Nerd's Eye View blog

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.

Summer Reading List of “Best Books” For Financial Advisors – 2015 Edition

June 1, 2015 07:01 am 20 Comments CATEGORY: Personal/Career Development

As June begins and the busy spring conference season comes to an end, it's time for the annual summer slowdown in the advisory business - when clients begin to travel and are harder to schedule for meetings, advisors themselves go on summer vacation with family, and there's a lot (or at least a little!) more time for relaxing and reading books.

As an avid reader myself, I know I'm always eager to hear suggestions of good books to read, and so in the spirit of sharing, I maintain a list of my top recommended books for financial advisors, and I launched my first "Summer Reading List" of recommendations back in 2013. It was so popular, I created a new Summer Reading list in 2014. And continuing the trend, I'm now excited to share my latest 2015 Summer Reading list, with suggestions on everything from practice management and "sales" skills to advisors, to the latest in Social Security, and for those who prefer a somewhat "lighter" fare, two recent books on how to teach children to be responsible with money and the science of how spending money really can make us happier.

So as we head into the summer season, I hope that you find this suggested reading list to be helpful... and please do share your own suggestions of what you're reading in the comments at the end of the article as well!

Weekend Reading for Financial Planners (May 30-31)

May 29, 2015 02:29 pm 24 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with recent discussion from Rep. French Hill (R-Ark.) who stated he plans to explore introducing legislation that would give FINRA the authority to examine RIAs, as the regulator originally created to oversee securities dealers continues in its efforts to gain oversight of registered investment advisers as well.

From there, we have a few practice management articles this week, including: guidance for advisors on how to be more secure online; tips on guidance that advisors can give to clients about how to protect themselves from identity theft; a look at how DocuSign is making a big push into helping advisors not only with electronic signatures but creating entire digital workflows; tips on how advisors leaving a broker-dealer can avoid or manage an unfavorable Form U5 filing; and a discussion of how large advisory firms can serve Gen Y profitably today (not just as a feeder system for future AUM).

We also have a few investment-related articles this week, from a look at the ongoing rise of Vanguard and the question of whether their growth may soon slow as the company goes into competition with the advisors it serves via its new Personal Advisor Services platform and as regulators scrutinize whether it is a "too big to fail" company, to a discussion of target-date bond ETFs that have a fixed maturity as a means to invest in a rising interest rate environment, and a look at how the "best" diversifier with a consistent negative correlation to stocks is actually the much-unloved long-term government bond.

We wrap up with three interesting articles: the first looks at the rapidly emerging trend of states creating their own state-based retirement plans to provide a means for small businesses to offer payroll deduction contributions to an IRA or other tax-deferred retirement plan; the second discusses the release of the new book "Misbehaving", a 'professional memoir' of behavioral economics pioneer Richard Thaler that tracks both his own career and the rise of the behavioral economics movement; and the last is a discussion of the little "white lies" we tell ourselves about money, like the idea that money will provide us safety and security when ultimately money can only ever go so far to provide those comforts (and relying on money to do so can mask more significant spiritual and internal challenges we may be facing along the way).

Enjoy the reading!

Big Raises And Lifestyle Creep – Why It’s Crucial To Establish Good Spending Habits Early

May 27, 2015 07:01 am 40 Comments CATEGORY: General Planning

While many of today’s workers may ultimately be in the workforce for 40 years or more, several recent studies have revealed that income growth does not occur steadily throughout that working career. Instead, the majority of our raises actually come in our 20s and 30s. By our 40s, income growth slows dramatically, and in our 50s income growth typically turns negative (at least on an inflation-adjusted basis)!

Accordingly, the reality is that for those in their 40s and 50s who are behind on retirement, there really is little to be done aside from working longer, or cutting lifestyle spending. In other words, there’s not much room for raises and future income growth to bridge the gap.

On the other hand, for those in their 20s and 30s, the fact that the biggest raises come early in their career means it’s especially important to control the pace of spending increases in the first place. Otherwise, the steady lifestyle creep towards an increasingly expensive life as our income rises may not only crowd out the ability to save now, but leave little room to save in the future as earnings growth slows. Fortunately, though, the magnitude of earnings increases in our early years means that good spending habits established early on can make an astounding difference over a lifetime!

Have We Made It Too Hard To Hire A Financial Planner?

May 25, 2015 07:01 am 30 Comments CATEGORY: Practice Management

For many financial planners, it’s increasingly difficult to get new clients. Those with a longer-term practice can at least rely on referrals from existing clients. For newer planners, though, it can be especially hard or even prohibitively expensive to find new clients, leading at best to a significant “income gap” in the early years of starting a new advisory firm.

Yet arguably, the process of matching a financial planner and a consumer isn’t necessarily much easier from the client’s perspective, either. The fact that consumers are regularly counseled to interview multiple advisors and ask them a dozen questions or more means there's a huge commitment of time and effort from consumers just to try to find an advisor. How many decide it’s easier to just find the answers to their questions themselves, than go through the hours it takes to find an advisor to answer them?

Similarly, planners themselves make the process even harder for prospective clients, as once the consumer finds a planner, it’s still not possible to just get the desired advice! Next comes an extensive data gathering and discovery process – all the more onerous for those who most need the help, who may not be organized enough to provide the requisite information! And once all that is done, the planner often still insists in going through a comprehensive financial planning solution, and is unwilling to “just” answer a new client’s specific and finite financial planning questions!

The end result of these challenges is that while it’s hard for advisors to find clients, perhaps the real issue is that we’ve made it too hard for consumers to find their way to us and work with us to efficiently get their own questions answered. How might financial planning be changed if the goal, truly, was to make it as easy as possible to become a client?

Weekend Reading for Financial Planners (May 23-24)

May 22, 2015 02:32 pm 20 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with coverage of this week's Supreme Court decision in the case of Tibble v. Edison, that will likely send ripples (and possibly even shockwaves) through the world of 401(k) plans and increased scrutiny about the expenses and share classes held inside of 401(k) plans. Also in the news this week is a proposal from the SEC to 'modernize and enhance' Form ADV with new information requests that RIAs would need to complete, and an announcement that robo-advisor-for-advisors Trizic has raised $2M of venture capital as the opportunities in providing 'robo' technology for advisors continues to heat up.

From there, we have several practice management articles this week, including: a look at the emerging trend of advisors using 'co-working' spaces instead of a home or traditional office; another emerging trend of advisory firms launching their own "active" ETFs even as large mutual fund companies struggle to do so; mistakes to be avoided when 'breaking away' or changing broker-dealers; how to use the free HARO (Help A Reporter Out) service to get media exposure; the issues that arise when couples have differing levels of risk tolerance (and the importance of measuring husbands and wives separately so you know there's an issue in the first place!); and the challenge in how to effectively "fire" a client who is no longer a good fit (ideally without burning a bridge in the process!).

We wrap up with three interesting articles: the first points out that notwithstanding all the buzz about the Department of Labor's fiduciary proposals, the real regulatory issue in the coming year is the potential for "harmonization" of regulation for investment advisers and brokers that could ultimately subject RIAs to FINRA oversight; the second is a discussion of what the popular personal finance blogger Mr. Money Mustache - as someone who 'retired' in his 30s - is aiming to teach his son about money; and the last looks at the rising number of firms that are beginning to explore hourly and retainer models, and whether the future of financial planning will eventually migrate away from today's AUM fees and make them obsolete.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including Advicent's launch of the new Figlo financial planning software platform, the announcement that Bloomberg-terminal-competitor YCharts has raised $6M of venture capital, and the release of a new workflows solution from SEI!

Enjoy the reading!

Deducting Financial Planning And Retainer Fees, And The (Tax) Problem With Bundled AUM Fees

May 20, 2015 07:01 am 24 Comments CATEGORY: Taxes

Under the Internal Revenue Code, expenses for investment management are tax deductible. Accordingly, taxpayers are permitted to deduct the typical assets-under-management (AUM) fee of an investment manager. However, financial planning fees not specifically attributable to investment management (or tax planning) are non-deductible, treated instead as a personal expense.

With the rise of wealth management, though, it is increasingly common for consumers to pay a single “bundled” AUM fee, that covers not only (deductible) investment management services, but also (non-deductible) financial planning as well. Which means technically, those clients should probably only be deducting a portion of the AUM fee, not the entire amount – at least, where the AUM fee covers a “material” amount of financial planning services. And the issue is especially concerning when it comes to retirement accounts like IRAs, where paying a personal financial planning fee with retirement assets could trigger a (taxable) deemed distribution, or at worst disqualify the entire IRA as a prohibited transaction!

Ultimately, the easiest solution to the problem – at least from a tax perspective – is simply to unbundle the financial planning and investment management fees. And in fact, unbundling is now required under new IRS regulations when it comes to the investment management vs administration and other fees for estates and trusts. Yet for some firms, unbundling fees can present other business challenges about communicating the value of their services.

Fortunately, the issue may not receive scrutiny anytime soon, given that many advisory firms with bundled fees are still charging the same as investment-only firms (implying the financial planning fees may not be "material" from a tax perspective). Nonetheless, as long as the tax treatment is different for financial planning versus investment management fees, advisors should at least be cautious about how those various financial advisor fees are characterized by clients, especially when extracted directly from an IRA!