Nerd's Eye View blog

The Ongoing Evolution Of Financial Planning Software – From Calculator To Collaboration To Client Portal

June 22, 2015 07:01 am 17 Comments CATEGORY: Technology & Advisor FinTech

For much of its history, financial planning software was basically just an elaborate calculator. Advisors could gather client data, feed it as input to the calculator tool, and the software would spit out the projected results… which were then used to facilitate the sale of a product.

As financial planning has evolved to be primarily about the delivery of advice itself – not just for the sake of a product sale – so too has the software evolved, from a calculator to illustrate the outcome of a product or strategy recommendation, to a collaborative tool that can be used to formulate the client’s plan itself. After all, given the complexity of an uncertain future, it’s hard to really understand what path to pursue, until the client first analyzes a range of scenarios to understand the opportunities. Accordingly, financial planning software has increasingly become a tool for real-time collaborative scenario planning.

In the future, though, financial planning software can and will progress further, from a tool that supports collaboration at a single point in time, to one that truly supports continuous planning for the reality of continuous change we face in our lives. Imagine a holistic personal financial management (PFM) solution for clients, that simultaneously operates as financial planning software for the advisor, all continuously updated from external data flows, making it feasible for the advisor and client to see the milestones and recommendations that have already been accomplished, and whether the client is on track in progressing towards goals of the future.

Weekend Reading for Financial Planners (Jun 20-21)

June 19, 2015 02:39 pm 20 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with an interesting article from Investment News, highlighting that while there's a growing discussion of how advisors can use "big data" to improve their businesses, asset managers may already be using "big data" insights by tracking every metric they can about us as advisors, to figure out which might be interested in using their company's investment products!

From there, we have several technology-related articles this week, including: a new "platform" bundled-technology partnership between portfolio reporting software Black Diamond and financial planning provider MoneyGuidePro; a review of one advisor's good (and some challenging) experiences using the eMoney Advisor account aggregation portal with clients; issues for advisors to consider as Windows 10 rolls out later this summer; a review of an emerging new financial planning software provider called WealthMinder; and a first look at a coming "Financial Health/Wellness" app coming out soon from FinanceLogix.

We also have a few more technical-competency articles this week, from a discussion of key issues to consider when clients become eligible for Medicare (e.g., when it is, and is not, ok to delay enrolling in Medicare!), to the issues that must be raised with clients who are thinking about retiring abroad, to a first look at how estate planning strategies may change if recent White House proposals are enacted that would eliminate the stretch IRA.

We wrap up with three interesting articles: the first looks at how financial planning services should be offered to younger clients, who actually experience a high volume of major life transitions that necessitate planning advice (from job changes to starting businesses to starting families) but may have little need for "traditional" planning software and its retirement-centric Monte Carlo projections; the second looks at a new open-source "robo" platform called Wealthbot.io, which would allow any advisory firm to hire a developer and adapt the platform for the needs of their particular practice and clientele (think "Wordpress for robo-advisors"); and the last is a call-to-action from FPA National board president Ed Gjertsen that financial planners need to step up and get more involved with the Financial Planning Coalition's advocacy efforts, especially as the Department of Labor fiduciary proposals loom large, and FPA prepares for its National Advocacy Day on Capitol Hill this coming Wednesday, June 24th.

Enjoy the reading!

Strategies And Tactics When Using Donor-Advised Funds For Charitable Giving

June 17, 2015 07:01 am 32 Comments CATEGORY: Taxes

The primary benefit of a donor-advised fund (DAF) is that it allows someone to donate assets for charity today – and receive a tax deduction now – even though the actual funds may not be granted to the final charity until some point in the future. In other words, the donor-advised fund essentially functions as a conduit, where the donor receives a tax deduction when the money goes into the DAF, but has discretion about when the assets will finally leave the DAF and actually go to the charity… and in the meantime, assets inside a donor-advised fund grow tax-free.

Given the potential of a donor-advised fund to separate the timing of the contribution and tax deduction, from the final donation to the charity itself, the most common strategy for using a donor-advised fund is to “front load” charitable contributions in a high income year – when the tax-deduction threshold for charitable contributions will be higher – and then use the DAF to make subsequent distributions to the charities themselves in the future. By using the strategy, the donor can maximize the value of the tax deduction in a high-income year, but retain the flexibility to decide in the future to which charities the funds will actually go.

Notably, though, the donor-advised fund as a vehicle provides a mechanism for other charitable giving tactics as well. For instance, the donor-advised fund can facilitate giving anonymously, or creating an “In Memoriam” fund. The DAF can also help facilitate donating appreciated securities to a smaller charity that doesn’t have the means of handling the donation directly. And for some families, the donor-advised fund can function as a less expensive alternative to a private (non-operating) foundation, providing a means for the whole family to engage in the process of charitable giving, while allowing the tax-free growth of a family’s charitable legacy.

Are Vanguard And RIA Custodians Like Schwab And Fidelity The New Disruptive Threat To Independent Financial Advisors?

June 15, 2015 07:01 am 29 Comments CATEGORY: Planning Profession

Wealth management – a combination of investment management and holistic financial planning advice, typically for affluent clientele – has become an increasingly dominant model in recent years. The transition to wealth management has spurred a massive shift to fee-based accounts, the explosion of independent and hybrid RIAs, and the success of a growing number of providers to independent advisors, from custodial platforms like Schwab and Fidelity to asset managers like Vanguard and DFA.

Yet an emerging transition appears to be underway, as a growing number of asset management platforms are no longer just providing support services to financial planners, but are entering the business themselves. From Schwab’s growing number of managed-account solutions (including its new Schwab Intelligent Portfolios) paired with increasingly-CFP-based branch consultants, to Fidelity’s acquisition of financial planning software and push for hiring CFP professionals as well, to Vanguard’s massive launch of its Personal Advisor Services platform - and TD Ameritrade announcing they plan to expand both their Amerivest and "Private Client Services" programs that blend technology with humans providing financial advice - the trend of “insourcing” financial planning has begun.

And what’s notable about this trend is that, given the existing size of these asset managers, their transition to offering financial advice allows them to immediately offer services at a size and scale beyond even the largest independent advisory firms. This gives the companies not only the potential to compete aggressively on price, but to utilize their massive marketing budgets and already-nationally-recognized brands to rapidly scale their marketing and drive growth even faster.

The end result is that independent advisors may increasingly find themselves in competition in the future with a number of large companies who also serve them as asset managers and RIA custodians. This will not necessarily undermine the existing clients of advisory firms – there are lower-hanging fruit for the new players to pursue, including converting retail clients already on their platforms – but presents a significant new headwind and challenge for future clients and growth, unlike anything independent advisors have ever seen before.

And perhaps most notable of all will be the rise of Vanguard’s personal financial advice solution. Not only because Vanguard is already the largest asset manager with the largest existing client base to solicit for planning services, but because its unique “mutual” company structure means it may simultaneously become the largest financial planning firm, and the first to operate solely in the interests of the clients who implicitly own it, without having a separate corporate profit motive. Welcome to the new disruption – the first “mutual financial planning” company has arrived.

Weekend Reading for Financial Planners (Jun 13-14)

June 12, 2015 02:30 pm 23 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the news that now TD Ameritrade is joining the "robo" race with a direct-to-consumer offering that will expand its current Amerivest program to compete against the likes of Vanguard and Schwab, including a new "Private Client Services" that may potentially compete against the RIAs who use TDA's custodial services, too. And also in the news this week was the announcement that Pershing is launching its own robo-advisor-for-advisors solution, partnered with newcomer Marstone.

From there, we have a few technical planning articles this week, from a look at important IRA-rollover-related "goofs" to avoid, to a discussion of the potential crackdown coming on Family Limited Partnership (FLP) valuation discounts via new Treasury Regulations that may soon be issued, and also a discussion of how income annuities may better support the fixed-income portion of a retirement portfolio over just using traditional bonds.

We also have several practice management articles, including: how advisors are increasingly adopting "virtual" location-independent business models that serve clients through telephone, email, and video conferencing technology; a discussion of how advisors operating as a sole proprietorship or single-member LLC could be creating client continuity planning problems; a look at the benefits of "reverse mentoring" (where experienced advisors take on a Millennial to get their own mentoring about today's 20- and 30-somethings); how employees at many advisory firms are actually quite unhappy, and why the fix is not just to pay them more; and a discussion of best practices to try to minimize employee turnover and retain to advisory firm talent.

We wrap up with three interesting articles: the first is a look at whether the whole concept of monthly "budgeting" is overrated or outright impossible, as research increasingly shows the reality is simply that our income and expenses are not as stable and consistent as a typical budgeting process would imply; the second is an in-depth look at how a credit bureau "security freeze" works and why advisors might consider it for themselves and their clients; and the last is a discussion of whether Wall Street's threat to abandon small investors if the DOL's fiduciary comes to pass may be both an empty threat, and one that is irrelevant because if Wall Street does abandon small investors, there are other organizations like Garrett Planning Network, XY Planning Network, and more, ready and waiting to fill the void.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including the announcement of Pershing's new partnership with robo-advisor-for-advisors Marstone, recent major growth milestones for advisor-client PFM solution Wealth Access, and a new open-sourced wealth management platform that advisory firms might develop for their own use, called Wealthbot.io.

Enjoy the reading!

Building Your Own Low-Cost Equity-Indexed Annuity Or Structured Note

June 10, 2015 07:01 am 27 Comments CATEGORY: Investments

Given the market volatility of the past 15 years, with both the “tech wreck” and the financial crisis, a growing number of consumers are seeking more safety for their investment portfolios, through everything from more proactive risk management strategies, to using products like equity-indexed annuities and structured notes that explicitly provide for "some" upside participation in bull markets, but with downside protection in a bear market.

Yet the reality is that constructing downside protection and a principal guarantee over time doesn’t actually require products like equity-indexed annuities and structured notes. They can actually be constructed with relatively simple combinations of bonds and either stocks or equity index options. In fact, just buying a portfolio of bonds and using the interest to buy at-the-money call options is sufficient to produce a partial upside participation rate in equities with a downside guarantee!

Unfortunately, though, creating such pairings can be especially difficult in low interest rate environments, as there simply isn’t enough yield to afford very many options contracts, which in turn results in relatively low equity participation rates. Yet given that annuity companies and structured note providers are subject to the same constraints, in the end investors will likely suffer from low returns in such solutions, regardless of which vehicle is used… and in fact may have the greatest upside potential by simply constructing the strategies themselves, and avoiding the internal costs of such products in the first place!

Advisor Succession Challenges – Issues To Negotiate And When To Walk Away

June 8, 2015 07:01 am 18 Comments CATEGORY: Practice Management

While buying into an advisory firm can be an incredible opportunity in the long run, there are also some very important caveats and potential problems to consider, in terms of both the financial terms of the succession deal, and also the more nuanced challenges of participating as one of several partners in a multi-owner firm.

In some cases, the problem is as “simple” as the fact that the business is not actually very profitable, especially once accounting for a reasonable salary to the existing owners of the practice (given that if/when they retire, a comparable salary must be paid for their replacement to do the same job duties!). Similarly, sometimes the problem is just that the valuation of the business is unrealistic, especially when it is valued based on a multiple of revenues but does not have very healthy profit margins to support that multiple.

On the other hand, some of the most challenging problems that crop up when buying into an advisory firm are more nuanced; for instance, if the timing of profit distributions won't line up to when the required loan payments are due, or when there are significant disagreements between the (new and existing) owners about how much to withdraw from the practice versus reinvest for the future. Often, it’s feasible to work through these conflicts – or even bring in an outside expert – but unfortunately, sometimes the only resolution is to raise the issues in advance, negotiate where possible, and if the challenges can't be resolved, to walk away from the deal.

Weekend Reading for Financial Planners (Jun 6-7)

June 5, 2015 02:29 pm 23 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the announcement that SIFMA is aiming to head off the DOL's fiduciary proposal by putting forth its own new uniform fiduciary standard for broker-dealers, even as critics note that the SIFMA proposal would fail to achieve exactly what the DOL proposal is meant to do: place meaningful restrictions on the worst practices that can cause client harm.

From there, we have a few technical planning articles this week, from a look at senior housing trends and the tendency of seniors to move (or not) when they retire, to a discussion of how to create a 'bridge' portfolio for clients who are delaying Social Security and need to come up with cash flows during the intervening delay years, an article about how to open the conversation about prenups with your clients who are getting married, and a review of the new FBAR rules for reporting foreign financial accounts that all U.S. citizens must comply with or soon face stiff penalties.

We also have several practice management articles, including: how advisors who are dragging their feet about succession planning may need to do some self-reflection to identify their fears and blocking points; tips on how to actually upgrade the quality of your client service; how to ensure you're complying with the RIA requirements for getting "best execution" for your clients; and how to think about whether your advisory firm, if you're hit a growth wall, needs to hire an operations manager or a chief operating officer (COO) instead.

We wrap up with three interesting articles: the first covers a recent high-profile McKinsey consulting report that suggests robo-advisors may not win the day, but that "virtual advice" delivered remotely by human advisors using technology may be the emerging major trend; the second looks at how the emerging "Internet Of Things" could dramatically change retirement, from medication dispensers that remind you if you're behind, to a coffee-maker that can alert your family if your sleep habits have changed; and the last is a look at how advisors are beginning to shift their compensation models... not necessarily because of the "robo-advisor" threat, but simply due to competitive pressures with other advisors, the ongoing evolution of advisory firm business and service models, and a desire to reach new types of clientele.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including John Hancock's acquisition of advisor PFM solution Guide Financial, the release of Fox Financial Planning Network's "AdvisorTouch Symphony" practice management resources to support advisory firms that want to roll out their own online investment service, and the announcement that Wealthminder has raised $1.45M in capital to expand their white-label online-advice-solution for advisors.

Enjoy the reading!

9 Out Of Top 10 CNBC “Fee-Only” Advisory Firms Not Actually Fee-Only?

June 3, 2015 02:55 pm 59 Comments CATEGORY: Industry News

Earlier today, CNBC released its second annual list of the "Top 100 Fee-Only Wealth Management Firms" to the public. In cultivating the list, CNBC noted that consumers should "make sure you understand how that [advisor] gets paid, and that means [understanding] fees vs commissions" and that "fee-only financial planners... do not accept any commissions or other compensation based on product sales." Independent RIAs were then ranked based on a "proprietary formula" including assets under management, having staff with professional designations like CFP or CFA, average account sizes, growth of assets, years in the business, and comprehensiveness of advice (even on insurance solutions).

Yet a deeper look at the Form ADV Part 2 disclosures of just the top 10 firms on CNBC's "fee-only" list reveals that 9 out of 10 of them share in insurance commissions, own an insurance agency, or are under common ownership alongside an insurance affiliate to which advisory clients are referred. In other words, 9 out of 10 of CNBC's "Top Fee-Only" firms would not actually be fee-only under the CFP Board's compensation disclosure rules.

Notably, the CNBC list does focus exclusively on registered investment advisers (RIAs), and in most cases the RIA firm does not receive any insurance commissions directly (though it does happen in at least one situation, as RIA status does not technically ban commissions). Nonetheless, in 9 out of 10 cases, the RIA does have a clearly related entity or relationship that generates commissions - to the point that ironically, those "fee-only" firms themselves actually disclose those commissions and the conflict of interest it creates in their own Form ADVs!

Ultimately, the fact that a firm (or its related entities) get commissions doesn't automatically merit any complaints or mean it is a "bad" firm - it's about doing whether the firm does what's right for the client (and is held accountable for it), not how the client pays for it. Nonetheless, this incident suggests that at best, the phenomenon first revealed in the now-infamous Camarda vs CFP Board case - where advisors hold out as "fee-only" based on their RIA but have a commonly owned/related insurance entity to collect commissions anyway - may be far more widespread and common than realized. And in the meantime, these firms are placed in an awkward position with the CFP Board, with its existing precedent in the Camarda and subsequent Goldfarb cases to issue public letters of admonition when commission-and-fee firms hold out as "fee-only" - though notably, in this case there is no evidence that any the firms themselves have ever represented themselves as "fee-only", beyond the unfortunate fact that CNBC has misclassified them as such on its very public list of "Top 100 Fee-Only Wealth Management Firms"!

The Ratcheting Safe Withdrawal Rate – A More Dominant Version Of The 4% Rule?

June 3, 2015 07:01 am 53 Comments CATEGORY: Retirement Planning

The fundamental purpose of the so-called “4% rule” is to determine an appropriate “income” or spending floor that is low enough to survive potential sequence-of-return risk – at least, based on the worst return sequences that can be found in the historical data. If market returns going forward turn out to be as bad as scenarios like the Great Depression or the stagflationary 1970s - from which the 4% rule originated - the portfolio is still anticipated to sustain inflation-adjusted spending to the end of the 30-year time horizon. If returns are better, there will simply be “extra” money left over.

Yet the reality is that in the overwhelming majority of scenarios, returns are not so bad as to necessitate a 4% initial withdrawal rate in the first place. In fact, by applying the 4% rule, over 2/3rds of the time the retiree finishes with more than double their wealth at the beginning of retirement, on top of a lifetime of (4% rule) spending! Half the time, wealth is nearly tripled by the end retirement, as retirees fail to spend their upside!

Accordingly, a more dominant approach is to plan in advance that if the portfolio gets “far enough” ahead, spending can be increased - but not increased so quickly that the retiree might have to go backwards shortly thereafter. Of course, the reality is that retirees experiencing a “favorable” sequence of returns will inevitably sit down for a portfolio/retirement review and realize they are so far ahead that it’s “safe” to increase spending anyway. But as it turns out, a relatively simple ratchet-style approach, where spending is increased by 10% any time the portfolio rises more than 50% above its starting value, can “dominate” the traditional 4% rule, generating equivalent or better retirement spending in all scenarios, even while being conservative enough to not require a spending cut in the event of a market pullback in the future.