises of where to draw the line between where investment advice ends and an (unregistered) investment company begins.

Rule 3a-4 of the Investment Company Act attempts to draw the line by stipulating that an investment adviser is “safe” from being deemed an investment company, as long as its portfolios are customized to individual clients, and the firm provides access to “personnel” of the advisory firm who are knowledgeable about the client’s account and how it is being managed.

Yet given the standardized investment portfolios of today’s robo-advisors, and the fact that most proudly state that they do not layer in the cost of a human advisor, the question arises of whether many of today’s robo-advisors even qualify for the Rule 3a-4 exception, or whether they really are operating as unregistered investment companies!

Notably, though, the issue is actually not unique to robo-advisors. The growing frequency of human (investment) advisers utilizing model portfolios and technology to implement them means some human-based RIAs may be running afoul of Rule 3a-4 as well. And if they’re not, ironically the shift of human advisors beginning to offer “robo” solutions to their clients could actually exacerbate the problem, if firms actually do so by eliminating direct human interaction with their clients!

Weekend Reading for Financial Planners (Feb 20-21)

February 19, 2016 02:01 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a new study out from Aite Group that finds the average CFP certificant is becoming significantly more successful than the non-CFP, with 40% higher average revenue in total and a whopping 70% higher average revenue per client as CFPs are showing themselves more able to attract higher net worth clientele.

From there, we have a couple of practice management articles this week, from strategies to create a retention plan for your advisory firm staff (ranging from bonuses to employee perks), to a checklist of the little things to consider in evaluating whether your physical office space is making a good first impression on prospective clients, and an interesting discussion from Mark Tibergien about whether much of the conventional wisdom about practice management trends for financial advisors is wrong (e.g., despite the buzz on "fee compression" the top advisory firms have actually been raising their fees by 5-10bps in recent years!).

We also have a number of advisor technology articles, including: the big news from the T3 Advisor Technology conference that Fidelity is launching "WealthScape" (which will include a new Fidelity proprietary portfolio accounting and performance reporting solution, in competition with Advent, Black Diamond, Orion, and others); a look at the evolving landscape of RIA custodian technology at Pershing, Schwab, and Raymond James; issues to consider for advisory firms looking to adopt e-signatures in the business; two new technology solutions that can help address compliance issues (including MyRIACompliance from RIA In A Box, and an about-to-be-launched RIAglass from MarketCounsel); and a look at how wirehouses have been reinvesting heavily into technology as well and are closing the gap on the independent advisor technology tools.

We wrap up with three interesting articles: the first is a discussion about how to explain that you're a fiduciary advisor, recognizing that raising the point about how other advisors are not fiduciaries could cause prospects to wonder about your own motives as well; the second explores the challenge that for most advisors, even if their ideal client showed up on their website to check them out, there's no way for the client to know they're the right fit; and the last explores the question of whether advisors are being hypocritical by insisting that "everyone" should have a financial planner to have a third-party perspective on their family financial issues, even as most advisors fail to pay for their own financial planner to get that very service to themselves.

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 coverage of the Technology Tools for Today (T3) Advisor FinTech conference, including Riskalyze's announcement of a new "Check-In" feature, eMoney Advisor's new client experience portal, and the coming new wealth management platform from Fidelity called Wealthscape!

Enjoy the "light" reading!

What To Do When Your Founders Are Selling The Advisory Firm You Work For

February 18, 2016 12:33 pm 0 Comments CATEGORY: Personal/Career Development

While the pace of advisory firm mergers and acquisitions has still not turned into the "financial advisor succession planning crisis" that some industry prognosticators once suggested, the pace of advisory firm founders selling their businesses is clearly on the rise, along with the growing number of articles about how owners can maximize their value and provide continuity for clients.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at advisory firm acquisitions from a different perspective: the employee advisor who remains behind, and may be worried about their compensation and even whether they have a future in the new acquirer's firm. Not to mention the inevitable change in culture that will come with a change in leadership.

The reality with most acquisitions, though, is that acquirers are very interested in seeing business cash flows remain stable... which means clients must be retained, and since financial advice is a relationship business, that means retaining the employee advisors as well. In fact, the closer you are to the client and the client relationship, the better your likely outcome in an acquisition scenario. And growth-minded employee advisors may even find that an acquirer provides them new opportunities for compensation upside, bonuses, and even equity potential, that were never an option in the past!

Why Consolidating Student Loans Through Refinancing Can Do More Harm Than Good

February 17, 2016 07:01 am 7 Comments CATEGORY: Debt & Liabilities

Refinancing debt to consolidate multiple loans into a single one is a standard of debt management. Sometimes it’s to get access to a more favorable interest rate. Sometimes it’s to reduce the monthly payment requirements by stretching them out of a longer repayment period. And in some cases, it’s just for the administrative ease and simplification of being able to make all the payments to one loan servicer.

When it comes to student loans, however, the refinancing picture is more complex. The reason is that today’s student loans are actually a combination of Federal and private loan programs, and to help alleviate explosive levels of student loan debt (the total of which now exceeds all outstanding revolving credit card debt in the U.S.!), Federal student loans are getting access to multiple forms of “flexible” repayment plans. Some of which even include terms that allow unrepaid student loans to be forgiven after 25, 20, or even 10 years in some circumstances.

But flexible Federal student loan repayment programs are only available to Federal student loans. In fact, old Federal student loans (under the prior Federal Family Education Loan [FFEL] program) can even be consolidated into new Federal loans eligible for (more) flexible repayment and potential forgiveness, under the Federal Direct Consolidation Loan program.

Unfortunately, though, students who refinance old (or new) Federal student loans into a private loan lose access to all of the flexible repayment and potential forgiveness programs. Which means when it comes to student loans, refinancing – even if it’s for a lower interest rate or a smaller monthly payment – can actually be far more damaging in the long run than keeping the original Federal loans, or simply consolidating (but not refinancing!) into the latest Federal programs!

Reinventing The Broker-Dealer Business Model To Survive A DoL Fiduciary Future

February 15, 2016 07:01 am 25 Comments CATEGORY: Planning Profession

The modern broker-dealer structure was created in the aftermath of the Crash of 1929, as the Securities Exchange Act of 1934 set forth new rules and registration requirements for the financial intermediaries that either were dealers in securities from their own investment inventory, or brokered securities transactions for their customers (including in subsequent decades the distribution of securities products, like mutual funds).

Yet in the coming years, the broker-dealer business model is under threat from the looming rollout of the Department of Labor’s fiduciary rule, which at best will likely reduce upfront commissions and drive a shift towards more levelized compensation for advisors, and some predict may eventually eliminate product commissions altogether.

Notably, a world without commissions is not necessarily the death knell for advisors, as the reality is that the non-commissioned RIA segment of advisors has already been experiencing the greatest growth in recent years, and even the majority of brokers have indicated that they think it is reasonable to be required to give advice in the best interests of their clients.

However, the ongoing evolutionary shift of “financial advisors” from securities product salespeople to actual advisors is creating an existential crisis for broker-dealers – after all, in a future fiduciary world where advisors are paid directly by their clients for advice, what is the purpose or need for a broker-dealer intermediary at all?

Which means in the long run, for broker-dealers to survive and thrive, they will be compelled to reinvent their business (and revenue) models altogether, to remain relevant in a world of financial advisors that rely on them not as financial intermediaries to facilitate the distribution and sale of third-party or proprietary securities products, but financial advisor support platforms that help to facilitate the success of cadvisors who are actually paid for their financial advice!

Weekend Reading for Financial Planners (Feb 13-14)

February 12, 2016 02:03 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a scathing letter submitted by Senator Warren to the Department of Labor, pointing out that while insurance and annuity companies have insisted that a DoL fiduciary rule would be disastrous, when legally obligated to disclose the rule's true impact to shareholders on earnings calls the major insurance companies have confessed that the rule will have "no significant impact" on their companies and that they're ready to adapt as necessary (which Warren uses as leverage to encourage OMB to quickly approve the DoL rule).

From there, we have a number of practice management articles this week, including: a consumer study finding that consumers might not actually be as resistant to higher advisor fees as most advisors fear (at least, for those providing real value as advisors!); best practices tips for retaining new associate advisors in a growing firm; more best practices advice about setting compensation for advisory firm employees (and dispelling some compensation myths, such as why it's not necessary to automatically give an annual cost-of-living adjustment); how advisory firm owners may be too quick to "embrace failure" rather than taking the time to make prudent business decisions; and how elite advisory firms are echewing traditional wholesaler arrangements with asset managers and instead are looking for more sophisticated support for their businesses and clients.

We also have a couple of technical articles this week, from a look at the recent Bipartisan Policy Center proposal to "fix" the country's long-term care issues with a combination of shorter-term LTC insurance plus a Federal backstop program for large claims, the reasons why clients should consider a revocable living trust besides just probate avoidance, and how Socially Responsible Investing (SRI) actually does appear to provide long-term outperformance (though it may just be because such funds tend to overweight the "quality" factor).

We wrap up with three interesting articles: the first is a discussion of how a subset of robo-advisor investors are actually high net worth individuals (and not Millennials), raising the concern for traditional brokerage firms that they must soon launch competing robo-advisor solutions or risk a rising tide of client outflows; the second is a dive into the research on not just the behavioral finance biases that cause clients to make poor decisions, but also some tips on what to do about it; and the last is some guidance about how advisors who feel "out of control" in their lives and businesses may need to take a hard look at their client capacity and whether they are simply trying to service more clients than they possibly can.

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 playlist of all the video highlights from his live coverage of the Technology Tools For Today (T3) Advisor FinTech conference!

Enjoy the "light" reading!

My 6 Top Tips For Handling A High Volume Email Inbox

February 11, 2016 10:29 am 18 Comments CATEGORY: Personal/Career Development

With the ongoing proliferation of email, it's now estimated that we collectively send around more than 200 billion emails per day, and the number grows exponentially every year. Yet unfortunately, it's also estimated that about 90% of those emails are spam. Which means with every passing year, there's more and more pressure to come up with new ways to keep control of your email inbox.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, I share my 6 top tips for how I handle my own high-volume email inbox. From setting up a clear file folder system to sort through, to using the "Rules" systems in email software to sort them for me, creating autoresponders and custom alias email addresses, and more.

The reality is that for most advisors, regaining control of your email inbox may take a while, especially if you've felt so overwhelmed in the past you've just allowed it to go from bad to worse. But the good news is that the tips I provide can be done incrementally over time. Start with one step, do the next, and then another. If you commit just a minute or two a day to make small changes, you'll find in a month that your email inbox is a lot more manageable than it ever was before!

President’s Budget Proposes Elimination Of Backdoor Roth, Stretch IRA, and Step-Up In Basis At Death!

February 10, 2016 12:45 pm 18 Comments CATEGORY: Taxes

Every February, the President formulates a budget request for the Federal government, which Congress then considers in coming up with its own budget resolution. And while many provisions of the President’s budget pertain to actual recommendations on appropriations for various government agencies, the proposals often include a wide range of potential tax law changes, recorded in the Treasury Greenbook.

Given that this is an election year and already within less than 12 months of the end of President Obama’s term, there is little likelihood that any of the President’s substantive tax changes will actually come to pass, from a version of the so-called “Buffet Rule” (a “Fair Share Tax” for a minimum 30% tax on ultra-high income individuals), an increase in the maximum capital gains rate to 24.2% (which would total 28% including the 3.8% Medicare surtax on net investment income), or a rewind of the estate tax exemption back to the $3.5M threshold from 2009.

However, the President’s budget proposals do provide an indication of what’s “on the radar screen” inside Washington, including a wide range of potential “crackdowns” and “loophole closers” that could appear in legislation (as was the case with the crackdown on Social Security file-and-suspend and restricted-application claiming strategies last year).

And in this context, it’s notable that the President’s budget proposal does include a wide range of potential crackdowns on individuals, from a new cap on the maximum gain to be deferred in a 1031 like-kind exchange of real estate, to the addition of lifetime Required Minimum Distributions for Roth IRAs after age 70 ½, the elimination of stretch IRAs and step-up in basis at death, shutting down the “backdoor Roth contribution” strategy, and more!

CFP Board Begins The Process Of Updating Its Fiduciary Standards of Professional Conduct

February 8, 2016 07:01 am 6 Comments CATEGORY: Regulation & Compliance

The CFP Board’s Standards of Professional Conduct are the rules by which CFP certificants are held accountable – and a violation of those rules can result in a private censure, a public Letter of Admonition, or even an outright suspension or revocation of the CFP marks. And after 8 years of the current Standards being in place, the CFP Board recently announced that it has formed a new 12-person committee – the “Commission on Standards” – tasked with evaluating whether it is time to update the standards… and if so, how they should be changed.

And arguably, the CFP Board’s standards do have room for improvement. While the last revision in 2008 took the positive step of introducing a fiduciary standard for CFP certificants, it notably applies only when a CFP certificant is actually “doing” financial planning, not merely for being a CFP certificant who works in the financial services industry – creating problematic scenarios where a consumer hires someone with the CFP marks only to find out later that person wasn’t required to act in his/her fiduciary capacity as a professional. Similarly, the CFP Board ‘requires’ a fiduciary duty for CFP professionals providing financial planning, but doesn’t specifically require those advisors to manage or avoid their conflicts of interest, and instead simply requires that such conflicts be disclosed… despite the available research that finds disclosure is a poor remedy to manage conflicts of interest, and can even cause advisors to behave worse. And of course, there’s the CFP Board’s compensation disclosure rules, which have dragged the CFP Board into both a lawsuit, and criticism that its current definitions render its definition of “commission and fees” as meaningless for consumers.

Fortunately, the CFP Board’s decision to revisit the Standards of Professional Conduct – as it does from time to time – gives the organization opportunity to correct these issues. The process this time around includes both numerous public forums with CFP certificants – being held in six major cities in the coming weeks – and will be followed by a public comment period for all CFP stakeholders to weigh in on any proposed rule changes.

So with 2016 shaping up to be the year of major regulatory change for financial advisors – with not just the Department of Labor fiduciary rule, but also the CFP Board’s prospective updates to its Standards – what changes are you hoping to see the CFP Board enact?

Weekend Reading for Financial Planners (Feb 6-7)

February 5, 2016 02:01 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a new industry white paper finding the ongoing shift of advisor compensation from commissions to fees has reached a crossover point, where fees now top commissions as the primary advisor revenue source (as trend that may only accelerate as the Department of Labor's fiduciary proposal rolls out later this year).

From there, we have a number of practice management articles this week, including: a look at the history of the Rule 206(4)-1 limitation against testimonials and what to watch out for; tips on communication not with potential new clients but existing ones; a look at what advisors serving ultra-high-net-worth clients are providing as "value-added" services; a review of how some value-added services and "perks" are being adopted by a wider range of advisory firms (not just those serving the super-rich); and a look at how mutual fund fees continue to be squeezed, and whether an advisor's AUM fee may be next (though the short answer is "no", probably not, because it's still so hard to comparison-shop advisors!).

We also have a couple of technical articles this week, from a look at the latest research on retiree spending patterns which finds that affluent clients tend to under-spend in retirement (creating a "consumption gap" between what they could spend and what they actually do), a look at the coming Actuarial Guideline 49 rules next month that will curtail the return assumptions used in sales illustrations of equity-indexed Universal Life (and whether the policies may still be over-projected), and a review of the Qualified Charitable Distribution (QCD) rules from IRAs now that they've been made permanent by last December's "Tax Extenders" legislation.

We wrap up with three interesting articles: the first is a look at why, despite all the ongoing warnings of disruption, big companies continue to get disrupted by start-ups that build on top those big companies' existing technology or service stack; the second is a look at the concept of "Deep Work" and how Bill Gates had incredible productivity by being able to apply an intense focus for extended periods of time; and the last explores how the biggest factor that drives our success is our personal engagement with what we're looking on (and how to refine it if you're not feeling fully engaged yourself).

Enjoy the "light" reading!