Nerd's Eye View blog

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!

Successful Social Media And Blogging For Financial Advisors Is About Scalable Prospecting, Not Selling

September 28, 2015 07:01 am 46 Comments CATEGORY: Marketing

As a very active user of social media, I’m often asked what business results it actually produces. Do people really do business with other people over social media? Is it really possible to get a prospective client to give you $1,000,000 to manage by sending out the “right” tweet?

Well after more than 60,000 tweets, I will confess that I still haven’t figured out how to master the “1-tweet close”, and find the magic 140 character message that gets a client to turn over their life savings. But expecting that such a result could be possible actually misses the point; social media is no more likely to get an instant client than it would be to show up at a networking meeting, and expect someone to sign your new account paperwork on the spot.

Instead, the reality is that social media really does function more like a networking meeting or referral marketing – where the goal is not to “close” clients on the spot, but to begin to cultivate a relationship with them, so that eventually they will know, like, and trust you, and then you can have the opportunity to do business with them. In other words, social media is not about “doing business” and selling, it’s about prospecting and finding those people you might someday do business with!

Except when it comes to social media, there is a potential to scale your prospecting efforts far beyond what can be accomplished by traditional networking and even a ‘successful’ referral marketing campaign. While the effort early on to produce online content that demonstrates your expertise can feel time-consuming, in the long run as a following builds the time to produce content remains the same, but the results become exponentially better!

Which means in the end, social media is simply an alternative to traditional networking and referral marketing, designed to accomplish the same kind of know-like-trust marketing effort to generate prospective clients, but with far more potential return-on-effort!

Weekend Reading for Financial Planners (Sep 26-27)

September 25, 2015 02:29 pm 28 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with some notable industry news, including a proposal from the SEC to institute "swing pricing" for mutual funds in times of market stress, to a new series of cybersecurity exams as regulators continue to eye new rules for advisors to protect client data, to the latest series of studies on advisor adoption of social media finding that advisors, finally, are starting to see real business results from their persistent social media efforts.

From there, we have several articles about the ongoing debate of whether advisors should be switching to retainer fees from the currently popular AUM business model, which collectively raise the question of whether the AUM model is too conflicted and it's time to move on, or whether the reality is that advisors are simply succumbing to competitive pressures as the AUM model is no longer the differentiator it once was and too few advisors have really crafted a specialization or niche around which they can demonstrate a unique value proposition for clients.

We also have a couple of technical planning articles this week, including: a reminder of the issues to consider given the likelihood that many mutual funds will be making big capital gains distributions in December for the first time in years; a discussion of the recent proposal from one Fed governor that the Fed may use negative interest rates as a policy tool to stimulate the economy, and how the strategy would work; and a look at how one advisor aims to create alpha for clients not just by trying to pick the best investment managers but considering ways that combinations of investment managers can be more valuable than any one individually.

We wrap up with three interesting articles: the first is a new study from the Center for Retirement Research suggesting that our shift from Defined Benefit to Defined Contribution plans in recent decades may not have been nearly as damaging to retirement savers as previously believed, once accounting for the fact that savers into DC plans actually get the direct benefit of the market returns that grow the account balance over time; the second is another notable study, finding that when it comes to retirement savings, showing people how much their peers are saving can actually backfire, making them feel so far behind that they're actually discouraged and less likely to save; and the last is a fascinating discussion of how success as an advisor can create more problems than it solves as the burdens of the business increase, and how the best solution is to keep raising your fees, to the point that if you're not turning away at least 1/3rd of your new clients and 1/5th of your existing clients every year, you may not be charging enough.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including a fresh push on cybersecurity from the SEC (including a $75k fine against an RIA for not creating a cybersecurity policy), how advisors should handle a "ransomware" demand if their own computers are hacked, and the launch of a new financial planning software provider RightCapital.

Enjoy the reading!

Why A QLAC In An IRA Is A Terrible Way To Defer The Required Minimum Distribution (RMD) Obligation

September 23, 2015 07:01 am 61 Comments CATEGORY: Retirement Planning

The longevity annuity has become increasingly popular in recent years as a potential new vehicle for retirement income, as its ability to delay payments to an advanced age like 85 allows for a significant accumulation of mortality credits. And since the introduction of last year’s Treasury Regulations, a so-called “Qualified Longevity Annuity Contract” (QLAC) can even be purchased inside of an IRA or other retirement account, allowing a portion of a retiree’s RMDs to be deferred from 70 ½ to as late as age 85!

However, as it turns out the unique nature of a longevity annuity’s payment structure is not very hospitable as an RMD deferral strategy. The fact that it can take until a retiree’s late 80s just to break even and recover principal means the retiree risks significant foregone growth by trying to merely defer RMDs through the use of a QLAC. And of course, the RMDs will still eventually happen anyway, as the QLAC merely defers when payments begin. In fact, ironically, if the retiree does live, the accelerated payments of a QLAC in the later years can actually deplete an IRA even faster than normal IRA RMDs would have anyway!

Ultimately, this doesn’t mean that the longevity annuity (or a QLAC inside an IRA) is a bad deal. The ability to accumulate mortality credits still means it can be very effective as a fixed income alternative for those who fear they may not have enough money to fund a retirement well beyond their life expectancy. And if retiree intends to spend all of his/her assets anyway, and the only available dollars for retirement are held in an IRA or other retirement account, the QLAC is an effective means to engage in such a strategy. Nonetheless, the bottom line is that while a QLAC may be a valid way to use a retirement account to hedge against longevity – and defer RMDs along the way – it’s still not very effective as an RMD avoidance or deferral strategy! Just because you can buy a longevity annuity inside a retirement account as a QLAC doesn't mean you should!

Retainer Fees Vs The AUM Model – Red Ocean Differentiator Or Blue Ocean Opportunity?

September 21, 2015 07:01 am 56 Comments CATEGORY: Practice Management

Whether due to fears of the next bear market, a struggle to differentiate in an increasingly crowded AUM-fee landscape, or the pressure of competition from robo-advisors, a growing number of financial planners are talking about changing from the assets under management (AUM) model to adopting some form of (typically annual) retainer fees instead.

While the AUM model has challenges, though, from revenue volatility to potentially misaligned pricing for clients to non-trivial conflicts of interest, the ongoing rise of the AUM model suggests that it still has more benefits than drawbacks. And in fact, its biggest strength from the business model perspective – the ability to have revenue per client grow over time as the market grows – may be a key factor that allows it to continue to dominate the more-salient retainer fee alternative, which may struggle to keep pace with rising employee advisor costs given the industry’s demographic shortages.

Yet the reality is that the greatest potential for retainer fees may have nothing to do with competing head-to-head with the AUM business model, but instead to reach out to clients that the AUM model can’t serve in the first place – as many as perhaps 80% of all households, that simply don’t have available assets to manage (or sufficient assets to be managed in the first place). In fact, the untapped market potential for using retainer fees to expand the reach of financial planning is so large that, in the long run, while the AUM model may still survive, it could become a niche for high-net-worth clients, while most consumers access financial planning through various retainer or fee-for-service alternatives!

Weekend Reading for Financial Planners (Sep 19-20)

September 18, 2015 02:09 pm 14 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week’s edition kicks off with the recent news that robo-advisor Betterment is now expanding into the world of 401(k) plans, an environment that some argue is especially ripe for technology disruption but due to deeply entrenched players may be especially challenging for Betterment to penetrate at all.

From there, we have a couple of practice management articles, including: a discussion of how advisors can build client loyalty; why asking for referrals is a poor strategy to actually get more referrals; how some advisors are working to build proactive relationships with attorneys to generate referrals; and the importance of hiring people with complementary skillsets to really build a successful advisory firm.

There are also a number of more technical financial planning and investment articles this week, from a look at the rise of DFA funds (now the #10 mutual fund family with almost $300B of AUM!), to a look at some of the recent research on active management suggesting that the search for good active managers may not be as impossible as critics suggest, to a discussion of how some advisors are beginning to do more planning around cash flow for clients, and a research article on how to cut through the wide range of various retirement research studies to figure out which approach is most appropriate for a particular client.

We wrap up with three interesting articles: the first looks at how curiosity is becoming one of the key traits for successful leadership (as it drives leaders to always be seeking new opportunities in today’s ever-changing world); the second raises the question of whether the brokerage industry’s objections to the DoL fiduciary rule are really because they can’t serve small investors, or whether they may be struggling to do so simply because they are operating outdated business models using outdated technology and have failed to stay current; and the last makes the good point that if financial planners really believe that the value of financial planning is more than just delivering technical information and involves providing clients with an outside and objective perspective to reach their goals, that perhaps more advisors should be hiring advisors for themselves, too.

Enjoy the reading!