Nerd's Eye View blog

Weekend Reading for Financial Planners (July 11-12)

July 10, 2015 02:52 pm 20 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 the U.S. District Court has ruled in favor of the CFP Board in its case with the Camardas, without even needing to go to trial... though the details of the judge's opinion will remain sealed for two weeks (and possibly indefinitely), which makes it unclear on what grounds the CFP Board was victorious. Also in the news this week was the revelation that Focus Financial may be preparing for an IPO, which could kick off renewed interest in so-called "roll-up" RIA aggregators and additional mergers-and-acquisitions activity in the industry.

From there, we have several technical articles this week, from a look at how to evaluate the pros and cons of investment-based versus insurance-based retirement income strategies, to the idea that advisors need to look at both sequence-of-return and "sequence-of-consumption" risk in retirement, to the rising frequency of financial abuse of seniors (and the role that advisors can play to help prevent it), and an article looking at how the growth in indexing in recent years is also leading to a growth in the number of firms trying to front-run the periodic changes in the stocks that comprise popular indices which may be impairing index returns by as much as 0.2%/year.

We also have a few practice management articles, including: how to improve your advisory firm's capacity by more proactively engaging and investing in your staff; how advisory firm owners need to be more cognizant of building a strong foundation for their firm before trying to innovate (rather than coming up with innovative ideas first and struggling to implement them); and the last is a retrospective look at how RIAs have fared over the past 3 years since Dodd-Frank forced advisors with between $25M and $100M of AUM to shift from SEC to state registration (the short answer: fears were overblown, though there have definitely been some additional paperwork and compliance hassles).

We wrap up with three interesting articles: the first looks at the value of assembling a "personal board of advisors" that includes both traditional mentors, career guides, and others who can play a role in helping you advance your professional career; the second is a discussion of the rising star of Teresa Ghilarducci who controversially proposed a shift from 401(k) plans to a government-run private retirement accounts system that seems to be gaining renewed interest; and the last looks at whether employee financial advisors who are considering whether to go out on their own need to "redefine [the risks of] failure", as the reality is that today's shortage of advisor talent means that even those who go out on their own and don't succeed are virtually certain to still have plenty of jobs to fall back on if it doesn't work out (and may even be bought out for whatever clients they have by a larger firm in the area).

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including a look at this blog's coverage of the emerging trend of virtual "location-independent" financial advisors, some new tech tools that advisors can use, and the upcoming #FPPadTechTour!

Enjoy the reading!

Judge Ends Camarda Case Against CFP Board – Time To Finally Fix The Fee-Only Compensation Definition?

July 8, 2015 07:40 pm 25 Comments CATEGORY: Industry News

This week, the controversial case between Jeff and Kim Camarda and the CFP Board came to a conclusion, with the judge granting the CFP Board’s motion for summary judgment to throw out the case altogether.

Yet within the CFP Board’s victory, numerous questions remain. The judge’s ruling itself has been sealed for 14 days, giving the CFP Board (and the Camardas) an opportunity to make the case for why it should remain private indefinitely… which means we may ultimately never know on what basis the CFP Board was declared victorious. Did the judge decide that the CFP Board really administered its disciplinary process appropriately, or ironically was the decision actually that the CFP Board isn’t accountable in a court of law at all… a win for the organization, but a frightening precedent for us as CFP certificants.

In any event, though, the conclusion to the lawsuit means that the CFP Board’s high-stakes gamble was avoided. And an end to the lawsuit – at least if it’s not appealed – finally gives the CFP Board an opportunity to update its still-problematic fee-only, commission-only, and overly expansive commission-and-fee compensation disclosure definitions… and hopefully in a manner that more constructively engages CFP stakeholders (unlike the CFP Board’s recent action to reduce the CFP experience requirement, which was implemented without any opportunity for public comment!).

CFP Board’s Reduced Experience Requirement Quietly Takes Effect With FPA And NAPFA Silence As Tacit Support?

July 7, 2015 07:01 am 20 Comments CATEGORY: Industry News

Last week, proposed changes to the Experience requirement for CFP certification quietly took effect, including both the elimination of the Capstone course requirement for CFP exam challengers, and more controversially a change to the definition of what constitutes “experience” for the 3-year requirement to include both direct and indirect support.

What’s significant about the new “indirect support” rule is that, by the CFP Board’s own statements, virtually any job in the entire financial services industry will now qualify as “financial planning experience”, including an employee benefits administrator, a compliance attorney, and even a journalist who simply writes about financial planning topics!

The change is even more significant given the CFP Board’s introduction of the 2-year “apprenticeship” option for the experience requirement in 2012… which means that over the past several years, the CFP experience requirement has slipped from “3 years of financial planning experience” to “2 years of financial planning experience, or 3 years of any job remotely related to the financial services industry”!

Sadly, while the CFP Board’s prior changes to the experience requirement in 2012 included a public comment period, this time the CFP Board acted unilaterally without stakeholder input, as it continues to push aggressively for growth in the number of CFP certificants. And notably, the FPA and NAPFA have remained remarkably silent about the change as well, suggesting the organizations either tacitly support cutting the experience requirement for CFP certificants, or that they have lost any ability as membership associations to hold the CFP Board accountable.

Ultimately, though, perhaps the most ironic aspect of the CFP Board’s change is the fact that it comes after 4+ years – and $40M+ in spending – on a public awareness campaign to communicate to the public that the CFP marks are the highest “gold standard” in financial planning… even as the CFP Board’s growth strategy makes it easier and easier to obtain that standard.

The Emergence Of The “Location-Independent” Virtual Financial Advisor

July 6, 2015 07:01 am 23 Comments CATEGORY: Practice Management

For its entire history, financial planning has been about sitting down across from clients, face-to-face, and talking them through solutions to their financial planning challenges. Finding clients was about in-person meetings, getting clients was about in-person meetings, and serving clients was about in-person meeting.

Yet the rise of technology is creating a new service model for financial planning – the “virtual” advisor, who uses web-based tools and technology to serve clients, regardless of where the client (or advisor) happens to be. And these “location-independent” advisors are able to serve new and different types of clientele, thanks to both the cost savings and efficiency of using technology in lieu of a traditional office, and the potential to craft an especially focused business serving a niche clientele that becomes feasible in the world of content and inbound marketing.

In point of fact, the growth of online financial advice (not just via "robo-advisor" but delivered by human advisors using technology) is already underway – fueling the growth of platforms from Personal Capital to Vanguard Personal Advisor Services – and an increasing number of existing advisors are beginning to use more technology tools to serve their clients as well. But as a new e-book entitled “The Virtual Advisor” by Alan Moore points out, the new location-independent virtual advisor model may be most appealing to the next generation of financial advisors, who will have the opportunity not to just create a life around the business of financial advice, but instead to create an advisory business around living their own great life.

Weekend Reading for Financial Planners (July 4-5)

July 3, 2015 02:47 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 TD Ameritrade's efforts to expand its Amerivest managed account into a full-fledged "hybrid" advisor solution (robo-technology plus TD Ameritrade retail branch advisors), raising the question of whether, given that Amerivest already has over $11B of AUM, it may become the largest "robo" solution by 2016. Also in the news this week was a discussion of how Schwab and Fidelity have been 'passing through' a portion of the shareholder service fees of certain no-transaction-fee mutual funds to large RIAs on their platforms, and whether doing so creates untenable conflicts of interest for RIAs that will end out being compensated more for using those funds in client portfolios over any others.

From there, we have several practice management articles this week, from a discussion of how to improve client review meetings by systematically implementing a pre-meeting survey to ensure the meeting is focused on what clients want to talk about the most, to the importance of creating standard processes in an advisory firm to cut down on potential advice mistakes, along with an article on how to get more insight from the results of your client surveys by discussing the responses with your client advisory board, and a look at some common 'myths' in web-based marketing for advisors and how to overcome them.

There are also a few more technical-competency articles this week, from a look at whether today's lifetime annuity products should be replaced with a "tontine" structure that was popular hundreds of years ago, to the portfolio design mistakes that some advisors may unwittingly be making (e.g., having clients hold a mortgage paying 4% interest while keeping a portfolio allocation in bonds paying only 2%!), to whether Deferred Income Annuities should have a role not just in planning for extended retirement longevity but also as a pre-retirement vehicle.

We wrap up with three interesting articles: the first is a discussion from industry commentator about why he thinks "the AUM fee is toast" and that advisors will increasingly migrate towards retainer-style fee structures; the second is a retrospective look at the CFP Board as it celebrates its 30th anniversary as an organization managing the CFP marks since it was spun off from the College for Financial Planning in 1985; and the last is a great summary article of "37 ways to upgrade your practice" that has a number of tweaks you could take and implement now in your advisory firm during the slower summer months.

Enjoy the reading, and happy Fourth of July!

Claiming Social Security Benefits And Other New Opportunities For Same-Sex Married Couples

July 1, 2015 07:01 am 14 Comments CATEGORY: General Planning

While the case of United States v. Windsor in 2013 required the Federal government to recognize the marriage of a same-sex couple if the marriage was legal where performed, states were not required to permit same-sex marriage, nor were they required to recognize legal marriages of same-sex couples performed elsewhere. However, with last week’s Supreme Court decision in the case of Obergefell v. Hodges, states are now required to permit same-sex couples to be married, and furthermore must recognize same-sex marriages performed in other states and jurisdictions.

The Supreme Court’s decision creates several immediate new planning opportunities for same-sex married couples, particularly those who were previously married in another state but have been recently living in a state that did not recognize (or one of the 13 that outright banned) their marriage. Those couples will now be able to do everything from filing joint income tax returns, to benefit from the marital deduction for state estate and inheritance tax purposes, to get divorced if the couple decides to separate. In fact, for many such couples, a major planning issue will simply be unwinding the strategies previously in place to handle the fact that their marriage wasn't recognized, but are no longer necessary!

Perhaps most financially significant, though, is that same-sex married couples will now be able to claim spousal and survivor benefits as a married couple, regardless of their current state of residence. This creates both immediate Social Security claiming opportunities for some same-sex couples, and the need to plan more proactively for a same-sex married couples’ Social Security benefits in the future, as all the claiming strategies for married couples – including file-and-suspend and restricted application – are now available.

On the other hand, the Supreme Court decision actually makes financial planning for same-sex couples far simpler in the future – or at least, no more complicated than the conversations that arise when any couple is considering whether to marry, and how it might impact them from income tax planning to financial aid to estate planning and everything in between. In fact, as the legal differences for marriage between same-sex and heterosexual couples shrink to almost nothing, it remains to be seen whether LGBT planning will even remain as a distinct ‘niche’ amongst financial advisors - as while potential discrimination against gays and lesbians remains an issue, equal marital rights appears to be eliminating most of the need or relevance of ‘specialized’ LGBT financial planning in the first place?

Designing The Financial Planning Software Of The Future – Calculator, Collaboration Tool, And Client PFM

June 29, 2015 07:01 am 19 Comments CATEGORY: Technology & Advisor FinTech

As the world of financial planning evolves, so too does the technology that supports it. And in the coming years, nothing may evolve in the world of advisor technology as much as financial planning software, as it continues its transition from simply being a ‘calculator’ to project the impact of financial planning strategies and recommendations, into an entire platform for ongoing collaborative financial planning for clients.

Yet the evolution of planning software is creating distinct new challenges from a software design perspective, as the tools are increasingly used in three distinct contexts: an interactive collaborative planning tool between advisors and clients in meetings, an ongoing monitoring and personal financial management (PFM) tool for clients, and an advisor support tool for everything from complex analyses to tracking and alerting which clients need assistance. Not to mention the increasing amount of ‘meta data’ available about the advisory business and its clients as well.

In fact, going forward financial planning software designers may need to increasingly view the use of the software through each of these distinct lenses – advisor, client, and advisor-client interaction, as well as business meta-data – to advance the efficacy of planning software, as each use case for planning software is creating its own unique needs and challenges for advisors to work with clients and enhance client outcomes!

Weekend Reading for Financial Planners (Jun 27-28)

June 26, 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 the announcement of Schwab's new "Institutional Intelligent Portfolios" solution for RIAs, which will allow advisors on the Schwab platform to provide "robo"-style services for their own clients alongside with Schwab's direct-to-consumer robo offering.

From there, we have several articles on marketing and practice management issues, from a look at the marketing best practices of the "standout" growth firms in the latest FA Insight benchmarking study, to a review of an interesting flat-fee investment model being offered by advisor James Osborne of Bason Asset Management (allowing him to grow $100M of AUM in under 2 years!), a look at the best way that advisors can differentiate themselves (hint: by doing whatever best fits your own personality style and passions!), a discussion of whether adivsory firms should hire a "Director of Client Success" to really aim to improve client retention rates and referrals, and a look at the so-called "pratfall effect" and whether advisors can actually build more credibility by not being perfect and instead committing - and admitting to - making small mistakes with clients.

We also have a few investment articles this week, including: a critique of the validity of smart beta and whether factors can really be anticipated in advance or are nothing more than data-mining; a discussion of the ongoing "buyback extravanganza" and why it may not actually be as problematic as some critics suggest (at least, not right now); and a study of whether the benefits of risk parity strategies have been understated by viewing them as an alternative to a traditional investment portfolio, when instead their greatest benefit may be as a complement to a traditional portfolio for a small slice of the total allocation.

We wrap up with three interesting articles: the first is a review of the recent book "Misbehaving" by economist Richard Thaler, a combination of personal memoir of Thaler's own career and also an interesting historical look at the rise of behavioral economics; the second is an article from the Wall Street Journal suggesting that the time may be coming for the value of financial planning to become separated from the 'traditional' AUM business model; and the last is a fascinating look from the Harvard Business Review as how the doctor-patient relationship is being disrupted by technology, in a manner that may be a harbinger of both the risks and opportunities that could play out in the coming years as technology impacts the advisor-client relationship as well.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including the rollout of Schwab's new Institutional Intelligent Portfolios, the latest advisor updates for Advent's Black Diamond portfolio performance reporting tools, and highlights of the TD Ameritrade Institutional technology summit!

Enjoy the reading!

Understanding The IRD Deduction That Inherited IRA Beneficiaries Often Miss

June 24, 2015 07:01 am 21 Comments CATEGORY: Taxes

Pre-tax assets like IRAs can face a significant income tax burden as their value grows, a challenge that is only made worse for those who are subject to estate taxes on those assets as well. In the extreme, the combination of the two can consume the majority of the value of an inherited IRA bequeathed to a beneficiary.

To help mitigate the combined income-and-estate-tax effect, the Internal Revenue Code allows for an “Income in Respect of a Decedent” (IRD) deduction under Section 691(c). Claimed by the beneficiary of an inherited IRA to the extent of any estate taxes that were caused by the account, the deduction can be material – as much as 40% of the value of the account!

Yet despite its size, beneficiaries in practice often “miss” the IRD deduction, not realizing it was there to claim, or perhaps “losing track” of it when changing accountants or tax preparation software. Fortunately, an amended tax return can be filed to claim a missed IRD deduction from recent years – but only the past 3 years. Which means going forward, anytime an inherited IRA appears with a new client, a good best practice for all advisors is to ask: “did the decedent who left you this account pay any estate taxes?” and if so, be certain the IRD deduction is claimed properly!

And notably, in the end the IRD deduction applies not only to inherited IRA accounts, but also other employer retirement plans, inherited non-qualified annuities, employer non-qualified stock options, deferred compensation, employer NUA stock, and more!