Nerd's Eye View blog

Is The SEC Failing To Enforce The “Solely Incidental” Advice Exemption For Broker-Dealers Under The Investment Advisers Act of 1940?

January 12, 2015 07:01 am 13 Comments CATEGORY: Planning Profession

When it originated, the Investment Advisers Act of 1940 sought to create a clearer line between stockbrokers who were primarily in the business of selling securities (for commission), and investment advisers who provided ongoing advice (for a fee). In fact, the ’40 Act declares that anyone who is in the business of providing investment advice for compensation must register as such. Registered representatives of broker-dealers could be exempt, but only if they received no special compensation for advice and any advice they did provide was “solely incidental” to their brokerage services.

Yet as the financial services industry has evolved over the nearly-75-years since the ’40 Act was passed, the lines between brokers and investment advisers have blurred, culminating in the SEC’s proposal in 1999 that “Certain Broker-Dealers [Could Be] Deemed Not To Be Investment Advisers” and not be treated as receiving special compensation even though they were offering fee-based wrap accounts. Ultimately, though, the FPA sued the SEC on the basis that this exemption was broader than what Congress intended with the ’40 Act, and the courts agreed, vacating the rule in 2007.

Yet ironically, when the Broker-Dealer exemption was vacated, so too was an expansion of the definition of “solely incidental” advice, including the recognition by the SEC that providing financial planning services, or holding out to the public as a financial planner, would mean the advice being provided was no longer solely incidental. Although these were merely clarifications of what constituted “solely incidental” advice, the end result is that the SEC has since allowed more and more brokers to hold out as financial planners and offer such services, without requiring them to register as investment advisers. In turn, this raises the question: with all of the fiduciary debate today, do we really need a new/different fiduciary standard for advice, or is the reality simply that the Financial Planning Coalition needs to lobby the SEC to finally step up and enforce the “solely incidental” rules as Congress originally wrote yet?

Weekend Reading for Financial Planners (Jan 10-11)

January 9, 2015 03:45 pm 11 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a look at the top "watch list" priorities from FINRA in the coming year, including new scrutiny on floating-rate bank loans, alternative mutual funds, and the dramatic increase in recent years of "securities-based lending" where affluent investors are using their portfolios to get access to faster, "cheaper" money to buy everything from real estate to luxury items (and raising concerns of what happens if there is some market volatility and the loans must be repaid quickly!).

We also have a number of investment-related articles this week, from an interesting defense of the benefits of the "maximize shareholder value" philosophy from AQR's Cliff Asness, to some thoughts from Howard Marks about the lessons we can draw about the recent volatility in oil prices, a look at the use of municipal bonds in portfolios, an overview of the coming money market reforms (and how some clients may end out in money markets with floating NAV if they're not paying attention!), and a look at where the next market meltdown and advisor debacle may come from (think non-traded REITs and risky bond funds).

From there, we have a few technical planning articles, including: a review of the FAFSA (Free Application for Federal Student Aid) and some planning opportunities and issues for those sending children to college; a look at the emerging rise of "deferred income annuities" and their potential role in a retirement portfolio; and a nice in-depth explanation of the Social Security earnings test, how it works, and how it can impact the decision about the optimal time to begin Social Security benefits.

We wrap up with three interesting articles: the first looks at how spectacularly bad the 2014 economic predictions were about everything from interest rates to the price of oil, yet notes that people will continue to seek out such predictions anyway... not because they want the accuracy of the prediction, but because they're seeking the reassurance that it implies; the second gives an interesting look at how "time perspective" (one's orientation/focus about events in time) can impact financial planning decisions, and raises the question of whether planners should do more to understand their clients' time perspectives when providing advice; and the last gives an interesting overview of the regulatory advocacy efforts of the FPA of Florida state coalition as a template for how financial planners can and are having some success in lobbying and advocacy.

Enjoy the reading!

Reader Survey: Want CE Credit For Nerd’s Eye View Blog Posts You’re Already Reading?

January 8, 2015 07:01 am 6 Comments CATEGORY: Nerd's Eye View

At Nerd’s Eye View, the goal is always to make this an ever-more-valuable resources for our readers. And over the years, your feedback has shaped everything to the look and feel of the blog (including the default font size!), the comment system we use, and availability of webinars for CFP CE credit, and more.

Due to ongoing requests from many of you, the latest feature we are considering is whether to offer the opportunity to earn CFP CE for some of the (more technical) articles you’re already reading here on the blog. I know that many of you already are getting more than enough CE, but if this would be beneficial for enough of you, we’ll see what we can do to offer it! We are exploring some additional "member" benefits for a premium members section as well.

Accordingly, I’m hoping you’ll take just a few minutes to answer this simple 5-question survey, about whether:

1) You would be interested in receiving CE credit for reading the blog;

2) What types of CE credit you want (for CFP certificants? For CIMA and CPWA certificants? For CPAs who need CPE? For attorneys? Something else?); and

3) Whether/what amount you’d be willing to pay as a processing fee (since we don’t have advertisers on Nerd’s Eye View and this does have some cost to make available!).

4 & 5) What types of other "member" benefits you might be interested in?

Thanks in advance for your feedback!

Can Increasing The Long-Term Care Insurance Elimination Period Make Coverage Appealing Again?

January 7, 2015 07:01 am 56 Comments CATEGORY: Insurance

Insurance functions best when it is used to cover high-cost low-probability risks – the kind that aren’t likely to occur, but would be devastating if they did. Technically, paying insurance premiums on an ongoing basis has a slightly greater expected loss than just retaining the risk, but an appealing trade-off if it means converting a potential financial disaster into a manageable ongoing premium.

Yet when it comes to long-term care needs in today’s environment, what was perhaps once a higher-cost lower-probability event has now turned into a very high-probability event with an increasingly large volume of “lower-cost” claims. As a result, long-term care insurance has begun to morph from effective insurance, into something that looks more like just prepaying long-term care expenses in advance at a high premium rate and with little insurance leverage.

As a result, perhaps it’s time to reform long-term care insurance policies so they once again focus on covering (only) high-impact low-probability events. For instance, what if elimination periods for long-term care insurance were increased to allow for a 2 or 3 year deductible, instead of today’s common 3-month period, and individuals could then take the significant premium savings and use it to cover their care during that time period? Could such an increase in deductibles reduce the cost of long-term care insurance coverage enough to make it affordable once again to most of the general public?

Personal Capital Crosses $1B AUM As Tech-Augmented-Human Advisor Revenue Outpaces All Other Robo-Advisors Combined

January 6, 2015 02:56 pm 8 Comments CATEGORY: Industry News

The big news today is that Personal Capital, the financial advisory firm that offers human advisors available to interact virtually with clients utilizing the company’s proprietary Personal Financial Management tools, has crossed the $1B AUM mark.

While often dubbed a “robo-advisor”, the reality as noted above is that Personal Capital does not really belong in the category, as the company actually offers one-to-one relationships between clients and a personal financial advisor (an actual human being) who simply happens to engage with the clients using digital communication tools, making the solution closer to a part-technology part-human "cyborg" advisor than a true "robo" solution.

What’s most notable about Personal Capital, though, is that not only does it function as a technology-augmented human advice platform, but that because it also charges more “traditional” AUM fees (with a starting cost of 0.89% for the first $1M under management), it actually generates significantly more revenue than its pure robo competitors. In fact, while Personal Capital may not be larger than the other “robo-advisor” platforms as measured by AUM, it has in the span of only 3 years actually grown more revenue than all other robo-advisors combined!

Top 3 Advisor Issues For 2015 – Advisor FinTech, Regulation, And The Crisis Of Differentiation

January 5, 2015 07:01 am 22 Comments CATEGORY: Planning Profession

As we begin another new year, a fresh set of challenges and opportunities await the world of financial advisors. The themes remain the same as years past – technology, regulation, and practice management – but the landscape is shifting and changing.

In terms of technology, 2014 seems to have been the year of the “robo-advisor”, but I anticipate that 2015 will be the year of “robo-advisors for advisors”, with a looming explosion of financial technology (or “FinTech”) for advisors. While the robo trend has not actually picked up much in the way of client assets, it has clearly highlighted the lack of competitive technology solutions for advisors, and that’s a business opportunity a number of new businesses are aiming to solve. After years of having few and poor choices for technology, 2015 may be the first year of a new trend, where the challenge for advisors is making a decision in a sea of overwhelming (though not necessarily all good) choices instead.

With respect to regulation, we face yet another year of potential proposals on a new fiduciary rule, but with the Department of Labor set to announce their fiduciary redraft as early as this month, we may finally be about to move on to the next stage of the debate. In the meantime, regulators are poised to make mandatory succession planning (or at least, business continuity planning in the event of death, disability, or retirement of the advisor) as the surprise “hot” issue of the year, and the first half of 2015 will also witness an outcome to the case of Camarda vs CFP Board – which, win or lose, will have significant ramifications for the role of the CFP Board and its marks in the future of the financial planning profession.

The third big trend for advisors in 2015 is the ongoing slow-motion “crisis of differentiation” unfolding amongst advisors. As organic growth rates slow for the entire industry, there simply aren’t as many “unattached” clients as there once were, and as more and more advisors step up to deliver financial planning and wealth management, being an experienced and credentialed advisor just isn’t the differentiator it once was. In the coming year, I anticipate we’ll see a lot of advisory firm taking a hard look at their current marketing approach, sowing the seeds of a future niche or specialization to reignite their growth in the future, and/or making a commitment that it’s no longer enough for the average firm to spend a mere 2% of revenues on marketing anymore.

Weekend Reading for Financial Planners (Jan 3-4)

January 2, 2015 03:01 pm 13 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the big announcement buried in the slow-news holiday season that the CFP Board is softening its experience requirement for new CFP certificants and offering an alternative to its Capstone course for those seeking to challenge the exam... changes the CFP Board has made unilaterally without a public comment period, even though the current-and-soon-to-be-former rules themselves were only put in place after such a process. Also in the news this week was an announcement by FINRA that it will soon begin sharing with state insurance regulators, on a monthly basis, disciplinary actions that suspend or bar registered representatives, in an effort to ensure that those problematic brokers don't just switch to selling inappropriate insurance products instead of securities.

From there, we have a few interesting investment and retirement research articles this week, including a review of a recent study suggesting that the widespread practice of benchmarking could actually be causing (harmful) distortions in asset prices, to a nice summary of some of the best retirement research in the Financial Analysts Journal for the past few decades, along with a good article describing the key details and features of Master Limited Partnerships, and a brief study looking at how a standby reverse mortgage line of credit could actually be a way of hedging against a poor housing market (and ironically, will function even better if interest rates rise in the future!).

We also have several practice management articles focusing on younger/newer advisors in particular, from tips to earning credibility when getting started, the benefits of getting a "side hustle" to bridge the income gap while you find your initial clients, and an interesting look at the ways to structure succession plans that may have value for both newer advisors who will be the successors and also the advisory firm owners who may be trying to decide how to sell/transition to them.

We wrap up with three interesting articles: the first looks at how advice-centric advisors often fear or entirely eschew the concept of "selling" even though the reality is that they still have to sell themselves, their services, and their advice (and avoiding the sales conversation can impair their opportunity to help clients!); the second is a good cautionary reminder of how some clients go through a "honeymoon" phase with advisors, which needs to be managed or advisors may find themselves losing some clients quickly; and the last is an interesting new study suggesting that a client's willingness to trust others may actually have a strong relationship to their willingness to invest in equities, which implies both that advisors who can build trust better may get their clients more comfortable owning stocks, and also that measuring a new client's comfort in trusting others may actually be a helpful indicator regarding how comfortable they will be holding equities in times of volatility!

Enjoy the reading!

CFP Board Softens Experience Requirements For New CFP Certificants & Reduces Capstone Requirement For Challenge Status

December 31, 2014 07:01 am 57 Comments CATEGORY: Industry News

With the CFP Board's ongoing efforts to continue growth in the number of CFP certificants, the organization has been involved in a number of ongoing initiatives, from its Women's Initiative to bring more females into financial planning, to its decision to convert to a shorter computer-based testing format to make the CFP comprehensive exam less daunting.

In a surprise announcement, though, the CFP Board has just declared that after adding a "Capstone Course" requirement to the CFP curriculum in 2012, and including the requirement for not only new students but also those who are seeking to challenge status for the CFP exam, the organization is now offering to waive the capstone course requirement for challengers who instead simply submit a comprehensive financial plan to be assessed by peer reviewers. In addition, the CFP Board also announced that a wider range of "support" activities will be permitted to count towards the requisite 3-year experience requirement to earn the CFP marks.

While arguably the change to the Capstone course is a positive, the adjustments to the experience requirement may now be opening the door for virtually anyone with a job in the broad financial services industry (or even journalists writing about it) to qualify for "financial planning" experience, despite having absolutely no actual experience being involved in the creation of a financial plan, supporting its delivery, or interacting with a client! And perhaps even more concerning, why is it that both the prior Capstone and Experience requirements were implemented with a lengthy public comment period and process, but the CFP Board now sees fit to change those rules at its own whim?

Top 14 Nerd’s Eye View Blog Posts Of 2014

December 29, 2014 07:01 am 14 Comments CATEGORY: Nerd's Eye View

As 2014 comes to a close, I'm so very thankful to all of you, the readers who continue to visit Nerd's Eye View more and more often and share this content with your friends and colleagues (which is greatly appreciated!). Overall, this blog has experienced yet another year of explosive growth (with traffic up over 75% from 2013!), and I'm looking forward to rolling out a number of new enhancements in the coming year to make your experience with the site even better in 2015! Stay tuned!

Yet notwithstanding all the growing readership of this blog, I realize that the volume of content can sometimes be overwhelming, and it's hard to keep up with it all. And blog articles, once published, are quickly left in the dust by the next new article that comes along.

Accordingly, I've compiled for you this list of the 14 most popular articles I wrote this year on Nerd's Eye View (along with the launch of our Top Advisor Blogs and Bloggers list!). So whether you're new to the blog, or simply haven't had the time to keep up with everything, I hope that some of these will (still) be useful or of interest to you!

In the meantime, I hope you're having a safe and happy holiday season. Thanks for an incredible 2014, and I'm looking forward to doing even more to be of service for all of you in 2015!

Weekend Reading for Financial Planners (Dec 27-28)

December 26, 2014 03:01 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a look at what kinds of retirement-related legislation and regulation may emerge in 2015 as the Republican leadership takes control of key committees in both the House and now the Senate. In addition, there's a glimpse at the quiet launch of President Obama's new myRA accounts, which are now available to investors.

From there, we have a few practice management and technology articles this week, from a nice To-Do/New-Year's-Resolution list for advisors from practice management consultant Angie Herbers, to a discussion of the ongoing rollout of the new cost basis reporting rules, a review of the latest technology and upcoming developments from the four major RIA custodians, and a profile of the newly expanded Indexing 2.0-style service from Wealthfront (their initial version, rolled out just a year ago, is actually responsible for nearly 1/3rd of the company's AUM now!).

We also have several estate planning articles, including: a look at the rise of online-based attorneys that prepare client estate plans but work virtually (an alternative to do-it-yourself document services like LegalZoom); a discussion of the rise of perpetuity trusts, and whether they may actually be unconstitutional under most state laws; and a discussion of the recently passed "Uniform Fiduciary Access to Digital Assets Act" that should spur state legislation on digital assets in the coming year.

We wrap up with three interesting articles: the first looks at the question of whether Google might someday enter the financial services business (or become a robo-advisor in particular), after rumors that Google had hired a consulting firm to scour the industry for potential opportunities; the second is a review of the interesting new book "The Deluge: The Great War, America, and the Remarking of the Global Order, 1916-1931" by Adam Tooze that looks at how the actions of the United States in the aftermath of World War I supported its rise as a global economic superpower but may have sowed the seeds of World War II in the process; and the last is a glimpse at an interesting new study that reveals reading on a bright screen before bed (e.g., on an iPad) produces an effect equivalent to a 1.5 hour jet lag, disrupting melatonin production and REM sleep, and implying that perhaps we should all consider going back to good 'ole paper books (or at least, a non-light-emitting Kindle Reader) before bed!

Enjoy the reading!