Nerd's Eye View blog

One Insurance Agent’s Transition To Fee-Only RIA, In Just A Few Months…

July 30, 2015 07:01 am 47 Comments CATEGORY: Practice Management

Making a big change in your advisory business can be scary, and there's perhaps nothing more scary than breaking away from where you started your financial services career to go out on your own as an independent RIA. From wondering whether your clients will come with you, to facing the burdens of being the business owner responsible for everything, to just the transition process itself, there's a lot to deal with.

In this guest post, Daniel Wrenne - a former Northwestern Mutual agent turned fee-only independent RIA - shares the story of his own transition process, and the surprisingly fast 6-month timeline it took from when he first had the idea to go out on his own, until his independent RIA was approved by the state of Kentucky and his new business was launched. And Daniel shares everything he went through along the way, from the key software tools and technology he chose, to how many clients actually transitioned (fewer than he hoped, but all the best clients he really wanted!), and the niche he's chosen to pursue going forward, supporting by an inbound marketing strategy to grow his business in the future.

So if you're an existing insurance agent or broker thinking about breaking away to start your own independent RIA, this should be helpful to you as you consider what it may take to move forward from here, as well as recognizing the realistic challenge you're up against (Daniel notes that even in transitioning existing clients, he'll be waiting a full year before taking any salary out of the business for himself!).

How Has The 4% Rule Held Up Since The Tech Bubble And The 2008 Financial Crisis?

July 29, 2015 07:01 am 50 Comments CATEGORY: Retirement Planning

The 4% rule has been much maligned lately, as recent market woes of the past 15 years – from the tech crash of 2000 to the global financial crisis of 2008 – have pressured both market returns and the portfolios of retirees.

Yet a deeper look reveals that if a 2008 or even a 2000 retiree had been following the 4% rule since retirement, their portfolios would be no worse off than any of the other "terrible" historical market scenarios that created the 4% rule from retirement years like 1929, 1937, and 1966. To some extent, the portfolio of the modern retiree is buoyed by the (only) modest inflation that has been occurring in recent years, yet even after adjusting for inflation, today’s retirees are not doing any materially worse than other historical bad-market scenarios where the 4% rule worked.

Ultimately, this doesn’t necessarily mean that the coming years won’t turn out to be even worse or that the 4% rule is “sacred”, but it does emphasize just how bad the historical market returns were that created it and just how conservative the 4% rule actually is, and that recent market events like the financial crisis are not an example of the failings of the 4% rule but how robustly it succeeds!

MailBag: Offering Insurance Solutions As An RIA, And How To Handle Life Insurance With An Outstanding Loan At Death

July 28, 2015 07:01 am 13 Comments CATEGORY: MailBag

Many readers of this blog contact me directly with questions and comments. While often the responses are very specific to a particular circumstance, occasionally the subject matter is general enough that it might be of interest to others as well. Accordingly, I occasionally post a new "MailBag" article, presenting the question or comment (on a strictly anonymous basis, of course!) and my response, in the hopes that the discussion may be useful food for thought.

In this week's MailBag, we look at how to structure an advisory firm that is aiming to be an RIA and help clients to implement their insurance needs (using an insurance broker general agent relationship to avoid working with a broker-dealer), and the tax consequences of a life insurance policy when the insured dies while there is still an outstanding loan against the policy.

How Video Conferencing Can Put The Face-To-Face (Back) Into Distant Financial Planning Client Relationships

July 27, 2015 07:01 am 27 Comments CATEGORY: Practice Management

Financial planning is a relationship business, but in our increasingly mobile and time-stressed society, it’s harder than ever to maintain face-to-face relationships. Not just because it may be difficult to find a time to schedule an in-person meeting with clients, but also because many clients relocate and aren’t even in the area for a face-to-face meeting!

Yet with the rise of broadband internet access, it is now increasingly feasible to use video to connect with clients at a distance. Of course, many advisors already communicate with clients at a distance via emails and telephone calls, but the significance of video is that it literally puts the “face-to-face” back into a distance-based relationship. You can see the client, the client can see you, and all the non-verbal communication that is lost in a telephone call or an email comes back into the conversation.

And notably, video is relevant not just for maintaining face-to-face relationships with existing clients, but as a means to build a relationship with new clients as well. In fact, arguably it may be even more feasible than ever for advisors to build relationships with new clients at a distance, as video allows even those who have never “met” in person to get to know each other, face to face!

Weekend Reading for Financial Planners (July 25-26)

July 24, 2015 02:39 pm 22 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a look at the landscape for the Department of Labor's fiduciary proposal, now that the public comment period has closed (with a whopping 775 comment letters submitted!), and moves on to public hearings, potential revisions of the rule... and a looming deadline of implementation in 18 months or risk having the rule derailed by the next administration.

From there, we have a few technical planning articles this week, including a look at the woes of energy-related MLP investments that have tumbled this year amidst declining energy prices, a discussion of how lifetime income annuity payouts may soon take a hint as the industry prepares to implement updated RP-2014 actuarial tables, and some tax issues to consider in retirement when coordinating between IRAs (and their prospective RMDs) and the taxability of Social Security benefits.

There are also a few practice management articles, from the latest Schwab benchmarking study for RIAs showing that the typical firm has doubled its revenues since 2009(!), the dynamics for advisors working in wirehouses as the large firms seek to fight the breakaway broker record as post-financial-crisis retention bonuses start to expire, and some issues to consider when running client appreciation or prospective client marketing events (especially from the compliance perspective).

We have a couple of technology-related articles this week too, from practical tips on cybersecurity for advisors, to a look at the big industry news that SS&C has decided to start pushing Advent Axys users over to Black Diamond, and some tips from financial advisor Dave Grant on new technology tools for advisors to check out (including website design providers, new planning software, and more).

We wrap up with three interesting articles: the first is a profile of SigFig, a firm in the "robo-advisor" category that has a whopping $350B of assets loaded into its analytics tools but only a paltry $69M of AUM, as the company begins a pivot towards working with established financial services firms (e.g., banks) to find growth; the second is an interesting new study from the Journal of Financial Planning, which finds that extroversion and agreeableness are (modestly) correlated to higher levels of net worth; and the last is a profile of 29-year-old financial planner Pamela Capalad, who engages clients by meeting over brunch (with a business literally called "Brunch & Budget") and has been able to build a base of almost 100 clients, mostly "hard-to-reach" Millennials, in just the past 3 years.

Enjoy the reading!

How To Evaluate The Pension Versus Lump Sum Decision, And Strategies For Maximization

July 22, 2015 07:01 am 51 Comments CATEGORY: Retirement Planning

While the use of pensions as an employee benefit is on the decline, many of today’s workers nearing retirement have participated in a pension plan for the past several decades, and have already accumulated a significant pension benefit. And as those individuals begin to retire, they are faced with the classic decision of whether to keep the lifetime pension payments, or choose a lump sum instead.

While there are several factors that go into the pension-vs-lump-sum decision, ultimately the trade-off can be boiled down to calculating the internal rate of return (IRR) of the promised pension cash flows, which reveals the “hurdle rate” of return that a lump sum portfolio would have to earn to generate to reproduce those same payments over the same time horizon. Of course, the longer the retiree is expected to live, the greater the number of anticipated pension payments, and the greater the portfolio hurdle rate will be.

Ultimately, though, because life expectancy will vary by the individual, and in practice the size of a lump sum relative to a pension payments will also vary from one plan to the next (and also over time, as the GATT rate used to discount the pension payments fluctuates from month to month and year to year), the decision of whether to keep a pension or convert it into a lump sum will vary from one person to the next. In some cases, choosing a lump sum will clearly be best (e.g., when life expectancy is short or the hurdle rate is especially low), while in others there will be no way for a portfolio to generate similar cash flows without a significant amount of risk – at least, as long as the pension plan itself remains secure and isn’t facing a potential default or being forced to rely on PBGC backing!

Consumers Now Prefer Their Financial Planner To Have CFP Certification Over A CPA License

July 20, 2015 07:01 am 24 Comments CATEGORY: Planning Profession

The CFP Board’s Public Awareness campaign has been underway for over 4 years now, investing a cumulative total of over $40M of “dues” from CFP certificants with an 80% increase in CFP registration fees that began in 2011, plus almost $10M of additional funds from the CFP Board’s own reserves. And after almost $50M, what does the CFP Board have to show for it?

As it turns out, a lot. The latest Ipsos brand tracking study for the CFP Board shows it is making very significant progress in building awareness with mass affluent investors who might seek out a financial advisor. In just four years, intent to seek out a CFP certificant is up from 30% to 52%, and overall trust in CFP certificants is up from 23% to 49%. Even more significant, top-of-mind awareness for CFP certification has leapt from 13% to 29%, passing the CPA license (only 12%), and dwarfing other designations like CFA, CLU, ChFC, and PFS (all scoring under 5%).

In fact, for the first time ever, the Ipsos study shows that consumers seeking financial advice are most likely to insist their financial planner have CFP certification, more than any other designation, certification, or license. The CFP marks even outrank the CPA license (as well as all other designations) when it comes to what a ‘professional financial planner’ is expected to hold.

These significant results mean the CFP Board remains committed to the public awareness campaign in the coming years – so CFP dues will not be going down anytime soon. But arguably, the real news is that the CFP Board’s efforts in public awareness are continuing to set the roots for financial planning to finally be recognized as a bona fide profession of its own, with the CFP marks at its core. Perhaps someday, the profession will eventually reach the point where consumers don’t even have to ask!

Weekend Reading for Financial Planners (July 18-19)

July 17, 2015 02:01 pm 19 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a discussion of the newly implemented reductions in the CFP Experience requirement, which quietly took effect earlier this month without any public comment period for CFP certificants, or public comments from FPA or NAPFA. Also in the news this week was the revelation that Vanguard's Personal Advisor Services platform added on another $4B of AUM in just the past quarter as its growth accelerates (potentially threatening both the robo-advisor platforms, and possibly even threatening established independent advisors in the coming years, too). There's also discussion of a new push from PIABA to get the SEC to create its own one-stop-shop database of public disclosure information about brokers and investment advisers for the public to access, as complaints continue that FINRA's BrokerCheck is not getting the job done.

From there, we have a few investment articles this week, including a discussion from Barron's about the challenges of navigating bond investing with the looming potential for rising interest rates, a discussion of ETF liquidity and whether advisors may be overestimating how liquid their ETF investments really are, and a discussion of the recent move by Dimensional Fund Advisors (DFA) to begin offering ETFs through John Hancock (but with fewer solutions and higher costs than its existing advisor-distributed mutual fund lineup).

There are also a couple of practice management articles, from a look at how 2015 is shaping up to be the "year of the mega-deal" for RIA mergers and acquisitions, to a broader look at how the RIA channel continues to be the only segment of the advisory industry that is growing as insurance, broker-dealer, and wirehouse channels all continue to lose market share, and the last is an interesting discussion of what it really means to be an "independent" advisor and whether many advisors may think they're more "independent" than they really are.

We wrap up with three interesting articles: the first is a look at a new book called "Endorphinomics" by advisory industry business consultant Steve Moeller, who looks at the surprisingly common phenomenon of advisors who are "successful yet miserable" in trying to find the right work/life balance with a thriving advisory firm; the second raises the question of when/whether financial planning will ever get a seat at the "big kids' table" in Washington DC and have a role in contributing the unique knowledge and experience of financial planning to public policy discussions; and the last is a look at how the rise of robo-advisors and a new slew of technology solutions have reignited the "fee vs commission" debates as fee-only technology-based platforms show that it really may be possible to serve the middle market without commissions after all.

Enjoy the reading!

How The 691(c) IRD Deduction Can Eliminate The Need For Deathbed Roth Conversions To Avoid (Federal) Estate Taxes

July 15, 2015 07:01 am 10 Comments CATEGORY: Estate Planning

For those in poor health who face potential estate taxes and have a large IRA, a popular tax strategy is the so-called “deathbed Roth conversion” where the IRA owner converts to a Roth before death as a means to pay the income taxes up front and reduce the size of his/her estate. For large estates (and large IRAs), the tax savings can be significant.

However, the caveat of the deathbed Roth conversion strategy is that in most cases it is unnecessary, thanks to the availability of the so-called “IRD” (Income in Respect of a Decedent) tax, which provides IRA beneficiaries an income tax deduction for any estate taxes paid by the original IRA owner. In fact, the whole purpose of the IRD deduction is to eliminate any need for deathbed conversions (or liquidations) of pre-tax assets, by aligning the tax deductions to ensure that the beneficiaries will be no worse off (nor any better).

On the other hand, it’s notable that while the IRD deduction does shelter against Federal estate taxes, deathbed Roth conversions can still be relevant to protect against state estate taxes. Though in either case, the greatest driver of the outcome is not actually the IRD deduction or minimizing state estate taxes at all, but trying to shift the timing of when the IRA is recognized for tax purposes, so that the income taxes are paid at whichever rate is lower – either the IRA owner now, or the rate the beneficiaries would pay by simply inheriting the pre-tax IRA and stretching it out in the future!