Nerd's Eye View blog

Should Portfolio Allocations Be Adjusted Based On The Industry You Work In?

October 21, 2015 07:01 am 20 Comments CATEGORY: Human Capital

The traditional approach to portfolio design involves diversifying the portfolio with low-correlation investments to help maximize the portfolio’s return for a given level of risk (or alternatively to minimize risk for a given level of return).

Yet from the holistic financial planning perspective, the reality is that the portfolio – or more generally, an investor’s “financial capital” – is only one asset on the household/personal balance sheet. And for accumulators who are still working, it’s not even the biggest asset, often trumped by the individual’s human capital that may be 2X, 5X, or 10X the value of his/her financial capital!

The significance of this distinction is that to truly maximize the risk/return characteristics of an individual’s total balance sheet, and all types of capital, it’s crucial to not just view the portfolio on a standalone basis, but to invest the portfolio to diversify around the often-much-larger human capital instead. Which means workers in conservative “bond-like” jobs might have even more equity-heavy portfolios, while those in more aggressive “stock-like” jobs should invest even more conservatively!

And even for those who are otherwise comfortable with their overall level of risk and equity exposure, arguably the future of designing portfolios for accumulators in particular – where human capital is really the dominant asset – is that the asset class and sector exposures of the portfolio should be adjusted around the risk/return characteristics of the worker’s job. For instance, those who work in the tech industry might really want to own less of the Technology sector in their portfolio! And ironically, the approach is especially relevant for financial advisors themselves, who are inherently so exposed to the economic and stock market cycle by virtue of their job, that they should own less in stocks themselves… or at least, far less in Financials!

Creating Blog Content As A Financial Advisor – Coming Up With Content Ideas And Other Best Practices

October 19, 2015 07:01 am 20 Comments CATEGORY: Personal/Career Development

The existence of social media and search engines like Google have made it possible for niche advisors to succeed like never before, obtaining clients simply by creating content that demonstrates their expertise to their prospective clientele, and allowing those prospects to find their way to the advisor.

Yet the caveat of engaging in such inbound marketing strategies as a financial advisor is that they only work by actually creating the content, which for many advisors is a challenge unto itself in trying to think up topics to write about! As it turns out, though, there’s a remarkably easy way to come up with appropriate topics: simply create content to answer the questions your clients are already asking you!

And if writing still seems overwhelming, consider crafting an outline to help figure out what to write about. By breaking your article into 3 key points, then identifying 3 key concepts associated with each point, all that remains to create an article is just to create one paragraph (3 sentences!) to summarize each concept! (I call this writing approach the 3x3x3 strategy!)

Or alternatively, if writing is still a blocking point, consider just not writing at all! If you’re better at speaking, try recording yourself on video instead! If you just prefer to talk about the topics, try a podcast! Or hire writer who can work with you to take an initial topic idea and expand it into an article!

Ultimately, though, the biggest key to overcoming any writer’s block and producing content regularly is simply to commit to a regular schedule of content in the first place. Whether it’s just planning to do one article per month, or a rotating series of articles every week, by crafting your own “Editorial Content Calendar” you can create a form of accountability for yourself, to help ensure that your content creation efforts get the priority they deserve!

Weekend Reading for Financial Planners (Oct 17-18)

October 16, 2015 02:01 pm 17 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the big news that a majority stake in mega-RIA Edelman Financial has been purchased by private equity firm Hellman & Friedman at a whopping $800M valuation, a market valuation that may have been upwards of 3X the $15B RIA's revenue, suggesting that the big money still sees a bright future for RIAs charging AUM fees. Also in the news this week was a final rule from FINRA that will require brokerage firms to include a link to FINRA's BrokerCheck system so consumers can more easily investigate the regulatory history of their brokers... though, sadly, the rule will not require brokers to provide consumers with a link directly to their actual BrokerCheck profile!

From there, we have a few technical planning articles this week, including: a discussion of the new DFA-based ETFs being offered by John Hancock and how they differ from DFA's traditional mutual funds; a new study raising the question of whether high-deductible health plans paired with health savings accounts are just leading consumers to skip out on important health care services (rather than becoming more savvy health care shoppers); guidance on why advisors might want to work with clients to reconstruct the total amount of non-deductible contributions into their IRAs if they haven't already been tracking it on Form 8606; and a recent Supreme Court ruling that opens the door for clients with income taxed by cities and counties across multiple states to file amended tax returns and claim a refund for the past 3 years.

We also have a couple of practice management articles, from a discussion of how the proposed DOL fiduciary rule could introduce significant paperwork and compliance obligations for RIAs as well as broker-dealer firms (for any RIA whose AUM fee is higher than the prospective client's former 401(k) plan), to a look at why it's so crucial to establish clear and consistent messaging about the services an advisory firm provides to its clients, and a reminder that if advisors are going to claim to be the "quarterback" of the client's financial team that they really need to step up and actually be the quarterback that proactively reaches out to and engages with a client's other advisors!

We wrap up with three interesting articles: the first raises the question of whether female-focused advisory firms, like Sallie Krawcheck's recent Ellevest initiative, are really likely to succeed, especially given that several prior high-profile initiatives in the past decade have all quietly folded (or whether the reality is that focused on "women" is still far to broad to be a relevant 'niche' solution); the second is a critique of the recent Elite Daily article that Millennials should just enjoy themselves in their 20s and not worry about savings, pointing out that our 20s are often the best time to work hard and set our careers on a path to success; and the last is a touching offering of financial advice from personal finance writer Morgan Housel to his newborn son, that provides good relevance reminders for anyone and everyone (regardless of age)!

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including why Winterberg is upbeat on the Morningstar acquisition of Total Rebalance Expert (tRx), the announcement that LogMeIn has acquired LastPass, and coverage of the recent LaserApp "AdvisorCon" conference.

Enjoy the reading!

The IRA Aggregation Rule And Pro-Rata Taxation Of After-Tax IRA Dollars

October 14, 2015 07:01 am 58 Comments CATEGORY: Retirement Planning

The IRA aggregation rule was created to limit the ability of taxpayers to take advantage of ‘abusive’ IRA tax strategies, by requiring that all IRAs are aggregated together to determine the tax consequences of a distribution from any of them.

The primary impact of the IRA aggregation rule is to determine how much of an IRA’s non-deductible contributions are treated as an after-tax return of principal when a taxable distribution occurs, whether as a withdrawal or a Roth conversion. And by forcing all accounts to be aggregated together, the rule severely limits many individuals from taking advantage of the so-called “backdoor Roth contribution” strategy.

However, the IRA aggregation rule reaches much further than just the taxability of after-tax contributions in existing IRAs. Thanks to the recent Bobrow case, it now also applies to the limitation of no more than one 60-day rollover in any 12-month period. Though on the plus side, the IRA aggregation rules apply to required minimum distribution (RMD) obligations as well, allowing a distribution from any IRA to satisfy the RMD rules for all IRA accounts!

Fortunately, though, the IRA aggregation rules do not apply when calculating substantially equal periodic payments (SEPP) under Section 72(t), reducing the danger that a withdrawal from one IRA could constitute a “modification” of the ongoing 72(t) distributions from another that would trigger a retroactive penalty. However, even in the case of SEPPs, the IRA aggregation rules will still apply in determining how much of a 72(t) payment constitutes a tax-free return of non-deductible contributions!

The 12 Best Conferences For Financial Advisors To Choose From In 2016

October 12, 2015 07:03 am 39 Comments CATEGORY: Conferences

Attending at least one industry conference every year is crucial for financial advisors who want to keep their perspective on industry and practice management trends to improve their career or advisory firm... not to mention being an efficient means to getting required continuing education credits. Yet the overwhelming challenge for many advisors is figuring out which conference to attend, given so many to choose from, and that many are little more than a never-ending series of thinly-veiled product pitches by sponsors.

Given that I speak at upwards of 70 conferences myself every year, I’ve participated in virtually every major conference available for financial advisors, and am often asked for recommendations of which events I think are the best to attend. Of course, the reality is that what is “best” will vary from one advisor to the next, depending on the kind of job they have or advisory firm they run, and their own needs and experience level. So in 2012 I started to craft my own annual list of “best-in-class” conferences, based on my own travels and experience, divided into various categories so advisors could find the best conference to fit their needs.

And now, I’m excited to present my newest list of “Top Financial Advisor Conferences” for 2016, including several new categories like “Best Social Media/Blogging” and “Best for Young Advisors”. Of course, the reality is that the 2015 conference season isn’t even over yet, but with some of the best conferences getting underway as soon as January and February of next year, the early bird registrations for 2016 events are already closing soon!

So I hope you find this year’s list of conferences helpful as a guide in planning your own conference budget and schedule for 2016, and be certain to take advantage of the special discount codes that several conferences have offered for all of you Nerd’s Eye View readers!

Weekend Reading for Financial Planners (Oct 10-11)

October 9, 2015 02:29 pm 25 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the big advisor #FinTech announcement that Morningstar is acquiring the rebalancing software platform Total Rebalance Expert (tRx). Also in the news this week was the launch of a new advocacy platform (courtesy of TD Ameritrade) to make it easier for advisors to submit comments to their Congresspeople regarding advisory industry regulatory issues, and a new study from Cerulli suggesting that a whopping 25% of wirehouse advisors could leave for independent channels in the next 4 years as post-financial-crisis retention deals start coming up for renewal.

From there, we have a few practice management articles this week, including a discussion of the growing number of younger advisors looking to buy out the advisory firms of retiring advisors, an excellent article by Angie Herbers on the growth barriers that advisory firms face as their size (and complexity) increases, and an explanation of what "distributions-in-guise" are and why the SEC is cracking down on them (highlighted by a recent $40M fine against investment adviser First Eagle Investment Management).

We also have a couple of technical planning articles this week, from a new research study out of the Center for Retirement Research finding that one of the primary reasons people lapse their long-term care insurance policies is due to cognitive decline (a sad reality, as those are also the people most likely to need the coverage!), to a look at the concept of the "tontine" and why it may soon make a comeback as a retirement income solution, and a discussion of how market valuations not only tend to mean revert to historical average valuations to but mean invert to historical valuation lows (which has significant implications for forward market returns from today's valuation levels!).

We wrap up with three interesting articles: the first looks at the world of financial advice in the U.K., which implemented advisor reforms two years ago that included an outright ban on all investment commissions, and is now starting to yield some data about whether low- and middle-income consumers really are abandoned in a no-commission world (the early data suggests they're not abandoned, but advisors may end out needing to charge fees higher than what consumers are willing to pay!); the second provides a good reminder than virtually any business model for advisors presents some conflicts around the advice delivered, as the easiest course of action is always to give advice that rewards the current business model; and the last is a critique from the editorial team at Investment News regarding the recent proposed NASAA model fee disclosure rules for broker-dealers, which ironically would increase transparency of "miscellaneous" broker-dealer fees but require no actual transparency regarding the (typically much larger) fees, commissions, and other compensation that consumers pay to the broker themselves!

And be certain to read through to the end, and check out Bill Winterberg's video coverage of the recent tRx Unplugged 2015 conference as well!

Enjoy the reading!

IRS Notice 2015-49 Cracks Down On Accelerated Lump Sum Pension Buyout Offers

October 7, 2015 07:01 am 15 Comments CATEGORY: Retirement Planning

In recent years, pension plans and their employer sponsors looking to “de-risk” their exposure have been increasingly offering “lump sum pension buyout” offers to employees, where a pensioner receiving ongoing payments has the opportunity to convert the remaining expected payments to a one-time lump sum that can be rolled over to an IRA.

Yet while the conversion of a lump sum to a pension isn’t always a bad deal – at least if the lump sum is ‘reasonably’ valued – in practice the lump sum offers have been so ‘modest’ that even a recent non-partisan GAO study raised the concern that participants may not be getting enough information (and therefore may not be making the right decision) when the offer comes.

Accordingly, the Treasury has announced plans to issue an updated version of Treasury Regulation 1.401(a)(9)-6, Q&A-13 and Q&A-14, that will limit the ability of pension plans to offer lump sum pension buyout offers to those receiving ongoing payments. And the IRS announced in IRS Notice 2015-49 that the new rules will be effective retroactively back to July 9^th of 2015, rendering lump sum buyout offers dead, effective immediately.

Notably, the crackdown on the employee pension buyout offer will not limit the ability to choose a lump sum versus a pension at the time of retirement, but it will prevent those from receiving ongoing pension payments from commuting those payments into a lump sum. For most, that’s probably good news, given ‘questionable’ buyout offers (and Congress beginning to scrutinize various "pension advance" schemes), and concerns about the ability of some retirees to manage the investment and longevity risk that they take on with a lump sum. However, for those in poor health or who fear their underfunded defined benefit plan may default (and don’t want to rely on PBGC backing), the new rules have taken a potential buyout offer off the table. And ironically, while the purpose of the new rules was to shore up protections for pensioners, the elimination of yet another means by which plan sponsors can “de-risk” their pension exposures may only serve to further accelerate the slow-motion demise of the defined benefit plan altogether.

The Solo Financial Advisor Is Not Just Surviving, But Thriving, By Serving The Mass Affluent!

October 5, 2015 07:01 am 28 Comments CATEGORY: Practice Management

The ‘popular’ view of the world of financial advisors these days is that we’re all in a collective race for size and economies of scale, because only the largest can survive and everyone else is doomed to a world of declining profit margins as the overhead costs of running an advisory firm grind their income down to nothing.

Yet the latest industry benchmarking research for RIAs, including both the 2015 FA Insight “People And Pay” and the 2015 Investment News “Compensation And Staffing” studies, found that just the opposite may be occurring – by operating with lean staff overhead and leveraging technology, standout solo financial advisors supported by just 1-3 staff members are actually some of the most financially successful and profitable advisory firms out there, taking home more in owner income than any advisors but the partners of the largest super ensemble firms!

And perhaps most notable is that not only is the typical successful solo advisor practice doing exceptionally well financially, but it is succeeding not by serving an exclusive set of high-net-worth clients with $1M+ minimums, but by serving a mass affluent clientele often claimed (incorrectly!?) to be ignored by the RIA community! In fact, the latest benchmarking data reveals that the common stereotype that RIAs serve "only" the high-net-worth is entirely wrong, as it's really only a small subset of the largest (albeit also the most visible) advisory firms who are focused on those clientele, while the mass of solo financial advisors serve the broader mass affluent!

Weekend Reading for Financial Planners (Oct 3-4)

October 2, 2015 02:29 pm 20 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week’s edition kicks off with the announcement of a new advisor leadership succession training program from Philip Palaveev of the Ensemble Practice, called G2 Leadership Summit, that will train advisors in groups of 50 to handle the real-world challenges of advisory firm ownership and management with a series of mock management scenarios. When viewed alongside a 'similar' training program launched by Schwab last year, the new program underscores a positive broader trend of leadership development efforts in the advisory world.

From there, we have a couple of practice management articles, including: a look at the lessons financial advisors can learn from how TurboTax did and did not impact CPAs (where self-service tax preparation software still only serves about 30% of households!); an interview with Dr. Brad Klontz about the rise of "financial therapy" and advisors incorporating behavior change management into their skillsets in serving clients; how to deal with a "ransomware" virus (and ideally how to avoid it in the first place!); how recent changes to the Facebook API may soon force advisors to adopt Facebook Business Pages instead of using their Personal Profiles for business; and an interview in the Journal of Financial Planning about how advisors can profitably serve Gen X and Gen Y clients but must abandon the AUM model to do so.

There are also a few technical financial planning articles this week, from a recent tax proposal to limit the transfer-for-value rules on life insurance that could create problems for clients transferring life insurance policies in/out/around of their business; a discussion of the common "myths" about bonds, such as the fact that back in the early 1980s bonds had a higher nominal yield but actually produced a lower after-tax after-inflation yield than they do today; and the recent Zahner court case that may help clear the way for short-term Medicaid-compliant annuity strategies.

We wrap up with three interesting articles: the first looks at how not all clients who ask "What do you think I should do?" to their advisor actually want advice about what to do (many are just looking for the advisor to validate their pre-existing idea, or to help them figure out their own solution); the second is a discussion of "The Experience Economy" and how advisors can avoid the commoditization of various parts of financial services by not just giving better service but crafting an experience around the process; and the last is an article by referral marketing expert Steve Wershing about how advisors calling their firms "boutique" may actually be inhibiting referrals, and that if the goal is to convey that the firm provides deep personalized service the best way to convey it is with examples of what the firm actually does, not by using the limiting "boutique" label!

Enjoy the reading!

New IRS Change Will Require Estates To Request An Estate Closing Letter

September 30, 2015 07:01 am 14 Comments CATEGORY: Estate Planning

For those who are subject to Federal estate taxes, the estate closing letter is a small but essential step in the process of administering an estate. It affirms that the IRS has reviewed and agreed on the Form 706 estate tax return as filed, and is often the last step for an executor to actually close an estate with the probate court.

However, in recent years the IRS has been forced to issue a rapidly growing number of estate closing letters, not to close out the estates of those who actually have an estate tax liability, but nontaxable estate tax returns that were filed solely for the purpose of claiming portability of a deceased spouse’s unused exemption.

To relieve its own administrative burden, the IRS informally “announced” in a recent update to its Estate Tax FAQ that it will no longer automatically issue an estate tax closing letter at all, and instead will require estate administrators to proactively request the closing letter instead.

For those who merely filed the Form 706 estate tax return to claim portability, this change isn’t necessarily a problem, as few in such situations would have requested (or had any need) for a closing letter anyway. However, for those who do face an estate tax, the new process adds yet another step for the estate administrator to manage. And because the estate closing letter can’t even be requested until four months after the Form 706 is filed, the new rules may force taxable estates to remain open even longer – delaying distributions for beneficiaries and racking up administrative costs – before the estate can finally be closed!