Nerd's Eye View blog

Intrapreneurship And Launching A Next Gen Offering In An Existing Financial Advisory Firm

February 2, 2016 07:01 am 11 Comments CATEGORY: Practice Management

In recent years, there has been a growing awareness of the importance for financial advisors to expand the breadth of clients they serve to include "next gen" clients like Gen X and Millennials. So far, however, most existing advisory firms have remained primarily focused on retiring baby boomers, and done little if anything to serve a younger clientele. Instead, the shift to working with Gen X and Gen Y clients appears so far to be primarily the domain of "younger" financial advisors - often Gen X or Gen Y themselves - taking the entrepreneurial leap of launching their own advisory firms to serve their peers.

In this guest post, financial planner Matt Cosgriff shares his perspective as a Gen Y advisor trying to establish a new service offering for younger clients, not by launching a new firm as an entrepreneur but by building it within an existing advisory firm as an "intrapreneur" instead. And as Matt notes, there is a big difference in the challenges of intrapreneurship and entrepreneurship. For instance, intrapreneurship requires justifying to the leadership why the new initiative is worth allocating limited resources of the organization in the first place, not to mention setting and managing expectations for growing the platform, but also has unique opportunities for success that come from building within an existing firm (including the opportunity for referrals from existing clients and established centers of influence, and being a realm of experimentation for the firm to vet new technology).

So if you're a "larger" established advisory firm thinking about a "Next Gen" offering for younger clientele, or perhaps are a younger advisor in a firm trying to figure out how to take up the mantle of intrapreneurship and convince the firm's owners to start serving Gen X and Gen Y clients, I hope that you find today's guest post and this example of intrapreneurship in an advisory firm to be helpful and inspirational about how to move forward in your own firm, too!

MaxMyInterest And MaxForAdvisors – A New Advisor #FinTech Tool To Maximize Cash Yields And FDIC Coverage

February 1, 2016 07:01 am 8 Comments CATEGORY: Technology & Advisor FinTech

In today’s low interest rate environment, “managing cash allocations to maximize yield” is virtually an oxymoron, as there’s little yield to be obtained with any level of proactive management. However, what’s unique about this upcoming rising interest rate cycle is that as rates rise and do become more appealing, for the first time ever internet and mobile banking are widespread. Which means it’s easier than ever before to open accounts online and move cash around to maximize yield. So easy in fact, that you could simply program a computer algorithm to monitor for higher yielding opportunities, and transfer your cash from one bank account to another.

And that’s exactly what a new FinTech startup has done. Called “MaxMyInterest”, the platform is designed to monitor the available yields from five major online banks, and automatically shift available cash dollars in a manner to always earn the maximal available yield. In addition, the platform can also be programmed to maximize yield up to available FDIC coverage limits (and then shifting the excess dollars over to other banks), effectively automating the asset protection strategy of spreading cash across banks to maximize FDIC protection!

And after an initial launch directly to consumers, MaxMyInterest is now developing a private white label platform for advisors. Dubbed “MaxForAdvisors”, the tool will allow advisors to offer this form of bank account cash management program directly to clients, both to maximize their yields and their FDIC-based asset protection, for a mere cost of 8bps/year (which for many clients will be more than recovered by the process of automatically shopping and shifting to higher yields), while also providing advisors a "Max Advisor Dashboard" to keep track of client cash positions. So in a world where advisors are actively seeking ways to differentiate from robo-advisors, will MaxForAdvisors become a technology solution advisors can use to enhance their own perceived value-add?

Weekend Reading for Financial Planners (Jan 30-31)

January 29, 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 breaking news that the Department of Labor's latest fiduciary proposal has in fact been filed with the Office of Management and Budget (OMB), which means with an expedited review that the final rule could be issued by April. In the meantime, anti-fiduciaries continue to maintain their pledge to fight the rule, but a number of large broker-dealers have announced that they're now re-positioning to prepare for what is increasingly viewed as an inevitable fiduciary outcome.

From there, we have a number of practice management articles this week, including: a look at what you should be aware of if you have an employment contract with your advisory firm (from non-compete to non-solicitation rules and more); an announcement that digital and content marketing platform Vestorly has raised a whopping $4.1M in venture capital to scale up their solution for advisors; tips from Angie Herbers on how advisors need to re-envision their role in a growing firm (transitioning from lead advisor to lead coach for the firm's other advisors); a review of the research on how to help clients in times of "crisis" (including panicked clients about a market crisis); and another article about best practices in talking to clients who are angry and emotional about markets, and recognizing that they may actually be feeling a form of grief over losses in their portfolio and how they expect those losses to impact their personal lives.

We also have a couple of technical articles this week, from a new way to consider the challenge of how long a retirement portfolio will last (considering both how long the funds may last and how likely it is for the client to live long enough to even see the portfolio possibly fail), to issues that must be considered when evaluating Medicare plans (and in particular, pros and cons of choosing a Medicare Advantage plan over 'traditional' Part B coverage with Part D and Medigap supplemental policies), and a new study looking in depth at the track record of popular "market strategists" who give annual forecasts of market returns... who have not only historically been wrong, but have actually been more wrong than the predictions that could have been achieved by just flipping a coin every year!

We wrap up with three interesting articles: the first is a look at how important it is for clients to figure out "how much is enough" to be able to retire, as the research on happiness finds that if we don't have a target for enough, we just inevitably keep seeking more, over-consume, and end out being even less happy; the second is another look at how to draw the line on "enough", and recognizing the significant of taking whatever we have in time and capital that is "over and above" what's necessary, and using it to plant the seeds of a better future (and find meaning and purpose); and the last is a discussion from industry legend Dick Wagner, who challenges advisors to consider what we even know of money itself, which in the past century has transformed from something that was just used by governments to facilitate foreign trade into what has arguably become one of the most powerful forces that impacts our lives, and at the same time is so intimate that it remains one of the greatest taboo subjects in society today.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including the official launch of Betterment for Business (the robo-advisor's new 401(k) solution), the latest iPad app for advisors from Morningstar, and a round of venture capital raising by advisor digital and content marketing platform Vestorly.

Enjoy the "light" reading!

FPA Eliminates Its Standards Of Care And Code Of Ethics Requirements – Why It’s (Mostly) A Good Thing

January 28, 2016 12:01 pm 18 Comments CATEGORY: Planning Profession

Financial advisor standards of care has become the "hot topic" of 2016, driven by everything from recent controversies about the CFP Board's enforcement of its compensation definitions, to the looming Department of Labor fiduciary rule. Yet despite rising scrutiny over fiduciary standards of care, the FPA took the somewhat controversial action last week of dropping its requirement for financial planning professional members to adhere to its own FPA Standard of Care and Code of Ethics.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we explore the FPA decision to eliminate its Standard of Care, and look at how it was actually a good decision of the organization - because the reality is that the FPA has no means to enforce a standard of care anyway, and claiming to have a standard of care without enforcing it just creates more problems than it solves by attracting low-quality "professionals" who wish to don the mantle of a professional association.

In fact, arguably the biggest problem with FPA's decision to drop its own Standard of Care was that it didn't go far enough. While the organization said members will still be required to follow the Standards of Care that apply from other credentialing bodies and regulators - from the CFP Board to the SEC and FINRA and state regulators - which means CFPs doing financial planning will be fiduciaries, as will financial planners working within an RIA, the reality is that the FPA still permits "financial planning professional members" to include non-CFP product salespeople who are not subject to a clients'-best-interests standard at all. Which means, ironically, that the FPA just lowered the required standard of care for its non-CFP members!

Ultimately, the FPA does continue to acknowledge that it sees the CFP marks as the best certification around which to build the financial planning profession... yet the question arises of how the FPA can say it embraces CFP certification as the basis for the financial planning profession, yet continue to invite "financial planning professionals" who are not CFP certificants and now, under FPA's revised rules, aren't even required to give financial planning advice in the best interests of their clients (as FINRA and state insurance regulators don't required them to) - which, notably, is a violation of the original Memorandum of Intent upon which the FPA was founded!

Understanding Longevity Insurance – How A Longevity Annuity Fits Into A Retirement Income Portfolio

January 27, 2016 07:01 am 50 Comments CATEGORY: Annuities

One of the hardest risks to manage in retirement is the uncertainty of longevity – how long the retiree will live, and therefore how long of a retirement time horizon needs to be planned for. Planning for too short of a retirement time horizon can lead to asset depletion if the retiree actually lives. Planning for too long leads the retiree to unnecessarily constrain retirement spending for a future that never occurs.

While one popular approach to managing the issue is simply to invest in a diversified portfolio, spend conservatively, and make adjustments in the future as necessary, an alternative is to actually buy “longevity insurance” in the form of a lifetime annuity. Historically, this could be done by purchasing a single premium immediate annuity at retirement, except in practice retirees rarely ever want to lock up so much of their capital - in fact, retirees annuitize so rarely that economists have dubbed it an "annuity puzzle".

A potential alternative, though, is to use a longevity annuity. This form of single premium deferred annuity still provides payments for life, but with payouts from the longevity annuity company not beginning until the distant future (e.g., at age 85). The upshot to this approach is that it significantly reduces how much capital must be committed to securing the longevity insurance guarantee, even as the deferred starting date can also delay required minimum distribution (RMD) obligations if purchased as a "qualified longevity annuity contract" (QLAC) inside of a retirement account.

And despite today’s low interest rates, a current longevity annuity quote reveals that it can already be an appealing competitor to the expected returns of a fixed income portfolio. In fact, if longevity insurance rates rise just a bit more, they may even become competitive with long-term equity returns, thanks to the benefit of mortality credits. Which means eventually, an allocation to a “longevity annuity bucket” may become a standard in retirement income planning… at least, as long as life expectancies don’t increase so much in the coming years that the longevity annuity rates just end out going down!

Reimagining Client Meetings With A More Client-Centric Financial Planning Process

January 25, 2016 07:01 am 25 Comments CATEGORY: General Planning

The typical client meetings conducted as a part of the financial planning process are challenging. It starts with data gathering, but clients can’t easily produce the needed data to analyze the situation. Clients are asked about their goals, but often articulate ones that will just result in a plan that “fails”. And the whole process culminates in a physical printed plan output that most advisors agree is rarely read by clients anyway.

Even worse, from the client’s perspective – since they don’t see much of the behind-the-scenes work that happens – financial planning is little more than providing data to the advisor, and getting printed planning software output in response. As though a financial advisor does little more than software data entry!

So in a world where the goal is to get clients to actually value each meeting of the financial planning process – rather than simply having it be a data-gathering-for-software-output experience – how could each meeting in the financial planning process be reimagined to be more relevant, more collaborative, more interactive, and more immediately and tangibly valuable?

Weekend Reading for Financial Planners (Jan 23-24)

January 22, 2016 02:44 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a great exploration of why, in these times of market volatility, investors continue to give such credence to pessimists and view them as sages.

Continuing the theme of recent market volatility, other articles this week include: a reminder of the ways to talk with clients about market volatility and reassure them; the latest investment commentary from Howard Marks of Oaktree about the dynamics of investor psychology; a caution from John Hussman that while market volatility has picked up the leading economic indicators are also turning down (and the combination of both can be especially concerning); and a reminder of tax planning opportunities that emerge in a down market, from tax loss harvesting to Roth conversions of IRAs while they're down to Roth recharacterizations of last year's conversions that have declined in value since the original conversion.

We also have a couple of practice management articles this week, from a look at why more clients don't provide referrals (hint: it's not that they don't want to, but that they're not sure how to describe you or to whom), to a look at the ongoing rise of salary-based advisor compensation models and whether they can be successful without fewer business development incentives, a discussion of the importance of engaging both members of a couple (as most advisory firms are at more risk to lose assets when a widow leaves than when the money flows to the next generation), and an important reminder that the SEC is scrutinizing the Chief Compliance Officer role in advisory firms (and warning that it should not be fully outsourced)!

We wrap up with three interesting articles: the first is a review of a recent SEC report on the credit rating agencies, which finds that they are still engaging in many of the questionable practices that led up to the 2008 financial crisis; the second is a discussion of Bitcoin, which appears to be in the midst of a systematic collapse as it reaches capacity limits (and is controlled by a small number of influences who are preventing the capacity from expanding, for their own financial gain); and the last is a great reminder that we all need to say "no" more often, not just to avoid over-committing ourselves in general, but because saying "no" more often ensures that you'll have the time and capacity to say "yes" when it really matters.

Enjoy the "light" reading!

The Benefits Of Attending A Financial Advisor Conference And Finding Just One Key Takeaway

January 21, 2016 07:01 am 9 Comments CATEGORY: Personal/Career Development

The financial services industry has hundreds of conferences for financial advisors, yet the reality is that with nearly 300,000 financial advisors in total, most advisors attend at most one conference per year, and many don't participate at all.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope was live from the AICPA PFP (Personal Financial Planning) conference, the first (chronologically) major advisor event of the year (and also one of the best financial advisor conferences that occurs all year long!). And so it only seemed appropriate to take some time to talk about why it's so important and valuable to regularly attend conferences.

Ultimately, the goal in attending a conference is actually quite simple: to find one real takeaway, one nugget, one powerful thing you can take home and implement in your business. Certainly if you can get 2-3 takeaways, that's even better, but 1 is all it takes.

The reason is the power of compounding, which applies not only for accumulating a retirement portfolio, but also in building a business and your personal success. After all, you just have to improve by as little as 0.2% per day to double your success in a year. Which means taking a few days to go to one conference that gives you an idea to make you just 5% better is actually the equivalent of nearly a month's worth of continuous improvement effort!

Supplemental Saving In An HSA For Retiree Medical Expenses

January 20, 2016 07:01 am 27 Comments CATEGORY: Retirement Planning

The Health Savings Account (HSA) is unique in the landscape of tax-preferenced investment acounts, as it is the only type that enjoys both the benefit of tax-deductible contributions and tax-free distributions (for medical expenses). In fact, the unique treatment of the HSA has created a wrinkle in the traditional approach of funding retirement accounts: given the inevitability of medical expenses in retirement, arguably the best savings account for retirement (or at least for a portion of retirement expenses) is to use a health savings account for retirement over “just” an IRA alone.

In other words, for any retiree that is saving for both medical expenses in retirement and also all of their other retirement goals, using a combination of an IRA (for most retirement expenses) supplemented by an HSA as a "retirement health savings account" may be the most tax-preferenced way to save holistically for retirement. In fact, the health savings account tax treatment is so good that it can even be superior to funding a 401(k) plan with a small match (for those who haven't already started a health savings account for retirement)!

Notably, this doesn’t mean that retirees would exclusively fund a health savings account for retirement, as the accounts are both taxable and potentially subject to penalties if used for non-medical purposes. But for those who already have some retirement accounts, and/or have more than enough dollars overall to achieve their goals, the fact remains that contributing the maximum to an HSA every year has the potential for more beneficial tax treatment than any other type of tax-preferenced account! Which makes accumulating in an HSA so desirable that it may even be preferable to pay current medical expenses out of pocket, just to preserve (and keep contributing to) the HSA account balance to be used as a future health retirement account!

Is Financial Planning Software Preventing The Growth Of Real Financial Planning Advice?

January 18, 2016 07:01 am 38 Comments CATEGORY: Technology & Advisor FinTech

One of the not-so-secret “secrets” of financial planning is that relatively few advisors actually generate the bulk of their income by getting paid for financial planning advice. Instead, despite the growth of financial planning in recent decades, the reality is still that most advisors get paid for financial planning through the subsequent products that are sold for implementation, or the subsequent assets they gather or retain through financial planning as a value-add.

And while arguably this is still not a bad way to build a business model around financial planning, the fact that financial planning remains rooted primarily in product sales and asset gathering has influenced – perhaps more than most advisors realized – the way that our financial planning software is built.

In fact, with its focus on investment accumulation (for retirement and college) and insurance-related scenarios, most financial planning software may be little more than a product sales and asset gathering tool shrouded in financial planning terms. Areas that are highly relevant for financial advice but not for product sales – from tax strategies to debt management to cash flow and budgeting – remain remarkably absent from most financial planning software tools available today.

Given that financial planning is a complex, intangible service that may be beneficial for clients but is hard for them to conceptualize, having tools to illustrate financial planning strategies, help clients adjust their behavior, and show the value of the advice we’ve delivered is essential. Yet in a world where most financial planning software remains so product-centric, have we progressed to the point where the financial planning software is not facilitating real advice, but limiting its growth?