Nerd's Eye View blog

An Emerging War Over Who Controls Client Data, And The Unconsidered Consequences Of Rising Interest Rates – Top Financial Advisor Issues For 2016

January 11, 2016 07:01 am 4 Comments CATEGORY: Planning Profession

In last week's blog post, we looked at what is shaping up to be the dominant issue for financial advisors in 2016: the rollout of the Department of Labor's new fiduciary rule, which will likely reshape not just the delivery of financial advice, but challenge the relevance of the companies that support financial advisors (i.e., broker-dealers), and the nature of how financial services products are distributed (in a world where companies will no longer be able to use big commissions to incentivize the use of their products).

However, the rest of the world is not standing still while regulatory change looms. The ongoing march of technology continues, and while 2014 was the year of the robo-advisor and 2015 was the year of robo-advisors-for-advisors, it appears that in 2016 the big issue in FinTech will be a looming war over client data - who has access to it, who controls it, how is it protected, and ultimately does the data about the client belong to the financial services firm or to the client themselves? As account aggregation is increasingly used not just to track a client's household data but actually used to facilitate money transfers - not to mention companies beginning to leverage the information for big data insights - the question of who has what rights to financial data and what can be done with it is coming to a head in 2016.

And of course, it's important to recognize what may still be the biggest outright impact to the business of most financial advisors in 2016 - the Fed's new path of raising interest rates, for the first time in nearly a decade, and the consequences that may bring in the coming year. The "good" news is that at least with fixed income enjoying outright higher yields, the pressure may be reduced for advisors to seek out various "alternative" asset classes in search of yield and return. The "badl" news, though, is that rising rates can adversely impact bond prices, and even risks cracking the stock market as today's P/E ratios and market valuations may not look as appealing once bonds are paying more. Yet ultimately, some of the biggest consequences of higher interest rates may be the secondary effects, from improvements in the pricing of long-term care insurance, to higher payouts and better guarantees from deferred annuities, and a potential explosion of earnings growth for RIA custodians (with some estimates that Schwab's total earnings could triple in a normalized rate environment!)... not to mention the ripple effects across the entire economy with changes to the cost of capital and the discount rate used in most financial models.
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Weekend Reading for Financial Planners (Jan 9-10)

January 8, 2016 01:41 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the latest release of FINRA's regulatory and exam priorities in 2016, where the organization has indicated its leading target is "broker-dealer culture" around compliance and the way that conflicts of interest are handled.

From there, we have several practice management articles this week, including: the ongoing rise of social media adoption by advisors (and that the highest adoption is amongst the most financially successful advisors); how despite the rise of social media, "old-fashioned" email remains a remarkably effective marketing strategy; tips on how to manage advisory firm staff members, particularly regarding setting and then monitoring/managing employee goals; a round-up review by advisor tech guru Joel Bruckenstein of leading RIA custodian technology platforms including Fidelity, TD Ameritrade, and LPL; and an article providing a great reminder that the real key to time management is not getting more efficient about what you do but getting better about deciding what not to do in the first place.

We also have a couple of technical articles this week, from a look at how "stress testing" portfolios with tools like HiddenLevers is becoming a popular alternative to analyzing traditional portfolio risk metrics like standard deviation or value-at-risk (VaR), to a discussion of how the structuring of irrevocable trusts has changed in recent years (from the separation of administrative and investment trustees to the rise of distribution committees and trust protectors), and a review of the data on what the true odds really are that a 65-year-old will need long-term care.

We wrap up with three interesting articles: the first is a discussion of the rising battle between banks and other financial institutions, and the account aggregation and personal financial management tools that draw upon and use that data (and potentially overload bank servers in the process); the second is a look at how economics research has been undergoing a significant shift in the past 30 years, from research being dominated by pure theory to increasingly focusing on real-world empirical data (supported by the availability of the personal computer and the rise of the internet and its data accessibility); and the last is a great reminder of the perspective that can be gained when a financial planner actually becomes a financial planning client, and sees the financial planning experience (and how it can be improved) from the other side of the table.

Enjoy the "light" reading!

Why Monte Carlo Analysis Still Matters And The Risk Of A Retiree Black Swan Is [Probably] Overrated

January 7, 2016 12:01 pm 17 Comments CATEGORY: Retirement Planning

Over the past 15 years, we’ve seen the rapid rise of Monte Carlo analysis as a tool for analyzing retirement. Yet at the same time, the use of conventional statistics to project potential market scenarios has been under attack, for failing to capture the so-called “Black Swan” phenomenon.

In this week’s #OfficeHours with @MichaelKitces – a new video series we’ve launched where I will take reader questions, both emailed and live, every Tuesday at 1PM EST via the Periscope social media platform – we look at the phenomenon of Black Swans, what a black swan event really is, and how the “risk” of a black swan is quite different for a long-term retiree who takes annual withdrawals versus a leveraged hedge fund who faces the risk of having their debt called in.

In fact, we ultimately find that while Monte Carlo analysis for retirees is commonly criticized for failing to capture extreme market events, it turns out that the biggest problem with Monte Carlo is not that it fails to model the downside risks but that it actually understates the possibility for upside surprises!

You can see me discuss all of this and more in our #OfficeHours video posted in today’s article, along with details on how to sign up to watch the next broadcast live, and participate for yourself!

How Continuing To Work, Even In Retirement, Can Increase Social Security Benefits

January 6, 2016 07:02 am 76 Comments CATEGORY: Retirement Planning

The conventional view of delaying Social Security is that doing so is an opportunity to earn delayed retirement credits, an 8%/year increase in benefits that can be highly appealing in today’s low-yield environment.

However, the reality is that delaying Social Security benefits doesn't just increase benefits by earning delayed retirement credits. Additional years of working while collecting Social Security benefits can also increase the worker’s Average Indexed Monthly Earnings used to calculate those Social Security benefits in the first place, just as ending work early can reduce AIME below what is projected as benefits on the Social Security statement.

And depending on how much additional income will be earned – and how low his/her historical earnings really are – the reality is that continuing to work while getting Social Security benefits can produce a material increase in future payments for some workers, simply because of how benefits are recalculated. In other words, for those past full retirement age (and no longer subject to the Earnings Test), it’s possible to be receiving Social Security benefits while working and have those years added to the Social Security work history to generate higher future benefits as well!

In the end, working while on Social Security won’t always produce a significant increase in Social Security benefits. For those whose prior working years produced more income – at least on an inflation-adjusted basis – it’s possible that continuing to work will generate no additional benefits at all. Nonetheless, for those who haven’t fully capped out Social Security benefits based on 35 years of maximal earnings already, it is possible to be working and getting Social Security benefits at the same time, and have that work increase the benefits (at least after reaching full retirement age). And the potential for a benefits increase can be material in some cases, and thus should definitely be considered in the timing and impact of when to stop working!

Top Financial Advisor Issue For 2016 – The Department Of Labor Fiduciary Rule And The Best Interests Contract Exemption (BICE)

January 4, 2016 07:01 am 9 Comments CATEGORY: Planning Profession

The turning of the New Year brings a fresh set of both opportunities and challenges, and 2016 looks to be no exception to the rule.

Last year the dominant themes included the pivot of "robo" technology from being a direct-to-consumer solution to instead becoming robo-advisor-for-advisors platforms (which spurred an explosion of FinTech acquisitions), the ongoing crisis of differentiation for advisors leading to more and more discussions of whether it's time to reinvent the advisor business model (or perhaps just finally get more focused into niches and specialization), and the growing pressure of regulatory reform as President Obama threw his full support behind the Department of Labor's proposed fiduciary rule and the anti-fiduciary lobbyists spent all year trying (and failing) to stop it.

In fact, with a final failed effort to stop the DoL proposal by trying attach a rider to the recent omnibus spending legislation last month, it now appears that the pending release of the Department of Labor's fiduciary rule will be the hot issue for financial advisors in 2016. The rule has the potential to completely reshape the landscape of financial advice, force broker-dealers to reinvent themselves (into turnkey financial planning platform [TFPP] solutions instead?), and force financial services product manufacturers for the first time ever to compete solely on the merits of their products rather than the size of the commissions they can pay.

While in the long run I would still maintain that a fiduciary rule for financial advisors is absolutely critical as a protection for consumers, there seems little doubt that 2016 will be a seminal transition year that sets the stage for how financial advice will be delivered in the coming decades - a tremendous opportunity for advisors (and the companies serving them) who are prepared for the change, and the beginning of the end for those companies who have not positioned themselves for an advice-centric future.

Weekend Reading for Financial Planners (Jan 2-3)

January 1, 2016 02:01 pm 5 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a scathing investigative report from Ann Marsh at Financial Planning magazine, highlighting how brokers guilty of consumer harm are obtaining settlements in FINRA arbitration and then getting their records expunged on the basis of not being found guilty (due to pre-empting a guilty finding with the settlement!). Also in the news this week was an SEC report reviewing the ETF "flash crash" from August 24th, which disturbingly finds the problem was so widespread that it's still not clear why it happened, nor is it clear what needs be done to prevent it from occurring again in the future.

From there, we have a few practice management articles this week, including: a Bob Veres discussion of whether the typical advisory firm's efforts to impress prospective clients are actually just intimidating them; the first of what will likely be many stories looking at how the Department of Labor fiduciary rule may change the industry; a controversial suggestion from practice management guru Mark Tibergien that perhaps the industry's "talent shortage" problem is actually a shortage of skilled advisory firm management capable of attracting, developing, and retaining Millennial talent; and a profile of Live Oak Bank, which has burst onto the scene in recent years to become one of the primary lenders financing advisory firm succession plans, with more than $250M of loans funded since 2013.

We also have a couple of technical articles this week, from a look at how the recent spending legislation's extension of the solar investment tax credit may spur an explosive boom in solar energy, a discussion of how traditional portfolio metrics fail to capture the benefits of downside portfolio protection (and an alternative way to better measure the impact), and an analysis of why most people should actually consider funding an HSA first for retirement (in some cases even before a 401(k) plan with a match) given that virtually all retirees will have at least some medical expenses in retirement which can be funded tax-free from the HSA.

We wrap up with three interesting articles: the first is an interview with John Thiel, the head of wealth management at Merrill Lynch, who discusses how the firm is preparing itself for the looming Department of Labor fiduciary rule (and that it would rather comply with a fiduciary obligation to clients than walk away from $2 trillion of AUM); the second is a nice turn-of-the-new-year reminder that it's a good time to de-clutter (whether it's your desk, your business, or your clients); and the last is a Wall Street Journal highlighting recent research into consumer spending behaviors, and why the traditional advice to just budget and monitor spending is so often ineffective in practice.

Enjoy the reading, and Happy New Year!

Using A NING Domestic Asset Protection Trust To Reduce State Income Tax Liabilities

December 30, 2015 07:01 am 7 Comments CATEGORY: Estate Planning

While most income tax planning is focused on minimizing Federal tax liabilities, the reality is that with state income tax rates as high as 13.3%, strategies that reduce state income tax liabilities are increasingly popular as well.

A recently popular strategy is the so-called “NING” trust, an extension of the DING trust where portfolio assets that may generate significant income are contributed into a Nevada trust to shift the tax exposure to Nevada’s 0% state tax rates, rather than the settlor’s high-tax-rate home state. The end result can be a significant state income tax savings, while avoiding any unfavorable gift tax ramifications (and for higher income individuals already pegged to top Federal tax brackets, no adverse Federal tax consequences). And as an added benefit, the trust itself qualifies as a Nevada asset protection trust (indirectly necessary for the favorable tax treatment!).

Unfortunately, the non-trivial costs to create and manage a NING trust, along with the potentially unfavorable Federal income tax treatment (for those not already at top tax rates) limit the appeal of the strategy for most. Nonetheless, for those who do have significant assets and income, and investments with significant tax exposure, a Nevada trust structured as a NING can generate substantial state income tax savings… at least, until the remaining high-tax-rate states follow the recent actions of New York and crack down on the strategy altogether!

2015 Highlights – The Top 20 Nerd’s Eye View Blog Posts You Might Have Missed

December 28, 2015 07:01 am 1 Comment CATEGORY: Nerd's Eye View

As we come to the end of 2015, I am once again so very thankful to all of you, the growing number of readers who continue to regularly visit this Nerd's Eye View blog, and have been kind enough to share the content with your friends and colleagues as well (which I greatly appreciate!). Over the past year, the cumulative readership of the blog has grown yet another 60%, and is now averaging over 120,000 unique readers every month. The continued growth has allowed me to continue to reinvest into this site - as many of you noticed the re-design that rolled out last month - and you will see more new additions and features to the site in 2016 as well!

Yet notwithstanding how many of you have made reading the Nerd's Eye View a weekly habit, I'm cognizant that the sheer volume of content can be overwhelming, and it's not always easy to keep up with it all. And blog articles, once published, are usually quite quickly left in the dust by the next new article that comes along.

Accordingly, just as I did last year, I've compiled for you this Highlights list of the top 20 articles this year that you might have missed. So whether you're new to the blog and haven't searched through the Archives yet, or simply haven't had the time to keep up with everything, I hope that some of these will (still) be useful for you! And as always, I hope you'll take a moment to share articles of interest with your friends and colleagues as well!

In the meantime, I hope you're having a safe and happy holiday season. Thanks again for an amazing 2015, and I'm looking forward to doing even more to be of service for all of you in 2016!

Weekend Reading for Financial Planners (Dec 26-27)

December 25, 2015 02:01 pm 3 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a newly proposed SEC rule to curtail the use of derivatives in mutual funds and ETFs... which could potentially impact a wide range of funds, from those using derivatives to hedge risk to those using derivatives to 'leverage' and amplify risk (e.g., 3X index funds). Also in the news this week is a discussion that the recent surge of broker-dealers for sale may just be the onset of an even bigger wave of selling for broker-dealers unprepared for the looming Department of Labor fiduciary rule and the ways it may reshape the world of financial advice.

From there, we have a few technical financial planning articles this week, from a look of how advisors can work with clients to "plan" for black swan events, to a discussion of whether retirement planning is akin to chaos theory (which implies our models aren't nearly as accurate as our probabilities suggest), to a recent study finding that the investment performance of those with defined contribution plans is actually remarkably close to defined benefits plans after all (where the primary difference is just that DC plans tend to be smaller and have higher costs), and another new study finding that giving Social Security beneficiaries their delayed retirement credits as a(n actually fair) lump sum may be a better incentive to encourage them to continue working (as opposed to just giving higher retirement benefits for waiting).

We also have a couple of practice management articles this week, including: a template on how to create content for your advisor blog by talking (constructively and anonymously) about the mistakes your clients make (which should give an endless supply of ideas to write about!); a review of the new (to the US) financial planning software platform Figlo (from Advicent, the company that also makes Financial Profiles and NaviPlan); and the last is a profile of physician-turned-financial-planner Carolyn McClanahan, and the success of her retainer-based financial planning practice that serves at the intersection of clients' financial and health-care-planning issues.

We wrap up with three interesting articles: the first is a Journal of Financial Planning contribution looking at the convergence between the research on Positive Psychology, and the evolution of financial planning, suggesting that ultimately the financial planning ideal may be the intersection between the two (the world of "positive financial planning" that aims to help clients use money as a tool to improve their psychological well-being); the second discusses a coming new book called "Radical Candor" that looks at how managers and business owners can help their businesses excel by giving the right kind of guidance to employees (and encouraging an environment where they can give that constructive feedback to each other as well); and the last is a look at how the accelerating pace of regulatory change, from the DoL fiduciary rule to the possibility the SEC will take up its own fiduciary rule in the coming years, and the CFP Board's own newly announced Commission to update its Standards of Professional Conduct, suggests that financial planning may finally be on the cusp of emerging as a true profession!

Enjoy the reading!

How Portfolio Rebalancing Usually Reduces Long-Term Returns (But Is Good Risk Management Anyway)

December 23, 2015 07:01 am 11 Comments CATEGORY: Investments

The conventional view of portfolio rebalancing is that it is a strategy to enhance long-term returns by periodically selling the investments that are up (and overweighted) to buy those that are down (and underweighted), in the process of realigning the portfolio to its original target allocation.

Yet the reality is that because most investments go up far more often than they go down, systematic rebalancing is actually more likely to just consistently liquidate the best-performing investments to buy ones with lower returns instead – especially when rebalancing across investments that have very significant return differences in the first place (e.g., rebalancing from stocks into bonds).

As a result, rebalancing may be helpful as a risk management strategy – otherwise higher-returning stocks would compound to the point that they are significantly overweighted relative to lower-returning bonds – but it’s only when rebalancing amongst investments with similar returns in the first place that rebalancing provides a return-enhancement potential.

Ultimately, the fact that rebalancing may actually reduce long-term returns isn’t a reason to avoid it (even if returns are lower, risk-adjusted returns may be improved if the risk is reduced by even more), and sometimes returns really can be enhanced (when rebalancing across similar-return investments, such as amongst sub-categories of equities). Nonetheless, it’s crucial to recognize the role that rebalancing really does – and does not – play in a long-term portfolio!