Nerd's Eye View blog

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?

Weekend Reading for Financial Planners (Jan 16-17)

January 15, 2016 02:31 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the big news that mega asset manager Invesco has bought "robo-advisor-for-advisors" platform Jemstep, in yet another example of an investment company acquiring a robo technology platform to use as a distribution channel for advisors.

From there, we have a number of technical financial planning articles, including: a look at why most retirees really go broke (hint: despite our focus on Monte Carlo analysis, it's not actually from market volatility, but spending shocks instead); how to proactively use the Roth recharacterization rules for various Roth conversion strategies; a discussion of recent research examining why corporate bonds don't seem to provide the risk premium over government bonds that would be expected given their default risk; and a look at the ongoing rise in various "values-based investing" approaches from SRI and ESG to impact investing (to the point that even regulators and the IRS are making it easier to pursue such strategies).

We also have a few practice management articles this week, from the ongoing decline of client referrals (as affluent clients seem to be increasingly concerned about the "social risk" of making a referral), to a reminder of the importance of updating your LLC operating agreement for your advisory firm (or more importantly, creating one if your LLC doesn't have one already!), the liability issues involved if an advisory firm employee makes a trading mistake, and some reminders of what not to do as you complete the annual Form ADV update process in the coming weeks.

We wrap up with three interesting articles, all focused on the topic of personal productivity: the first is a look at why you might consider getting a personal assistant to help you be more productive in business (even if you have to pay for it out of your own pocket); the second is a reminder of how helpful it can be to create a structured weekly routine for yourself (where client meetings are only scheduled on certain days of the week); and the last is a powerful reminder of the difference between just being "busy" (even if you're very efficient at getting things done!), and truly being productive.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including a discussion of the Invesco acquisition of robo-advisor Jemstep, social media platform Snapchat is rumored to be working on its own robo-advisor offering, BBVA Compass is announced as the first financial services firm to be linked up to FutureAdvisor since Blackrock acquired it, and Wealthfront announced its own Portfolio Review service to analyze fees and performance of a prospect's outside portfolios in an effort to try to amplify its own lead generation.

Enjoy the reading!

Getting Funding To Launch An RIA And The Startup Costs Of Becoming A Financial Advisor

January 14, 2016 09:01 am 6 Comments CATEGORY: Practice Management

The Bureau of Labor Statistics projects that employment opportunities for personal financial advisors will grow by 30% in the coming decade, and Cerulli projects that nearly 1/3rd of existing advisors will retire over that same time period as well - creating a tremendous opportunity for those who are interesting in becoming a financial advisor.

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 how much it costs to start an advisory firm, what it takes to survive in the early years, and why it is so difficult to get funding for your new advisory business venture.

Yet ultimately, it turns out that the simple reality is it's actually remarkably inexpensive to become a financial advisor - at least compared to the startup costs for most other industries. The real blocking point for getting started is not the cost to establish the business, but the "income gap" that is created as you leave another job and haven't yet gotten clients in your new firm. Or viewed another way, it's the difficulty in paying your personal bills while getting started as a financial advisor that is the real challenge, not the startup costs for creating the business itself.

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!

Should Equity Return Assumptions In Retirement Projections Be Reduced For Today’s High Shiller CAPE Valuation?

January 13, 2016 07:01 am 49 Comments CATEGORY: Retirement Planning

The sustainability of retirement cash flows from a portfolio depends in no small part on the returns generated by that portfolio – in particular, the real returns, given the pernicious impact of inflation over a multi-decade retirement.

In today’s high-valuation environment, many retirement projections are being done with reduced long-term return assumptions… with the caveat that while many advisors agree on the need to project lower returns, there is little agreement on how much lower it should be.

A look at the available market data suggests that realistically, it would be appropriate to reduce equity return assumptions by about 100bps (or 1 percentage point) over the next 30 years, to reflect the current valuation environment. Ironically, the reduction is not greater, because 30 years is such a long time that even if returns are bad for a period of time, there are enough subsequent years to recover as well.

In point of fact, though, it turns out that market valuation is even more predictive of 15-year returns, and that today’s high P/E ratios imply that between now and 2030, market returns could be reduced by as much as 400bps. On the other hand, because market valuations (and the associated returns) tend to move in cycles, this also implies that in the 2030s and 2040s, market returns could be as much as 400bps above the long-term average as well.

Ultimately, then, the ideal way to adjust return assumptions in a retirement plan in today’s environment may not be to reduce long-term returns at all, but instead to do projections with a “regime-based” approach to return assumptions. This would entail projecting a period of much lower returns, followed by a subsequent period of higher returns, in a manner that more accurately reflects the impact of market valuation on returns – and better accounts for the sequence-of-return risk along the way as well!

Life Settlements – Selling A Life Insurance Policy That’s No Longer Wanted For More Than Its Cash Value

January 12, 2016 07:01 am 9 Comments CATEGORY: Insurance

The classic view of life insurance is that it is purchased as long as needed or desired, and then lapsed (or if there's any cash value, surrendered) when it is no longer necessary. Term insurance policies are usually expected to lapse, and in practice even "permanent" insurance often ends out being surrendered before it is ever paid out as a death claim.

Technically, though, there is a third option to the "keep versus lapse" decision of life insurance: to sell the policy to a third party in a transaction called a "life settlement" to an (institutional) investor who might be willing to pay more than just the policy's cash value (or the $0 value that might be available if the coverage just lapses on its own). After all, in the hands of an investor, a life insurance policy is simply an "investment" that has ongoing cash flow requirements (premiums) but will eventually mature as a (much larger) death benefit later. So as long as the time horizon is "reasonable", the policy can actually have a remarkably appealing implied rate of return to an investor, for which the current policyowner can be paid!

In this guest post, Lingke Wang - co-founder of Ovid Life, a technology firm aiming to create a centralized transparent marketplace for life settlements transactions - provides a "Financial Advisor's Guide To Life Settlements" with a detailed review of the life settlement industry, what a life settlement provider is and how life settlements operate, and the mechanics of how an investor evaluates a prospective life settlement contract purchase (which is important to understand for any policyowner who might be selling their life insurance policy!).

Ironically, the biggest caveat of engaging in a life settlement is the reality that any life settlement policy worth selling to an investor is worth even more in the long run for the policyowner to just keep themselves, where the internal rate of return will be even more appealing (since the investor has both transaction costs to acquire the policy, and does not enjoy the death benefit tax free as the original policyowner would). Nonetheless, that appealing internal rate of return for keeping a permanent life insurance policy only applies by continuing to maintain the policy, including ongoing premiums. So for a policyowner who simply doesn't want to - or can't afford to - keep the policy in the first place, a life settlement may still be a more appealing exit than just letting the policy lapse away!

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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