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What Robo-Advisors Truly Threaten To Disrupt: Index ETFs and Mutual Funds, Smart Beta And Algorithmic Investing, Custodians and Their Advisor FinTech Ecosystem

March 9, 2015 07:01 am 30 Comments CATEGORY: Technology & Advisor FinTech

While the debate rages on about whether robo-advisors will ultimately be a threat to human advisors, or whether the solutions that combined technology and humans will be the ultimate victors, the reality is that to view the battle as one of “technology vs human advisors” may be missing the real “threat” of robo-advisors. As technology platforms, their disruptive potential goes far beyond just impacting financial advisors.

For instance, the ability of software tools to re-create index funds – but without the mutual fund or ETF wrapper – creates the potential for today’s robo-advisors to disintermediate much of the existing index fund industry, aided by the tailwind of a benefit under tax code that uniquely favors these new “Indexing 2.0” robo-platforms over current fund-based solutions. Similarly, robo-advisors as “trading” software creates the potential to eliminate many active management middlemen, allowing a wide range of smart beta and rules-based trading algorithms to be implemented and automated directly.

And as the robo-technology trends shift from a direct-to-consumer focus to offer new robo-advisors-for-advisors solutions instead, the new platforms present the threat to today’s existing RIA custodians, who face the potential of a generational shift as new less-investment-centric financial planners adopt simplified robo-advisor investment platforms, and build a business there for the long run… which means in the end, the greatest threat of robo-advisors may not be their competition with human advisors, but the way that human advisors adopt them to disrupt much of the existing FinTech ecosystem!

Weekend Reading for Financial Planners (Mar 7-8)

March 6, 2015 02:01 pm 15 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with coverage of the recent SEC and FINRA cybersecurity "sweeps" of advisor best practices, which finds that RIAs have been more lax in their cybersecurity policies and managing than broker-dealers, although notably a higher percentage of broker-dealers have actually suffered fraudulent loss events (though the reasons are unclear). Also in the news this week was a warning that Genworth anticipates yet another bad quarter of financial results due to continued losses on its long-term care insurance, which has now driven the company's stock price down by more than 50% over the past year and led to its debt rating being downgraded to "junk" status.

From there, we have several marketing-related articles this week, from a discussion of the various types of tools/platforms available for advisors who want to blog, to tips in building a "virtual" client webinar event to gather prospects, to a look at how advisors should focus on building "social capital" to grow their firms, and a study of "elite" advisors suggesting that the best advisors spend upwards of 4% of revenues on marketing (compared to only 1%-2% for "typical" advisory firms).

We also have a few retirement-related articles, including one that raises the question of whether more advisors should recommend retirement income solutions with "guarantees" because the cost is a worthwhile trade-off to the client for peace-of-mind (even if it results in less expected wealth and isn't justified "mathematically"), a second that looks at the trade-offs to consider in lump sum versus pension decisions, and a third looking at how variable withdrawal rate strategies may "dominate" fixed withdrawal rate strategies... although it depends on how you define "success" in the first place.

We wrap up with three interesting articles: the first is an open letter from Bob Veres to SEC Chairwoman Mary Jo White, questioning why the SEC really needs to increase RIA exams at all, whether the process is outdated, and why the SEC's staff is allowed to be so inefficient with each examiner averaging of only 2.2 RIA audits per year; the second is an interesting look at how the culture is changing in wirehouse firms since the financial crisis, and whether their outflows of breakaway advisors have less to do with shifting commission-versus-fee business models and more to do with current management undermining the entrepreneurial partnership culture that built those firms in the first place; and the last provides a look at the emerging rise of the Financial Therapy Association and a new body of research that looks at our physiological and psychological responses to money issues and how to better help clients work through them.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including the announcements that robo-advisor Wealthfront has crossed $2B of AUM, ByAllAccounts has crossed $1T of account aggregation, and a review of Morningstar's new iPad app!

Will Section 529A ABLE Accounts Replace The Need For Disabled Beneficiary Special Needs Trusts?

March 4, 2015 07:01 am 21 Comments CATEGORY: General Planning

Planning for special needs beneficiaries is highly complex, a mixture of making challenging care decisions and managing limited resources. Many families will try to save assets on behalf of a special needs beneficiary to provide further support, but if not coordinated properly, can actually disqualify the beneficiary from Federal and state aid programs, including SSI and Medicaid.

The primary solution – establishing a (third-party) supplemental special needs trust – can help preserve the beneficiary’s eligibility for aid programs, but itself has a non-trivial cost to create and maintain, in terms of both legal fees, administrative expenses, and potentially unfavorable tax treatment.

To help ease the challenge for families with special needs children, the recently passed “tax extenders” legislation at the end of 2014 created a new type of account for the supplemental needs of special needs (disabled) beneficiaries. Under the new IRC Section 529A, Qualified ABLE programs will allow families to accumulate funds for such beneficiaries, enjoy tax-free growth, and allow the assets to (mostly) avoid disqualifying the beneficiary from any state or Federal aid, but without the cost and hassle of creating a special needs trust.

Given the limitations of these new 529 ABLE accounts – from restrictions on the size of contributions, to a rather “unfavorable” Medicaid payback provision after the death of the disabled beneficiary – the new Section 529A plans will not likely replace all special needs trusts, but could be used effectively as a supplement to them, and may be an especially appealing alternative to trusts for “smaller” account balances under $100,000.

How I Finally Learned To Delegate By Creating Video Tutorials With Screencasting Software

March 2, 2015 07:01 am 43 Comments CATEGORY: Personal/Career Development

As any advisory business grows, eventually the work that was “always” done by the founder has to be delegated, as there’s just not enough time in the day to do everything. Yet speaking from personal experience, delegating can be difficult, as it often feels like it takes even more time to show someone how to do a task and oversee it, than it takes to just do it oneself!

For me, the “breakthrough” in how to delegate effectively came from using screencasting software – tools that record what’s happening on your computer screen, paired with the audio of you talking while you’re sitting in front of it. The end result – in the time it takes me to actually do the task, I can create an entire “how-to” video tutorial for whoever I wish to delegate the task to in the future… and by recording it, I’ve acted once created a guide that can be referenced again and again as necessary for whoever will be doing the task in the future!

In fact, creating videos of the tasks you delegate can be done so quickly and easily that you may ultimately find yourself forming an entire video library of the key “processes and procedures” of your business… where all you have to do is just do the task you’ve long done already, but record it and then delegate it for good! So if you have trouble delegating, you might want to check out screencasting as a very practical solution!

Weekend Reading for Financial Planners (Feb 28 – Mar 1)

February 27, 2015 03:02 pm 23 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with several big news announcements, including President Obama's public endorsement of the Department of Labor's looming fiduciary proposal, Envestnet's acquisition of robo-advisor-for-advisors platform Upside Advisor barely more than a year into its existence, and the decision of Fidelity to merge its broker-dealer and RIA custodian clearing units into one while also creating a new Fidelity Wealth Technologies division to push forward the company's increasing focus on next generation technology.

From there, we have several investment-related articles this week, from the emerging "existential" crisis for indexing (and whether non-cap-weighting indices like fundamental indexing represent true "indexing" at all), to whether rebalancing really does increase returns or not, to the opportunities of "local investing". There are also discussion of the surging popularity of cash balance pension plans for high-income professionals and small business owners, a nice "lessons learned" article about the world of investment management, and an interesting look at whether owning long-term Treasury bonds might still make sense even at today's low rates (think: defending against deflation risk that could take rates even lower from here).

We wrap up with three interesting articles: the first is a look at the life of 109-year-old Irving Kahn, an investment adviser who started in the business in 1928, profited by shorting stocks in the crash of 1929, and ultimately went on to become a deep value investor after working as a research assistant directly under investing legend Benjamin Graham; the second article is a discussion of how parents should properly set allowances for children, suggesting that most parents do not give children nearly enough responsibility with money early on when it can be best used to teach important lessons about values; and the last is a look at how the "Uberization" of work could lead to an entirely new era of how we find employment and earn money, that may allow for more flexible work than ever, but also lead to a significant decline in the stability and security of employment, with profound ramifications for how we give career, earnings, and saving advice to young people today.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including the Envestnet acquisition of Upside Advisor, the "Superfish" vulnerability on Lenovo laptops, and a new integration from mobile dictation service Mobile Assistant!

MailBag: Can You Relocate As A Financial Advisor Without Giving Up Your Existing Advisory Firm Clients?

February 26, 2015 07:01 am 15 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 will occasionally post a new "MailBag" article, presenting the question or comment (on a strictly anonymous basis!) and my response, in the hopes that the discussion may be useful food for thought.

In this week's MailBag, we look at the issues to consider if you want to change where you live, but are concerned about whether the relocation means you'd have to sever all your existing client relationships and "start over" or not. Fortunately, the answer is that while not all clients be willing to stick through you in a transition, today's technology tools make this more feasible than ever before, and the key is to start interacting with your clients more virtually now, so that by the time you actually move it won't be such a big deal anymore!

The Problem With Naming A Trust As The Beneficiary Of An Annuity, And Using A Beneficiary Designation With Restricted Payout Form As An Alternative

February 25, 2015 07:01 am 23 Comments CATEGORY: Annuities

Retirement accounts and annuities used as accumulation vehicles can create significant tax-deferred account balances over time, with the caveat that eventually the tax bill must still come due. If the accounts are liquidated during life, the account owner faces the tax consequences; if the accounts are held until death, the tax liability falls to the beneficiaries instead. To help ameliorate the potential for a large liquidation to thrust the beneficiary into higher tax brackets after the death of the owner, Congress created the “stretch” rules for retirement accounts and annuities that allow distributions to be taken in small amounts over the life expectancy of the beneficiary.

However, the rules for stretching an inherited account are more problematic in the case of a trust as the beneficiary, because a trust is not a living breathing human being, and therefore doesn’t have a life expectancy to stretch against! In the case of retirement accounts, the IRS and Treasury have created the “see-through” trust rules that allow post-death required minimum distributions to occur based on the life expectancy of the underlying trust beneficiaries. However, in the case of annuities, no see-through trust rules exist, compelling trusts to instead liquidate inherited annuities over the far-less-favorable 5-year rule!

As a result, consideration of whether to use a trust as the beneficiary of an annuity must weigh the adverse tax consequences against the favorable/desired non-tax provisions of the trust. In some situations, using an annuity’s own beneficiary designation with “restricted payout” may be a viable alternative, saving on both the cost of the trust itself and preserving the stretch. However, in situations where it is most important to limit a beneficiary’s access to a trust – such as irresponsible spendthrifts, asset protection, and estate planning scenarios – there may be little choice but to accept the less favorable tax treatment, at least until/unless the rules change!

Takeaways From The T3 Advisor Technology Conference: PFM Portals, Dashboards, And Robo-Advisor-For-Advisors Platforms

February 23, 2015 07:01 am 18 Comments CATEGORY: Conferences

Celebrating its 10^th year as an event, this year’s Technology Tools for Today (T3) advisor technology conference was the biggest ever, punctuated by a stream of major product launch announcements at the conference itself, and buzzing about the literally billions of dollars of merger and acquisition activity for advisor technology firms in the two weeks leading up to the conference.

The breakout categories at this year’s event included several new “Personal Financial Management” (PFM) tools for advisors to work collaboratively with their clients, including the launch of EMX Select from eMoney Advisor (which, finally, will be “unbundled” from their financial planning software!) and a new solution called “Narrator” from Advicent (maker of NaviPlan and Financial Profiles). Also highly visible at this year’s T3 conference were an onslaught of more than half a dozen new “robo-advisor-for-advisors” solutions, all seeking to bring a better technology platform for advisors to build their businesses and automate much of the onboarding and investment implementation with their clients.

Yet underlying the potential efficiency of all these new technology solutions is the ongoing challenge that for many advisors, working with smaller clients isn’t actually a matter of efficiency (which technology can solve), but a marketing problem to get a sufficient volume of those clients in the first place. And while several new technology solutions are aiming to automate more of the advisor marketing process, along with making advisor websites more engaging with a series of “self-help” tools that can get prospective clients interested in actually working with an advisor, the question remains: how many advisory firms have a good enough marketing process to actually leverage these tools in the first place?

Weekend Reading for Financial Planners (Feb 21-22)

February 20, 2015 03:01 pm 15 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with two big news announcements, including a new $60M round of venture capital for robo-advisor Betterment that will be used in part to build out its robo-advisor-for-advisors solution Betterment Institutional (with a reported 90 RIAs already using the platform), and a detailed review of Form ADV for the new Schwab Intelligent Portfolios "robo" solution as well that reveals the platform will only be "free" because its 30bps management fee will be covered by the profits Schwab makes on its underlying ETF and bank offerings (including a 7%-30% cash allocation in all portfolios!).

From there, we have several practice management articles this week, including a look at how doing financial planning for Millennials means retooling the advisor's services (and business model?) away from AUM-centric retirement accumulations and towards building "financial independence" instead, an interview with "Reformed Broker" and financial advisor Josh Brown as he approaches 100,000 Twitter follows about how his blog and social media presence helped to build a $170M AUM practice, a look at the importance of effective branding and communications for advisors, and some tips on how to publish an "e-book" to establish your credibility.

We also have a few technology-related articles, from a look at how to better "personalize" and humanize the ways you use technology with your clients, to software reviews for the latest Tamarac iPad app and the newest release of eMoney Advisor's financial planning software (dubbed "EMX").

We wrap up with three interesting articles: the first is a letter from CFP Board chair Richard Rojeck as the organization celebrates its 30-year anniversary, looking back at what has been accomplished and where the CFP Board still sees opportunity from here; the second is a review of the recent new book "The Incredible Shrinking Alpha" by Larry Swedroe looking at how the competition for alpha is fiercer than ever (which makes less and less of it available to capture); and the last is a great reminder that helping clients through the stressful times can be stressful for the advisor as well, so now - while markets are relatively calm - might be a good time to take a "reboot", and make sure you're fresh for when the next inevitable bear market finally comes.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including highlights of the Technology Tools for Today (T3) conference, a review of the news that Betterment has raised another $60M of venture capital (in part to support its new service for advisors, but also to expand its capabilities to answer basic financial planning questions), and more!

Proposals For Eliminating Stretch IRAs, Repealing NUA, And The $3.4M Retirement Account Cap In The FY2016 Treasury Greenbook

February 18, 2015 07:01 am 22 Comments CATEGORY: Retirement Planning

Every year, the proposed changes to the tax laws encapsulated in the President’s budget request for the Federal government are recorded in the Treasury Greenbook, which is then taken under advisement by Congress to create its own budget resolution. And while the President’s budget request does not necessarily dictate what Congress will decide to do, it does provide valuable insight into potential legislation that may be considered in the coming months and years.

While some tax proposals in the Greenbook are relatively minor, or pertain to issues not directly relevant to our work as financial planners, this year’s FY2016 budget request had several proposals that would represent major changes in the world of planning for retirement accounts, both during clients’ lives and after they pass away.

Accordingly, following on last week’s review of the “good” and the “bad” of the proposed tax law changes for retirement accounts, we look at some of the “ugly” provisions that could have a more dramatic impact in the coming years, from the possible elimination of stretch IRAs (requiring the 5-year rule for most non-spouse beneficiaries), to a $3.4M “cap” on retirement accounts (though it is actually just a cap on new contributions to retirement accounts), and the proposed repeal of the Net Unrealized Appreciations (NUA) rules for those who were born after 1965!

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What Robo-Advisors Truly Threaten To Disrupt: Index ETFs and Mutual Funds, Smart Beta And Algorithmic Investing, Custodians and Their Advisor FinTech Ecosystem

Weekend Reading for Financial Planners (Mar 7-8)

Want CE Credit for reading articles like this?

Will Section 529A ABLE Accounts Replace The Need For Disabled Beneficiary Special Needs Trusts?

How I Finally Learned To Delegate By Creating Video Tutorials With Screencasting Software

Weekend Reading for Financial Planners (Feb 28 – Mar 1)

MailBag: Can You Relocate As A Financial Advisor Without Giving Up Your Existing Advisory Firm Clients?

The Problem With Naming A Trust As The Beneficiary Of An Annuity, And Using A Beneficiary Designation With Restricted Payout Form As An Alternative

Takeaways From The T3 Advisor Technology Conference: PFM Portals, Dashboards, And Robo-Advisor-For-Advisors Platforms

Weekend Reading for Financial Planners (Feb 21-22)

Proposals For Eliminating Stretch IRAs, Repealing NUA, And The $3.4M Retirement Account Cap In The FY2016 Treasury Greenbook

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