Nerd's Eye View blog

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!

Will Congress Someday Repeal The Tax-Free Roth IRA Promise?

February 25, 2016 12:04 pm 29 Comments CATEGORY: Retirement Planning

The Roth IRA has become immensely popular in the nearly 20 years since it was first created - driven no doubt by its favorable tax-free treatment for all growth spent in retirement. From Roth IRA contributions, to Roth conversions, or Roth 401(k) and other employer retirement plans, there are more and more ways to get money into a Roth.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at the issue of whether retirees may be banking on too much of a good deal, though, and whether Congress might someday repeal the tax-free Roth treatment and renege on the Roth promise. Should retirees hedge their bets against a future tax law change?

Fortunately, the reality is that while repealing tax-free Roth treatment is legally possible for Congress to do, it is politically unlikely. Not just because it would be immensely unpopular with active senior voters, but also because eliminating Roth treatment actually scores very poorly in Federal revenue projections, due to the 10-year budgeting process that is typically used to analyze major tax law changes.

Notwithstanding this, however, the odds are still good that some "crackdowns" and loophole closers do come for Roth accounts soon. Potential changes include introducing Required Minimum Distribution (RMD) obligations to Roth IRAs for those over age 70 1/2, the elimination of the stretch Roth IRA for young beneficiaries, a cap on maximum IRA account sizes beyond which no new contributions are allowed, and the elimination of the so-called backdoor Roth IRA (which arguably is already risky if done too aggressively).

Of course, none of this entirely eliminates the value of contributing to a Roth IRA as long as your tax rates are low, but it makes the timing of when it's best to contribute to a Roth IRA (versus making a traditional IRA or 401(k) contribution and doing a Roth conversion later), more important than ever!

Retirement Date Risk – The Impact Of Sequence Of Returns Risk On Those Still Accumulating For Retirement

February 24, 2016 07:01 am 27 Comments CATEGORY: Retirement Planning

The conventional view of sequence-of-return risk is that it’s something retirees face as they take ongoing distributions from a retirement portfolio, and requires caution in the early years of retirement.

Yet the reality is that sequence of return risk is equally relevant for accumulators in the years leading up to retirement as well. The only difference is the problematic sequence is reversed – for retirees, the dangerous sequence is to get bad returns at the beginning (of retirement), while for accumulators it’s getting bad returns at the end (of the accumulation phase) that causes the problem.

In fact, the volatility of an accumulator’s portfolio can also be viewed as its “retirement date risk” – the danger that a planned date of retirement (or financial independence) may turn out to be later than originally expected, due to a poorly timed sequence of bad market returns. And as it turns out, the greater the volatility of the portfolio and reliance on growth, the greater the retirement date risk that goes along with it.

Accordingly, accumulators in the final years leading up to retirement may wish to proactively manage risk and reduce the volatility of the portfolio, specifically as a means to reduce the retirement date risk they face. Of course, getting a portfolio more conservative at the end of the accumulation phase may also force an accumulator to work slightly longer, or save more, to make up for the lower expected returns in those last few years. Still, for those who don’t want the risk of a much later retirement date, a decreasing equity glidepath leading up to retirement may be a very appealing retirement date risk management strategy!

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!