Nerd's Eye View blog

A Primer On Advisor Succession Planning Deals From The Buyer’s Perspective

April 6, 2015 07:01 am 12 Comments CATEGORY: Practice Management

For the past decade, the growth of advisory firms has led to a wave of hiring new planners, many of whom are ultimately anticipated to be the successor to the founding owner. And as time has passed, more and more are reaching the moment of transition when the successor actually does begin to buy into the practice; in fact, even in firms where the owners aren’t looking to exit anytime soon, it is increasingly common to add “junior partners” who will help to grow the firm going forward.

However, while a great deal has been written about the ways to sell some or all of an advisory firm from the founding owner’s perspective, there is remarkably little written to guide the prospective buyer of an advisory firm – which is especially problematic, as younger buyers are often in a position of more limited negotiating power and have less knowledge and experience in analyzing an offer (and may struggle even to just gather all the appropriate information!).

Accordingly, in today’s article, we look at the dynamics and issues to consider from the buyer’s perspective when evaluating an offer to buy in as a partner. If you’re in the position of being someone’s successor, hopefully this will be a helpful primer for you on the issues to consider. And even if you’re the one looking to sell your practice, the buyer’s perspective may be helpful as well!

Weekend Reading for Financial Planners (Apr 4-5)

April 3, 2015 03:45 pm 14 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a recent industry benchmarking study, finding that not only are advisors enjoying record levels of productivity (as measured by assets and revenue), but the average AUM fee actually ticked slightly upwards last year, despite the explosion of media coverage about "robo-advisors" and the alleged fee/pricing pressure they would begin to put on traditional advisory firms.

From there, we have a few interesting investment articles this week, including a fascinating discussion of investment liquidity (and a warning against assuming that any ETF will remain liquid if its underlying investments are not), the first blog post by former Fed chairman Ben Bernanke about why he thinks interest rates remain low (hint: it's not Fed actions, but sluggish economic growth that the Fed is merely mirroring), a look at how the popular Shiller CAPE ratio can be adjusted for changing historical trends in dividend payout rates (although the conclusion is still that markets are expensive even after the CAPE is adjusted), and a look at how due to bad market timing even the average value investor (in a value mutual fund) fails to capture the value premium (which in turn suggests it won't be arbitraged away anytime soon!).

We also have several more technical articles this week, including: a look at how the concept of retirement is evolving as the rather-arbitrary "traditional" retirement age of 65 comes increasingly into question; a look at how to decipher financial aid letters and what to watch out for to determine if a student's aid package is really a "good deal" or not; new estate planning tips and strategies for clients who once were exposed to potential Federal estate tax but are no longer (due to higher exemption amounts); and a discussion of Deferred Income Annuity (DIA) products and how they can be superior to more traditional Single Premium Immediate Annuity (SPIA) solutions.

We wrap up with three interesting articles: the first looks at the rise of Zenefits, a "robo-broker" in the employee benefits world that really does appear to be disrupting the status quo, though it is actually building its business with a strong technology component overlaid on top of human brokers who still consult directly with clients; the second looks at how the explosion of smart beta ETFs is also a trend of increasing robo-advised investment management as the majority of smart beta funds are implemented using computer algorithms; and the last is a lighter look at how to nail an email introduction in a world where most people are increasingly bombarded by a high volume of email.

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 by Schwab that its "robo-advisor" platform Schwab Intelligent Portfolios already has $500M of AUM, highlights of a recent review of Orion Advisor Services, and the LinkedIn acquisition of popular app Refresh.

Enjoy the reading!

Announcing CFP CE Credit For the Nerd’s Eye View Blog And A New Premium Members Section!

April 2, 2015 03:47 pm 7 Comments CATEGORY: Nerd's Eye View

At Nerd’s Eye View, the continued goal is always to make this an ever-more-valuable resource for our readers, and the financial planning profession at large. And over the years, your reader feedback has shaped everything from the look of the site, to the frequency of the content, the topics being covered, and more.

And in response to your continued feedback, we’re excited to announce today the launch of several new features and benefits for readers, including the availability of CFP CE credit for reading Nerd’s Eye View blog posts! That’s right, you will now be eligible for CFP CE credit for the content you’re already reading!

In addition, today marks the launch of a new premium Members Section of Nerd’s Eye View. Many of you have already long been subscribers of our newsletter service, The Kitces Report, providing in-depth advanced financial planning content (also eligible for CFP CE credit). Going forward, we will be slightly decreasing the frequency of The Kitces Report newsletter issues, but wrapping it into a broader Members Section, that will also include webinars and additional member resources you can use in your practice!

I hope you enjoy the new features and benefits! Thank you for your continued readership!

Understanding The Role Of Mortality Credits – Why Immediate Annuities Beat Bond Ladders For Retirement Income

April 1, 2015 07:01 am 25 Comments CATEGORY: Annuities

For retirees who don’t wish to take any market risk, one of the most straightforward retirement income strategies is to simply purchase a bond ladder that will provide the desired cash flows in each year of retirement. Ideally, the payments are secured out to an advanced age, “just in case” the retiree lives that long… with the obvious caveat that if the retiree doesn’t actually live that long, there will be a lot of money left over that “could have” been spent but wasn’t. But that’s simply the risk of an “unknown” retirement time horizon.

In the case of a (lifetime) annuity, on the other hand, the time horizon is known, at least in the aggregate – because with enough people, the mortality rate actually becomes highly predictable, even if it isn’t known exactly which people will pass away from one year to the next. Yet by knowing that at least some people will die each year, an annuity can pay out a portion of the funds that will have been left behind by those decedents, effectively providing larger guaranteed payments for the group than any one individual could have generated on his/her own.

These “excess” payments are known as “mortality credits”, and represent a unique contribution of (lifetime) annuities that simply doesn’t exist with an individual bond ladder. In fact, the potential for mortality credits means that, for any given maximum potential life span, annuities can actually pay out significantly more than what any individual could enjoy on his/her own, as the contribution of principal and interest and mortality credits will always be greater than the underlying principal and interest alone! Conversely, though, the benefit of mortality credits exists only by virtue of the fact that the other annuitants – and not the annuity owner’s heirs – will benefit from any unused funds that are left over; in fact, trying to protect against an annuity loss in the event of early death, and protect heirs, actually eliminates much of the benefit that annuities are meant to provide in the first place!

Why I Do Not Believe The SEC Should Create A Uniform Fiduciary Standard For All Brokers And Investment Advisers

March 30, 2015 07:01 am 47 Comments CATEGORY: Planning Profession

With 2015 shaping up to be a potentially significant year for fiduciary regulation, recent comments by SEC chairwoman Mary Jo White suggests the SEC will soon begin to consider how to draft rules that could subject broker-dealers to a similar fiduciary standard as the one that applies to investment advisers. Most likely, this would occur by creating a “uniform fiduciary standard” that would apply equally to both groups, given that the lines between the two types of “financial advisors” have blurred to the point that consumers no longer understand the differences.

Yet the reality is that when advisors and salespeople are clearly labeled as such, consumers actually can understand the difference. We intuitively understand that the advice of a doctor or lawyer is different than the fashion “advice” of the salesperson in a clothing store or the nutritional "advice" of the person behind the counter in a butcher shop. And in fact, subjecting salespeople to an advice standard can create more problems than it solves, whether it’s making butchers become Registered Dieticians, or turning brokers into fiduciaries while they are supposed to still fulfill their actual role as brokers.

Accordingly, perhaps the better solution to the blurring of the distinction between investment advisers and brokers is not to subject them all to a single uniform fiduciary standard as "financial advisors", but instead to simply re-assert the dividing line between them. Let advisors be [investment] advisers (subject to the fiduciary rule that already exists), brokers be the salespeople they legally are, and rather than mixing the two let each hold out as such to the public - where brokerage salespeople are called brokers and investment advisers are called financial advisers - so consumers understand the true choice being presented to them. In other words, consumers don't deserve a choice between fiduciary and suitability; they deserve a choice between advisers and salespeople.

And notably, the rules already exist to create such a separation, under the Investment Advisers Act of 1940. Which means if the SEC merely enforced the existing rules as written, where any advice that is beyond being “solely incidental” to brokerage services would require investment adviser registration anyway, we could resolve today’s consumer confusion about financial advisors… without writing any new laws at all!

Weekend Reading for Financial Planners (Mar 28-29)

March 27, 2015 02:45 pm 22 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the big announcement that traditional insurer Northwestern Mutual has bought out "robo-advisor" LearnVest for a sum reported to be more than $250M in cash, though it's not entirely clear whether Northwestern is looking to grow and adapt LearnVest's fee-only financial planning business model, or simply adopt LearnVest's unique technology, including a consumer Personal Financial Management (PFM) app and financial planning software, internally for Northwestern's own agents and brokers. Also in the news this week were new details about Schwab's Institutional Intelligent Portfolios, its "robo-advisor-for-advisors" offering that appears to have more flexibility than the direct-to-consumer solution, but will still entail some indirect and possibly direct costs for advisors and their clients.

From there, we have a number of additional technology-related articles this week, from a discussion of why it's important to "own" and not "lease" your website from a packaged template provider, to a review of the latest "3.0" edition of the FinaMetrica risk tolerance software, to a review of the latest in rebalancing software tools, and also a discussion of some important caveats and exclusions to be aware of when considering cybersecurity insurance for your advisory firm.

We also have several more technical articles this week, including: recent new research into how retirees spend on health care as they age, showing that medical expenses are actually far more stable than most believe (but long-term care remains a big wildcard); a discussion of sequence of return risk and what it really means; and a look at how, even in times of volatility, only a portion of a diversified portfolio is really at risk for retirees, which has implications for both how funds should be invested in retirement, and how to manage that risk with dynamic spending policies.

We wrap up with three interesting articles: the first looks at the rising trend of RIA custodial platforms moving into more and more direct competitor with the independent RIAs they serve (from growing their own wealth management offerings to giving consumers money-back guarantees that independent RIAs can't match); the second is a review of the ways that broker-dealers make money off their own advisors, in both transparent and not-so-transparent ways; and the last is a discussion of how the nature of client review meetings is evolving, as information that once had to be discussed in a meeting can now be easily accessed from a smartphone, raising interesting questions of just how often it's really necessary to meet with clients in person and what role shorter virtual meetings could play in the process.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including his own discussion of the new Schwab Institutional Intelligent Portfolios for advisors, and the Northwestern Mutual acquisition of LearnVest.

Enjoy the reading!

LearnVest Sells (Out?) To Northwestern Mutual – Successful Robo Sale Or Just Another FinTech PFM Software Deal?

March 26, 2015 10:50 am 20 Comments CATEGORY: Industry News

The first quarter of 2015 has been a record-breaking flurry of merger and acquisition activity in the world of financial advisors, not just amongst advisory firms buying each other, but with acquisitions of the technology companies that serve advisors. In fact, 2015 continues to shape up as a breakout year for advisor FinTech.

The latest news is this week’s announcement that “robo-advisor” LearnVest is being acquired by traditional insurance company Northwestern Mutual for an undisclosed sum. Yet for all the buzz about the robo-advisor movement, the reality is that LearnVest’s business model was actually built around human advisors – it was not a true robo-advisor – and the Northwestern Mutual purchase may have actually been focused more on the software tools that LearnVest built for itself, in particular its integrated Personal Financial Management (PFM) and financial planning software, not the core LearnVest Planning business model.

In fact, with details emerging that LearnVest may have only had a few million dollars of revenue and been far from profitability (or even scaling to profitability) after 6 years of growth, its free PFM app for consumers and supporting integrated planning software for its advisors had a whopping 1.5 million users, giving Northwestern Mutual both a powerful technology tool to leverage across its existing advisor base, and a treasure trove of data on 1.5 million prospective clients to which it can cross-sell financial services products in the future. Which means in the end, LearnVest may simply finish as an example of a company that started out to disrupt the financial services with a unique business model, raised too much capital and created expectations that couldn't be fulfilled, and ended up being sold (out?) as a technology solution pivoted to serve the financial services establishment and its traditional manufacturing and distribution of financial products instead. And now the only questions are: how long will Northwestern keep LearnVest planners in place, and which advisor FinTech solution – PFM or otherwise – will be bought out next?

Qualified Charitable Distributions From IRAs Have Lapsed Again For 2015 But May Be Reinstated Again – Defend By Doing Them Anyway!

March 25, 2015 07:01 am 21 Comments CATEGORY: Taxes

While the Internal Revenue Code does allow those who donate funds to charity to receive an income tax deduction to offset a portion of their income, in practice the two rarely offset perfectly. Income is counted “above the line”, increasing Adjusted Gross Income and impacting a wide range of tax credits and deductions, while charitable contributions only apply for those who itemized deductions in the first place (and face further charitable contribution deduction limits as well). As a result, there is often some “tax slippage” between the two.

In recent years, retirees who have “more than they need” in their IRA have been able to utilize the “Qualified Charitable Distribution” (QCD) rules to donate directly from an IRA to a charity, achieving a “perfect” pre-tax contribution and avoiding any tax slippage. Unfortunately, though, the QCD rules have come and gone several times since they were created in 2006, and after being briefly reinstated at the end of last 2014, the rules for QCDs have lapsed once again for 2015, raising doubt for those who want to do QCDs this year about how to proceed.

However, as it turns out, the best strategy to handle the uncertainty of whether QCDs will be extended or not is just to do them anyway! At worst, if the rules are not reinstated, the outcome will be no worse than just being forced to take an RMD and making a charitable contribution anyway (with the not-perfectly-offsetting tax deduction). However, if the rules are brought back once again, those who make direct charitable distributions from their IRAs will enjoy all the benefits of QCDs… even if the rules are only “fixed” after the fact!

Crafting An Annual Client Service Calendar To Illustrate A Financial Planner’s Value To Prospective Clients

March 23, 2015 07:01 am 17 Comments CATEGORY: Practice Management

In a relationship-based service business like financial planning, a lot of work goes on behind the scenes to provide value to clients. On the one hand, this is the whole point of hiring a financial advisor – to delegate at least some of that work to a professional – yet at the same time, when much of the service work becomes invisible “shadow work”, clients may not fully appreciate how much is really done on their behalf.

For existing clients, bringing the shadow work out of the shadows can be as simple as tracking and documenting all the service work done throughout the year, and providing a year-end summary that clearly illustrates just how much the firm has done for them. Yet for prospective new clients, this doesn’t work – it’s not possible to show clients what’s been done when nothing actually has been done yet!

A potential solution to this dilemma is for advisory firms to create what practice management consultant Angie Herbers calls an “annual client service calendar” – a physical document that illustrates all the different financial planning and investment work being done on their behalf, as well as the reports that will be delivered, and the various events the firm makes available to its clients. While the exact details of an annual financial planning service calendar will vary by the advisory firm and the services it provides – and may be highly unique for firms with a focused niche clientele – ultimately the goal is simply to turn the “intangible” service work of financial planning into something tangible the client can feel and touch and see, to really understand the value they’ll be getting for the advisor’s cost!