Nerd's Eye View blog

Standing Desks, Walk-And-Talks, And Getting Healthier As A Financial Planner

December 21, 2015 07:01 am 30 Comments CATEGORY: Personal/Career Development

It’s an inevitable reality in the job of being a financial planner that there will be a lot of sitting. It may be at a desk doing financial plans on a computer, writing emails to or having phone calls with clients, or just outright sitting across from clients meeting with them. The problem: research finds that sitting for 8+ hours/day can increase the risk for everything from cardiovascular disease to type 2 diabetes (and an overall 24% increase in mortality rate!).

Of course, a financial planner can’t exactly avoid this by shirking their job duties. But it is possible to be productive in different ways, that don’t involve extensive sitting.

For instance, over the past year I’ve been ‘experimenting’ with everything from a standing desk (which I now use for all of my writing and office work) to doing conference calls with a headset while walking outside. You may find that meetings with colleagues or even some clients can be done while taking a walk together as well (at least if there isn’t any paperwork to go over!).

The end result, at least for me – the change in habits have helped me to lose over 40 pounds this year, accompanied by a material decrease of what was previously borderline high blood pressure, and my cardiovascular health has improved enough to drop my resting heart rate by nearly 10%! Of course, not everyone’s body may react quite the same way, but the fundamental point: it really is possible to get healthier, and remain productive, too!

Weekend Reading for Financial Planners (Dec 19-20)

December 18, 2015 02:48 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the big news of this week's "Tax Extenders" legislation that not only reinstated popular provisions like Qualified Charitable Distributions from IRAs but makes most of them permanent so advisors and their clients won't be in tax-extender-limbo in the future.

Also in the news this week was the announcement from the CFP Board that it is beginning a process of updating its Standards of Professional Conduct, including both public forums and a public comment period scheduled in 2016, to address both any appropriate updates given the changing regulatory environment, and also perhaps its controversial "fee-only" compensation definitions. And given the outcome of this week's legislation - which did not include a debated provision to limit the Department of Labor's fiduciary rule next year - there's a discussion of what the final rule will likely include, as it is expected to be released in early 2016.

From there, we have a number of technical financial planning articles, including: a discussion of whether the Barclays Aggregate Bond Index is "broken" as a bond benchmark; a critique of a recent Wade Pfau study suggesting that whole life might actually be a better retirement accumulation vehicle than buying term and investing the rest; a look at how "positive feedback loops" (that amplify negative outcomes) can occur in retirement, especially for those who lack spending flexibility; tips for financial aid filings, from FAFSA to CSS/PROFILE, as the annual financial aid process gets into full swing; reminders of common IRA distribution and RMD-related mistakes to avoid; and a discussion of how for most clients still working, their most valuable asset to "manage" is not their retirement portfolio or their real estate, but their own individual earnings ability (which means their best path to greater wealth is not through earning better investment returns but getting an increase in their salary/income from working!).

We wrap up with three interesting articles: the first is an Investment News feature on the financial advisory industry's ongoing diversity problem (where only 20% of financial advisors are African-American, Hispanic/Latino, or Asian, while even financial analysts and CPAs have a 27% minority representation); the second is a Harvard Business Review article about disruptive innovation and what it really is (and is not), and why Uber is not actually true disruption at all (but robo-advisors might be); and the last is a fascinating look at the ongoing demographics "problem" emerging in both the U.S. and developed nations around the world, that may explain everything from sluggish U.S. growth to low interest rates, and why the dynamic may not change anytime soon.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, featuring his 6th annual take on the "Best Technology Of 2015" in the categories of Best Back-Office Technology, Best Clint-Facing Technology, and the Best Overall Innovation of the Year!

Enjoy the reading!

Congress Approves (Mostly Permanent) 2015 Tax Extenders Legislation For QCDs And More!

December 16, 2015 11:15 am 19 Comments CATEGORY: Taxes

Late last night, the House Ways and Means committee came to an agreement for key legislation to renew the so-called “Tax Extenders”, a series of tax provisions that have lapsed and been reinstated (i.e., “extended”) repeatedly over the past decade. The new legislation, entitled the Protecting Americans from Tax Hikes (PATH) Act of 2015, will once again retroactively reinstate for 2015 the tax extenders that were renewed for and then expired at the end of 2014.

Unlike past tax extenders legislation, though, this time many of the provisions are permanently renewed. From the popular qualified charitable distribution (QCD) rules for making charitable contributions from an IRA for those over age 70 ½, to the American Opportunity Tax Credit for college, and the deduction for state and local sales taxes, this will be the last time that these key tax planning provisions remain in an end-of-year limbo!

However, not all tax extenders provisions were made permanent; a few, such as 50% bonus depreciation for businesses and the work opportunity tax credit, are only extended a few years. The legislation also includes a few new “tweaks”, from a slight expansion of how qualified distributions from section 529 plans can be used, to the elimination of in-state-plan requirement for the coming new 529-ABLE plans for disabled beneficiaries.

Although the PATH legislation has not quite passed yet – it still needs to be Omnibus Appropriations legislation that sets the government’s budget through September 30 of 2016 – the tax extenders expected to pass in its agreed-upon form in a matter of days, once the remainder of the rulemaking process is completed.

And notably, the final version of the Omnibus legislation will not include any changes to the Department of Labor’s fiduciary proposal, which remains intact and on track for the DoL to issue its final year in the coming months!

How To Pick The Right CFP Educational Program For You

December 14, 2015 07:01 am 46 Comments CATEGORY: Personal/Career Development

The starting point for earning CFP certification is to complete the Educational requirement, a series of six college-level courses worth 18 credit hours on the various principal topics in the financial planning body of knowledge. A CFP educational program is intended to prepare future financial planners not only for taking the 6-hour CFP exam, but also the base of knowledge necessary to actually give personal financial planning advice.

Yet the caveat is that with the ongoing growth of financial planning, there are now more than 300 CFP Board Registered Programs available to complete the CFP educational requirement, with costs that range from under $3,000 to nearly $10,000 (or more for CFP programs part of a broader undergraduate or graduate degree!). So which is the best CFP program to choose and provides the best value for its cost?

Given the reality that everyone has a different style of learning, ultimately the truth is that there is no one “best” CFP educational program. Do you want to just complete the certification program as quickly as possible, or do you prefer to do it as part of an undergraduate or graduate-school degree? Do you learn better in a classroom or with an online program? Do you want the structure of a live educational program, or is it preferable (or easier) to manage a less structured CFP self-study format? And in the end, do you plan to finish with your CFP certification, or is that just the first step in your planned pursuit of post-CFP designations as well?

The bottom line: if you want to choose the best CFP educational program, look introspectively at what you think you need in terms of structure and support to get through the CFP curriculum and really learn it… and then do a comparison of the various CFP programs, to figure out which is the best match for you personally.

Weekend Reading for Financial Planners (Dec 12-13)

December 11, 2015 02:37 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the announcement of the CFP Board's new Chair-Elect Blaine Aikin, a long-standing CFP certificant who has spent the past decade not working as a practitioner but in a leadership position with fiduciary training program Fi360, and raising the question of whether it's a problem for the CFP Board to have a "non-practitioner" Chair, or a positive for it to have a fiduciary leader at a time of potentially significant fiduciary regulatory change (with the Department of Labor fiduciary rule anticipated in early 2016). Also in the news this week was the decision of high-yield bond fund Third Avenue Focused Credit to not only shut down, but suspend redemptions to 'ensure it can liquidate in an orderly manner', raising both concerns about how severe the stress in the high-yield bond market really is, and questions of whether more bond funds may soon limit their redemptions given the illiquidity of their underlying bond holdings as well.

From there, we have a few technical financial planning articles this week, from a discussion of whether advisors need to give a fresh look at the uses of reverse mortgages, to year-end planning strategies to optimize FAFSA reporting for those looking to qualify for financial aid, and a review of the rules and requirements for clients to hold investments of gold within an IRA and avoid disqualifying the account (given that IRAs normally cannot invest in "collectibles", which includes some forms of gold).

We also have a couple of practice management articles this week, including: the value of adding a virtual meeting with clients between the data-gathering process and the plan presentation meeting, to review and reaffirm the data and make sure it's accurate before crafting recommendations; how defining a niche for an advisor is about more than just targeting a certain level of wealth; how the real challenge for succession planning is not actually selling the business, but transitioning the founder's role from advisor to business leader; and some tips for young advisors looking to be a successor about how best to prepare themselves for the transition from their end.

We wrap up with three interesting articles: the first is a Reuters investigative report about whether the explosion of share buyback activity is no longer just enhancing returns for investors but may be overdone to the point of threatening American innovation and even exacerbating income inequality; the second is a discussion of upcoming regulatory trends in 2016, including not only a looming DoL fiduciary rule, but also new anti-money laundering rules for RIAs, an expansion to Form ADV, and a new regulatory fight about whether the SEC should use third-party reviewers to increase the pace of RIA exams; and the last is commentary for RIABiz founder Brooke Southall about whether the vendors serving advisors (particular the RIA community) today are still operating too much like the 'traditional' Wall Street firms that advisors are increasingly running away from.

Enjoy the reading!

Capturing An Excess Return Premium For Illiquidity Is A Privilege Not A Right!

December 9, 2015 07:01 am 10 Comments CATEGORY: Investments

Liquidity may be an appealing characteristic for an investment, but a growing base of research is finding that illiquidity may be even more desirable. Because ironically, demand for illiquid investments is so low, that they appear to carry a persistent excess return premium – a view popularized in recent years by those like David Swensen of Yale Endowment, who racked up a whopping 13.9% annual return for the past 20 years in large part by relying heavily on illiquid investments.

Of course, the first caveat to investing in illiquid assets is that it is only appropriate for the portion of investments that the investor can afford to segment into illiquid holdings. Yet the more significant (albeit more nuanced) danger of investing in illiquidity is that the return premium is only a benefit for an otherwise sound investment. For a bad investment, owning one that is also illiquid just compounds the problem by locking the investor in!

And notably, a bad investment is not just one with poor economic fundamentals, but also one where the interests of the investment manager and the investor themselves are not well aligned – leading to situations where even an appealing investment at first turns out to sour later, as has occurred with illiquid investments from various hedge funds, to certain life insurance and annuity products, and more recently with nontraded REITs.

Yet perhaps the greatest misalignment of interests is simply the one that occurs when illiquid investments are sold by salespeople who benefit in the short-term while an investor is locked into the illiquidity for the long run. In other words, illiquid investments may be one situation that is especially appropriate for the involvement of a fiduciary where long-term economic interests are aligned – which goes a long way to explain why illiquidity has served institutional investors like the Yale Endowment so well, even as for the individual investor it so often goes awry!

Is Financial Planning Software Incapable Of Formulating An Actual Financial PLAN?

December 7, 2015 07:01 am 33 Comments CATEGORY: Technology & Advisor FinTech

While crafting a “financial plan” for clients has been a staple of financial planning for decades, virtually no financial plan today actually constitutes a real “plan” for anything. After all, the whole point of planning is to formulate the strategy of how to handle a range of possible future scenarios. If A happens, then we’ll do B. If C happens, we’ll do D instead.

Yet financial plans today, and the financial planning software that supports the process, is incapable of illustrating such scenarios and the appropriate responses! Answering a simple planning question like “how much do the markets have to decline before I need to cut spending in retirement, and how much would I need to adjust my spending to get back on track” cannot be easily answered with any financial planning software available today!

Ultimately, as financial planners, we cannot eliminate the uncertainty of what the future may unfold, but we can eliminate the uncertainty of what to do and how to respond to those possible future scenarios. And by crafting a real plan about how to deal with that future, we can make it far less stressful as well, and eliminate the danger of needing to make a potentially regrettable high-stakes decision in the worst possible (and highly emotional) moment!

But ironically, in the end the very software that we rely upon to do financial planning and help clients navigate their uncertain future may actually be the greatest inhibitor to truly formulating a real financial plan for clients to deal with it!

Weekend Reading for Financial Planners (Dec 5-6)

December 4, 2015 02:33 pm 3 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the latest 2015 Financial Advisor Tech Survey from Financial Planning magazine, highlighting the latest in advisor technology trends, from the most popular CRM and financial planning software, to which advisor channels (and age demographics) are adopting new technology the fastest. Also in the news this week is another discussion of the Vanguard whistleblower suit, suggesting that Vanguard really is facing the possibility of being forced to increase its internal pricing by as much as a factor of 4X (and potentially pay billions of dollars of "evaded" taxes as well).

From there, we have a few technical financial planning articles, including: Social Security planning tips from Larry Kotlikoff in the aftermath of the recent Bipartisan Budget Act crackdown on File-and-Suspend and Restricted Application; a summary of the upcoming rules changes next year on money market funds, including which types may face a 2% redemption fee and have a floating (not-fixed-at-$1) NAV; a discussion of looming Medicare changes, from rising healthcare inflation impacting premiums, to new income threshold for the Medicare surtaxes in 2018 and changes to Medigap supplemental policies in 2020; and a look at "swap powers" and their relevance in income and estate tax planning (especially to get a step-up in basis on certain appreciated assets) for various types of irrevocable grantor trusts.

We also have a couple of practice management articles this week, from a review of the latest technology enhancements at broker-dealers like Cambridge, Commonwealth, and LPL, to a look at how advisory firms are adopting virtual part-time paraplanners and interns, and a discussion of the "pricing trap" that many advisory firms are facing as growth rates slow and firms (wrongly?) try to cut prices to compete instead of getting more focused on really crafting a unique value proposition for a clear target clientele (because in the future, it's really going to matter!).

We wrap up with three interesting articles: the first is a look at the recent FINRA initiative to reshape the Series 7 exam and/or to introduce a new "general knowledge" exam, which in turn has kicked off questions about whether the Series exams are even still relevant in today's financial advisor (and not-stockbrokering-centric) world; the second is a discussion of Facebook founder Mark Zuckerberg's announcement to donate 99% of his Facebook stock (about $45B) for philanthropic purposes, but to not use a private foundation and instead contribute to a for-profit LLC instead (possibly a newly emerging philanthropic trend?); and the last is a touching discussion about the "real" value of the home, as told by the Wall Street Journal's Jason Zweig when he had to move his 87-year-old mother out of the family home that they had owned for more than 50 years.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, featuring his own take on Financial Planning magazine's 2015 Advisor Technology Survey results, from what is still poor adoption of advisor CRM (the most common advisor CRM is "none"!?), but rising technology spending budgets as advisors look to step up in the future!

Enjoy the reading!

Using Systematic Partial Roth IRA Conversions And Recharacterizations To Fill The Lower Tax Bracket Buckets

December 2, 2015 07:01 am 34 Comments CATEGORY: Retirement Planning

From the moment the Roth IRA was created in the late 1990s, it has been a popular vehicle to generate future tax-free growth and income, whether by contributing to the account on an ongoing basis, or even doing a Roth conversion of an existing IRA or other pre-tax retirement account.

Yet the caveat is that the decision to contribute or convert to a Roth IRA incurs an immediate tax liability. And in the extreme, a large Roth conversion can generate so much taxable income that it actually drives up the IRA owner’s tax bracket to the point that the transaction becomes wealth destructive!

Fortunately, though, the decision to do a Roth conversion doesn’t have to be “all or none” – and in fact, not only is a “partial” Roth conversion permitted, but in practice it’s often the optimal strategy, allowing retirement account owners to convert just enough to fill the lower tax brackets, without causing “too much” income that would trigger the top tax brackets.

In fact, the Roth recharacterization rules make it feasible to precisely fill the bottom tax brackets, but not a dollar more, by converting more than enough to fill the lower tax brackets each year, and then doing a partial recharacterization to back into the optimal partial Roth conversion amount after the year is over!

How Tax Treatment Changes The Valuation Of An Advisory Firm Acquisition

December 1, 2015 07:01 am 2 Comments CATEGORY: Practice Management

As the pace of advisory firm acquisitions slowly but steadily increases, more and more attention is being paid to the "going rate" valuations of advisory firms, with some recent mega-deals valued at upwards of 2.0X recurring AUM fee revenue.

Yet the caveat is that not all advisory firm acquisitions are treated the same for tax purposes. Earn-out arrangements result in the purchase price being taxed as ordinary income to the seller, while others deals that purchase the underlying business assets may be treated as a capital transaction eligible for long-term capital gains treatment. As a result, a deal that is reported at 2X revenue could actually be worth another 15% more (or quite a bit less) depending on the tax treatment.

The issue is further complicated by the fact that the treatment most favorable to the seller - taxation at long-term capital gains rates - is least favorable to the buyer, who will be compelled to spread the cost of the purchase for tax purposes over 15 years as "goodwill amortization" even though the cash flows for the purchase occur immediately. As a result, the tax treatment of the deal can be a significant factor in setting the price itself, as buyers may pay more for a deal with more favorable tax treatment for themselves, and sellers may accept less if they can receive more favorable tax treatment on their end.

In this guest post, advisor Daniel Zajac shares his perspective on how the valuation of an advisory firm can swing by 15% or more, based on both the tax treatment to buyers and sellers and the expected growth rate of the practice. Whether you're considering the sale of your own practice, or are a prospective buyer of one (either as a way to start out as a financial advisor, or to make your existing advisory firm bigger), hopefully this information will help you gain a better understanding of the tax issues to consider that may influence the valuation of the firm involved!