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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!

New Change To FAFSA Rules Will Allow Prior-Prior Year (PPY) Income Data When Qualifying For Financial Aid

September 16, 2015 07:01 am 26 Comments CATEGORY: General Planning

Qualifying for Federal financial aid requires filling out and submitting the Free Application for Federal Student Aid (FAFSA), based on your income from the preceding year. Except historically, this FAFSA process has been challenging, because schools are already issuing acceptance letters about attendance before most families have even finished filing their tax return to know what income to report on the FAFSA!

To make the process easier, this week President Obama signed an executive order that will change the FAFSA rules beginning with the 2017-2018 school year, allowing students to complete the FAFSA based on the “prior-prior year” (PPY) income, and shifting the entire application process back to October of the preceding year (a full 11 months before the student will matriculate!).

The new rules should make it much easier for students to file the FAFSA to determine eligibility for financial aid (especially since it will now be feasible to use the IRS’ automated Data Retrieval Tool). But notably, it means that the current 2015 tax year will now count twice for financial aid purposes (2016-2017 under the current prior-year rules, and again in 2017-2018 under the new PPY rules!). And in the future, the new prior-prior year rules mean the “key” years of income for college financial aid now start as early as the student’s rising sophomore year of high school… but notable end mid-way through the student’s sophomore year of college!

One Young Breakaway Broker’s Story Of Navigating The Broker Protocol And Choosing An RIA Custodian And Technology

September 15, 2015 07:02 am 21 Comments CATEGORY: Practice Management

The reality of starting out as a financial advisor is that it's hard to know what type of advisory firm structure will be best in advance; often, the best strategy is just to dive in, get a job at any reasonable firm that will allow you to launch your career, and after you get some experience, decide whether it's really the right fit for the future. Of course, the caveat to this approach is that if it turns out you do need to make a change later, that change can be scary - so frightening, in fact, that many advisors never make the subsequent changes they should, fearing the unknown and finding comfort in an (admittedly not ideal) current firm or environment.

In this guest post, financial advisor Noah Morgan shares his own transition process in making the leap, first from his original advisory firm to an independent broker-dealer, and then subsequently to an independent RIA. Accordingly, Noah gained a wide range of experience and perspective about what it's like to make these transitions, from vetting RIA custodian platforms to navigating the Broker Protocol and compliance concerns, to selecting the entire suite of technology necessary to sustain the new advisory firm.

So if you're an advisor who's currently unhappy at your current firm, and considering the process of transitioning to something new, hopefully this will be helpful to you in gaining an awareness of the issues that you need to consider if you're really going to make a switch in the future!

Best Practices For Internal Succession Planning Of Financial Advisory Firms

September 14, 2015 07:02 am 14 Comments CATEGORY: Practice Management

The process of executing an internal succession plan within an advisory firm is a challenge, even in the best of circumstances. And the stakes are high. When an advisory firm is created, the founder takes the “risk” of foregone income for a period of years while trying to get the business off the ground… yet when a successor takes over, in many ways the risk is even more severe, as it's no longer just the danger that the business doesn’t succeed, but the more substantial financial risk that the successor won’t be able to repay his/her lenders for the significant capital that was borrowed to execute the deal!

Yet unfortunately, while there have been some books written about how founders should aim to execute a succession plan, remarkably little has been written from the perspective of internal successors, and the steps they should take to maximize the odds of completing a successful succession of the founder’s firm.

Until now. In the new ‘must-read’ book for advisory firm successors, “Success and Succession” (just released this week!) explores how internal successors can best navigate the challenges of completing a succession plan. Written from the perspective of two successful advisory firm internal successors, Eric Hehman and Jay Hummel, along with industry veteran (and successfully-exited founder) Tim Kochis, the book provides guidance on not only the key operational and financial issues faced in executing an internal succession plan and how to manage them, but the emotional challenges that will inevitably arise – for both the successor and the founder – which must be navigated to successfully complete a succession transition!

Weekend Reading for Financial Planners (Sep 12-13)

September 11, 2015 02:22 pm 19 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the latest industry data showing that mergers and acquisitions of financial advisory firms is running at a record pace for 2015, both in terms of the number and the size of advisory firms. Also in the news this week was an interesting new study showing that the bulk of current ETF growth is being driven by independent RIAs, especially firms with over $500M of AUM, that have collectively added half a trillion dollars to ETFs in just the last 12 months!

From there, we have a few practice management articles, particularly focused around the 'necessary' topic of compliance, from a look at the kinds of 'boilerplate' provisions that really are important to include in an advisory agreement with clients, to a discussion of the recent Notice of Proposed Rulemaking from the Treasury's FinCEN division that may require SEC-registered investment advisers to adopt Anti-Money Laundering (AML) compliance rules, to a look at a large RIA that recently received a huge fine from the SEC not because it had significant compliance breaches that harmed clients but because the firm failed to engage in their internal compliance oversight processes necessary to know that employees were acting properly (in other words, it's not enough to be compliant, you need a process to demonstrate that you've confirmed you're being compliant!).

We also have a couple of technical planning articles this week, including: a look at Qualified Longevity Annuity Contracts (QLACs) that were heralded last year as a savior for retirees but thus far have seen very little adoption; recent new research from Wade Pfau, finding that given the impact of investment costs and overpriced stock and bond markets the "safe" withdrawal rate might be under 2%(!); a good article about the key differences between Designated Roth Accounts (the Roth version of an employer retirement plan) and a Roth IRA; and a discussion of the research of Dr. Brigitte Madrian, whose research 15 years ago on the power of automatic enrollment of employer retirement plans indirectly spawned the explosion of the target-date fund industry.

We wrap up with three interesting articles: the first raises the question of whether it even makes sense for financial advisors to retire at all, given how rewarding financial planning is both emotionally (given the deep client relationships) and financially (where it often pays more to keep an advisory firm for several years rather than sell it); the second article looks at the rollout of a new post-CFP designation, called the "Certified Financial Transitionist", originally designed to help train advisors to work with clients who experience "Sudden Money" events, but arguably relevant for virtually any/all advisors (after all, doesn't virtually every client come to us because they need help with some kind of transition!?); and the last raises the question of whether it's finally time for financial planning to shift from an industry where "best practices" are often based on little more than a combined of tradition, intuition, and the school of hard knocks, to a profession where true best practices are established via thorough research and the application of the scientific method to cultivate an "evidence-based" approach to effective financial planning.

And be certain to check out the latest Bill Winterberg video at the end - the latest segment of his FPPad Tech Tour video series for 2015, featuring an interview with yours-truly where Bill reveals, for the first time ever on video, how many blue shirts are actually hanging in my closet!

Enjoy the reading!

The ETF Problem With Stop Loss Market Orders

September 9, 2015 07:01 am 24 Comments CATEGORY: Investments

Now with more than $2 trillion in assets, the exchange-traded fund (ETF) has exploded onto the investment scene in the past 20 years, with the bulk of the growth occurring even more recently, built on the base of popular ETF features from their tax efficiency to relatively low cost to their ability to trade intra-day like a stock (and unlike a traditional mutual fund).

Yet ironically, in recent weeks the popular feature of being able to trade intra-day has turned into a liability instead, as market volatility has triggered a number of extreme (but short-term) situations where ETFs have traded at a significant discount to their intrinsic net asset value, in some cases as much as 30% below intraday NAV for an hour or few at a time.

For those advisors and investors who trade infrequently anyway, this kind of intra-day volatility may be a “non-issue” that was literally not even noticed by those who owned the ETF securities. Except those who panicked and sold at the market’s open based on overnight news. Or, unfortunately, those who were using Good ‘Til Cancelled (GTC) stop loss market orders.

In fact, the recent volatility of ETFs highlights that when it comes to using stop loss orders in particular, advisors and investors must be especially careful about how those trades are structured, in a world where ETFs with ‘temporary’ bouts of illiquidity can trade at dramatic discounts. At a minimum, those who wish to continue to use stop loss orders as a form of risk management may seriously want to consider using stop loss limit orders instead, with a gap between the stop loss and limit thresholds that is wide enough to still trigger a sale when the underlying NAV is falling, but reducing the risk of triggering a market sell order at the nadir of an ETF’s short-term “flash crash” price!

Why Robo-Advisor Technology Still Won’t Help Most Financial Advisors Reach Millennials

September 7, 2015 07:01 am 32 Comments CATEGORY: Technology & Advisor FinTech

While much has been written about the disruptive “threat” of the robo-advisors, the reality is that even after several years, their market share is still a miniscule fraction of 1%. Robo-advisors have had limited success, even in areas with little or no head-to-head competition against traditional financial advisors, like working with Millennial clients.

In fact, the struggles of most robo-advisor platforms have been so significant, they’ve been increasingly pivoting to work with established financial services firms, or to become available to individual financial advisors, in the hopes that such partnerships will allow robo-technology firms to gain the volume and scale they need to succeed.

Yet the caveat is that individual financial advisors rolling out web-based “robo” tools to reach Millennial clients will probably be even less successful than the pure robo-advisors have been! After all, the challenge of client acquisition costs is equally difficult for human advisors as it has been for robo-advisors, yet most existing advisory firms are even less attuned to the challenges of how to effectively execute a digital marketing plan!

Ultimately, this doesn’t mean that “robo-advisors-for-advisors” solutions will be worthless for all, but the key point is to recognize that advisors who want to serve Millennials must start by crafting a service model that is actually relevant and valuable for Millennials, have a means to market to Millennials, and then add a robo-technology solution on top to aid with the implementation. Advisors won’t be able to “out-robo” a robo-advisor; at best, the opportunity is to leverage robo-advisor technology as a part of a broader holistic service offering for Millennials, where advisors can focus on their strengths, and use technology to improve the efficiency of the process... but only for advisors who can solve the marketing challenge first!

Weekend Reading for Financial Planners (Sep 5-6)

September 4, 2015 02:25 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 Edmond Walters, founder and CEO of the popular eMoney Advisor financial planning software, has abruptly resigned from the company, barely 6 months after being acquired by Fidelity, in what is rumored to have been a significant culture clash between the aggressive entrepreneur and Fidelity's more conservative and traditional corporate culture. In the wake, questions now abound regarding the future fate of eMoney Advisor, in the hands of Fidelity's leadership to execute, but without eMoney's visionary founder.

From there, we have a few more articles on industry technology news and practice management advice, from an announcement that account aggregation provider Quovo just raised a fresh $4.75M round of venture capital to expand its solutions for advisors, to a look at the "new" (to North America) financial planning software Figlo, a great reminder from Mark Tibergien that if your advisory firm's greatest asset is its people then the firm should be investing in them that way, and a discussion from Kelli Cruz reinforced the point by noting that most firms have a remarkably mediocre process for recruiting and hiring new staff members despite the incredible importance of building a good team!

We also have a couple of technical planning articles this week, including: a reminder of the prohibited transaction rules for IRAs and how a small mistake can not only trigger a small distribution but disqualify an entire IRA account; a look at some of the latest research and policy discussions in Washington about retirement, including a growing recognition that solutions may need to become more sophisticated given the significant gap in life expectancies across higher vs lower income individuals; and a look about whether it's really possible for an investment strategy that produces favorable returns to continue to "work" even after it is widely known and "everyone" starts doing it.

We wrap up with three interesting articles: the first looks at a new book by Barry Schwartz entitled "Why We Work" and whether the idea that human beings are "lazy" and unmotivated to work and will only do so when financially incentivized to do so could actually be the very thing that is damaging our motivation to work and leaving us so disengaged; the second is a brief reminder of the importance of balancing work and rest, and that while working excess hours is a fine way to get through a crunch, but on a sustained basis can actually result in less total productivity even with more hours; and the last is a 'mea culpa' from Bob Veres on behalf of all industry journalists, noting that our industry media may have become so obsessed with the idea of growing the biggest advisory firm that it has failed to remember that we all have our own definitions of success, which may be as much about what happens in our personal lives, and the quality of the service we provide our clients, beyond just trying to finish with the largest pile of AUM.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including the 'surprise' announcement that eMoney Advisor's founder and CEO Edmond Walters has resigned, and big news about account aggregation provider Quovo that both raised $4.75M of venture capital this week and also announced a major integration with financial planning software provider Advicent (makers of NaviPlan and Figlo).

Enjoy the reading!