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MailBag: Pursuing An MBA or CPA License After CFP Certification, And Problems With Criss-Cross Continuity Planning Amongst Solo Advisors

August 18, 2015 06:01 am 19 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 a question of whether it’s better to pursue an MBA degree or a CPA license after completing CFP certification (or whether some other post-CFP education would be even better!), and the problems that can arise when solo advisors try to satisfy the recent NASAA Model Rule on continuity planning by arranging a “criss-cross” buy-sell agreement with each other (when they don’t necessarily have the client capacity to actually execute it!).

Essential Requirements In Crafting A One-Page Financial Advisor Business Plan

August 17, 2015 07:01 am 21 Comments CATEGORY: Practice Management

In a world where most advisory firms are relatively small businesses, having a formal business plan is a remarkably rare occurrence. For most advisors, they can “keep track” of the business in their head, making the process of creating a formal business plan on paper to seem unnecessary.

Yet the reality is that crafting a business plan is about more than just setting some business goals to pursue. Like financial planning, the process of thinking through the plan is still valuable, regardless of whether the final document at the end gets put to use. In fact, for many advisory firms, a simple “one-page” financial advisor business plan may be the best output of the business planning process – a single-page document with concrete goals to which the advisor can hold himself/herself accountable.

So what should the (one-page) financial advisor business plan actually cover? As the included sample template shows, there are six key areas to define for the business: who will it serve, what will you do for them, how will you reach them, how will you know if it’s working, where will you focus your time, and what must you do to strengthen (or build) the foundation to make it possible? Ideally, this should be accompanied by a second page to the business plan, which includes a budget or financial projection of the key revenue and expense areas of the business, to affirm that it is a financially viable plan (and what the financial goals really are!).

And in fact, because one of the virtues of a financial advisor business plan is the accountability it can create, advisors should not only craft the plan, but share it – with coaches and colleagues, and even with prospective or current clients. Doing so becomes an opportunity to not only to get feedback and constructive criticism about the goals, but in the process of articulating a clear plan for the business, the vetting process can also be a means to talk about the business and who it will serve, creating referral opportunities in the process!

Weekend Reading for Financial Planners (Aug 15-16)

August 14, 2015 02:01 pm 17 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a summary of this week's Department of Labor hearings on the fiduciary proposal. While arguments were heated on both sides (which variously argued that fiduciary duty will either drive costs down for investors by eliminating conflicted advice, or drive them up by raising compliance costs!), the rule still appears to be on track for implementation in 2016, with perhaps just some adjustments to make it more "workable" in practice.

From there, we have several practice management articles this week, including: a look at how despite the rise of technology solutions Cerulli finds that the number of self-directed investors has significantly decreased in the past 5 years and the number of "advisor-reliant" consumers is on the rise; a summary of the latest FA Insight benchmarking study on People and Pay in advisory firms, which finds that RIAs are enjoying record profit margins and productivity, but that the lack of young talent may soon begin to take a toll; a discussion from industry practice management guru Philip Palaveev about how "flat" organizations with little hierarchy sounds good in concept but fails in practice, especially in advisory firms; tips from Mark Tibergien on a different approach to strategic planning; and a look at how the aging advisor population is leading to an increased number of practices that have to fold due to the sudden death of the owner, and how custodians are often compelled to act quickly, especially when the firm lacks a continuity plan, which may include cutting off the advisory firm's staff access to clients, and even shifting clients over to the custodian's self-directed platform, retail branch advisors, or even other firms.

We also have a few technical planning articles, from a look at the rise of "private exchanges" for health insurance in mid- and large-sized firms, the latest research from S&P that finds actively managed funds are so struggling to generate outperformance that they're not just underperforming net of fees but the majority in most categories (especially equities) are even underperforming before fees, and a discussion of the current research on how much retirees really need for retirement income and how the common 70%-80% replacement rate may actually be significantly overstating what most retirees really need (especially those with above-average household income).

We wrap up with three interesting articles: the first covers some of the latest polling research from Gallup, which finds that adoption of financial planning is on the rise across the country, especially amongst those who are still saving and aren't yet retired (perhaps a result of the pressure of technology on commoditizing the value of investment-only solutions for accumulators?); the second is a discussion of the new Schwab Executive Leadership Program, which is taking cohorts of 30-35 future leaders from advisory firms and putting them through a year-long MBA-style program in management (and getting rave reviews for the quality and beneficial impact of the program from its participants); and the last is a discussion of how the market's sustained inability to make materially new highs since last Thanksgiving could be a troubling sign that the positive feedback loop for investors is breaking down, which risks culminating in a fear-driven bear market if the bull market cycle doesn't underway again soon.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including a discussion of Envestnet's acquisition of Yodlee, a new integration of up-and-coming financial planning software Advizr with Orion Advisor Services, and a look at whether automated investment services (i.e., direct-to-consumer robo-advisors) are losing their exclusivity as established financial services firms increasingly launch their own.

Enjoy the reading!

How To Do A Backdoor Roth IRA (Safely) And Avoid The IRA Aggregation Rule And Step Transaction Doctrine

August 12, 2015 07:01 am 92 Comments CATEGORY: Taxes

Since the income limits on Roth conversions were removed in 2010, higher-income individuals who are not eligible to make a Roth IRA contribution have been able to make an indirect “backdoor Roth contribution” instead, by simply contributing to a non-deductible IRA (which can always be done regardless of income) and converting it shortly thereafter.

However, in practice the IRA aggregation rule often limits the effectiveness of the strategy, because the presence of other pre-tax IRAs and the application of the “pro-rata” rule limits the ability to convert just a new non-deductible IRA. On the other hand, those with a 401(k) plan that allows funds to be rolled in to the plan can avoid the aggregation rule by siphoning off their pre-tax funds into a 401(k) plan, and then converting the now-just-after-tax IRA remainder.

Perhaps the greatest caveat to the backdoor Roth contribution strategy, though, is the so-called “step transaction doctrine”, which allows the Tax Court to recognize that even if the individual contribution-and-conversion steps are legal, doing them all together in an integrated transaction is still an impermissible Roth contribution for high-income individuals to which the 6% excess contribution penalty tax may apply. Fortunately, though, the step transaction doctrine can be navigated, by allowing time to pass between the contribution and subsequent conversion (although there is some debate about just how much time must pass!). But perhaps the easiest way to avoid the step transaction doctrine is also the simplest – if the goal is to demonstrate to the IRS and the Tax Court that there was not a deliberate intent to avoid the Roth IRA contribution limits, stop calling it a backdoor Roth contribution in the first place!

As Envestnet Buys Yodlee For $590M, Total PFM Acquisitions In Advisor #FinTech Crosses $1B!

August 11, 2015 10:15 am 19 Comments CATEGORY: Technology & Advisor FinTech

Yesterday, Envestnet ‘surprised’ the FinTech world by announcing that it was buying data/account aggregation company Yodlee for a whopping $590M, at a 70% premium to Yodlee’s valuation at its IPO less than 12 months ago. Yet looking at Envestnet’s apparent strategy of building a “Holy Grail” technology platform solution for advisors, that includes CRM, portfolio accounting, and financial planning software, it’s not entirely surprising that Envestnet decided they wanted to own the data that feeds the engine, too.

From the broader industry perspective, though, Envestnet’s acquisition of Yodlee may make some competitors nervous. There are relatively few data sources for quality account aggregation data in the first place, especially ones that include a holistic picture of household cash flows (and not just investment account/performance data). And with Envestnet now owning one of the top two players (the other is the Intuit API that powers Mint.com), and having its own financial planning software given the recent FinanceLogix acquisition, it raises the troubling question of whether competing financial planning software providers like MoneyGuidePro (which relies solely on the Yodlee solution) could someday be left in the lurch.

More broadly, though, the Yodlee acquisition marks a massive uptick in what has already been an incredibly hot technology category. Just under two years ago, I predicted that account aggregation and Personal Financial Management (PFM) solutions would become the hot new category of advisor technology, and earlier this year (before any major deals had yet been announced) that 2015 would be the year of Advisor FinTech. Now it’s not even the end of summer, there have been over $1B of account aggregation and PFM-related providers in just the past 6 months alone, and suddenly the biggest problem may be that there are almost no players left to acquire… unless someone new comes along soon?

Pricing Models For Financial Advisors And The Power Of “Free” Financial Planning

August 10, 2015 07:01 am 22 Comments CATEGORY: Practice Management

The conventional view in financial planning is that if something is “free” it’s not worth anything, and that therefore if we want consumers to really “value” financial planning, we need to charge for it. Yet the caveat, as expressed by author Chris Anderson in his book “Free: The Future of a Radical Price”, is that bundling “free” solutions with another paid product or service is an entirely legitimate business model, and in fact a surprisingly robust one.

In fact, not only can a business be very profitable by giving away an initial product or service for ‘free’ and get paid for a complementary or supporting solution – the classic “freemium” model – but by leading with something that’s free, the business may actually grow and gain even greater adoption in the process. Arguably, this suggests that not only has offering financial planning for ‘free’ over the past several decades been a good business model, but it may have even helped to gain adoption and acceptance of the value of financial planning in the first place!

On the other hand, the reality is that the ongoing advancements of technology are beginning to undermine the products and asset management services that have classically been the financial engine of the financial planning business model. From declining commission rates on products – to the decline of commission-based products altogether – and new threats to the pricing of asset management from robo-advisors, the question arises of whether the free-planning-plus-paid-financial-products-and-services model may be on its way out.

In the near term, this phenomenon appears to be shifting the landscape, as financial services products and asset managers (e.g., Schwab, Fidelity, and especially Vanguard) begin to deliver their solutions directly to consumers – packaged together with ‘free’ financial planning. But perhaps in the future, the business model will flip around altogether, and instead of giving away free financial planning and getting paid via financial products or AUM, advisors will give away financial products and asset management, and get paid for the financial planning instead, turning the financial planning “freemium” model around 180 degrees?

Weekend Reading for Financial Planners (Aug 8-9)

August 7, 2015 02:05 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 that Jeff and Kim Camarda have decided to appeal the unfavorable ruling they received in their case against the CFP Board, alleging that there are serious issues with the CFP Board's disciplinary process that still haven't come to light and that they believe they can ultimately prevail in court, even as the CFP Board insists that Judge Leon's ruling was appropriate and will be upheld.

From there, we have several technical articles this week, including: a Morningstar discussion of the recent Wells notice the SEC served to PIMCO alleged mispricing issues with certain non-agency mortgage-backed securities held within their BOND ETF; why affluent clients may wish to implement a GRAT sooner rather than later (if they're thinking about doing one at all); ongoing trends to watch in the long-term care insurance industry; how despite their early hype, adoption of QLACs in retirement accounts continues to be slow; and a discussion by Wade Pfau of how portfolios that combine stocks and immediate annuities (i.e., partial annuitization) may be superior for retirement income and wealth accumulation over just buying traditional stock-and-bond balanced portfolios.

We also have a few practice management articles, from a look at the latest industry trends research on the continued rapid growth of RIAs (which drove hiring of 31,000 non-clerical financial services jobs last year, and added a whopping 2 million clients in the aggregate), to a discussion of how despite recent growth of advisory firms there are concerns that profitability is slipping (which does not bode well for when the next real bear market occurs), and a look at how the ongoing evolution of the financial services industry (especially thanks to technology) will increasingly put pressure on advisors to add (more) value or be put out of business.

We wrap up with three interesting articles: the first looks at several new studies coming out suggesting that the "midlife crisis" phenomenon may not just be a "first-world problem" but that instead the "U-shaped curve" of happiness throughout life is something found across the globe, and even in other species; the second is a fascinating futurist look at whether small/solo law firms will survive in our increasingly technology-driven world, and the implications it raises for financial advisors who are following a similar path to the legal profession; and the last is a good reminder that for advisory-firm owners in particular, the ego that may have given you the courage (or stubborness!?) to go out and start your own firm and succeed in the first place may well be the same ego that is now limited your ability to continue to grow and succeed from here.

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 LPL Financial's recently revealed intent to offer a "robo" solution for its advisors, the announcement from Wealthbox CRM that it will be the first advisor CRM to integrate with popular business communication platform Slack, and a new service from Smarsh that will archive web-based Office 365 email and documents!

Enjoy the reading!

Why Bonds Funds Aren’t Necessarily A Losing Proposition In Rising Rate Environments

August 5, 2015 07:01 am 35 Comments CATEGORY: Investments

With interest rates hovering around multi-decade lows, investors have been increasingly concerned about the consequences to bonds when the “inevitable” shift happens and rates begin to rise. As the simple math of bonds makes clear, rising interest rates will drive down bond prices, potentially to the point of creating negative total returns for bonds.

To defend against this risk, an increasing number of advisors have been shifting to buying individual bonds in lieu of using bond funds. Given that bond funds tend to target a consistent maturity, in a rising rate environment the potential exists that bond funds will “lock in” bond price losses annually, while holding individual bonds until maturity allows for the investor to be assured that the bond will not face capital losses and will eventually mature at par value.

Yet the reality is that in an upward-sloping yield curve environment, rolling bonds to maintain a constant maturity is actually an enhancement to total return… enough that even if rates do rise, funds that roll bonds down the yield curve may still outperform the hold-to-maturity bond investor! And the steeper the yield curve becomes, the greater the benefit to sticking with bond funds after all.

Of course, the reality is that if rates spike “enough”, there is still risk that funds rolling their bonds will underperform just holding individual bonds until maturity. But on the other hand, trying to avoid rising rates by buying individual bonds is still at best a risk-return trade-off, as investors give up a “known” potential to roll down the yield curve for greater returns against just the potential that interest rates may, eventually, rise far enough and fast enough to offset the benefit!

MailBag: Intra-Plan And In-Service Roth Conversions Of A 401(k) Plan

August 4, 2015 07:01 am 22 Comments CATEGORY: MailBag

In this week's MailBag, we look at two questions related to the increasingly popular strategy of making after-tax contributions to a 401(k) plan and subsequently converting them to a Roth, either via an intra-plan conversion to a Roth 401(k), or using ongoing in-service distributions from the 401(k) to convert to a Roth IRA!

Sales Training And Business Development Skills For The Next Generation Of Financial Advisors

August 3, 2015 07:01 am 20 Comments CATEGORY: Personal/Career Development

The first generation of financial planners rarely started out as financial planners; most were initially insurance agents or stockbrokers in the business of selling a product, who later evolved their business to get paid for advice instead (after they already learned how to sell). By contrast, financial planners entering the profession today often come to the table to be paid for their advice from the start, and subsequently struggle due to their lack of business development experience and sales skills.

After all, the reality is that even if someone comes into financial services to be paid for their advice – not the products they sell – it is still necessary to learn how to sell in order to convince potential clients to pay for that advice. Yet unfortunately, relatively little exists in the way of sales training for financial advisors who actually want to be paid for their advice – historically (and still), most “sales training” was/is available from the product firms who train their “advisors” how to sell their products.

Nonetheless, even if they must pursue it on their own, whether by reading, hiring a sales coach, or experience from the "school of hard knocks", it’s crucial for today’s new advisors to recognize that selling - and developing their sales technique - is an essential skill for success. From being ready to “ask for the business” and “go for the close”, to crafting a sales process, managing a sales pipeline, and monitoring business development metrics – in the end, it doesn’t matter how great your advice actually is if you can’t convince anyone to pay you for that advice in the first place!