Nerd's Eye View blog

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!

Happy Money And The Science Of Spending – How Money Really Can (Sometimes) Buy Happiness

December 24, 2014 07:01 am 14 Comments CATEGORY: General Planning

Historically, financial planners have tended to focus more on strategies about how to earn or accumulate more money, grow and protect those assets, and perhaps figure out how much can be spent… but not necessarily to look at and give suggestions to clients about how that money should be spent.

Yet contrary to the conventional wisdom that “money can’t buy happiness”, a recent new book entitled “Happy Money” by researchers Elizabeth Dunn and Michael Norton suggests that there may be far more opportunity than we realize to derive greater happiness by changing the ways we spend our money. How we spend – on ourselves, and others – really does impact the enjoyment and emotional well-being we derive.

In fact, the research of “Happy Money” suggests that sometimes, the best things we can do to improve our happiness may lie in not trying to maximize our wealth, but instead focusing on experiential purchases (rather than “stuff” that appreciates in value), spending money to buy time, and even spending money to support family and relatives instead of ourselves (which may not be cost-effective, but can be remarkably happiness-effective!).

So hopefully, this review of some of the “Happy Money” research will give you ideas about how you can have these spending-happiness conversations with your own clients… and perhaps even reconsider some of the ways you do and don’t spend money for yourself in the coming year!

Should The CFP Board Really Risk Losing The Camarda Case, Or Is It Time To Settle?

December 22, 2014 07:01 am 7 Comments CATEGORY: Planning Profession

As the case of Camarda vs CFP Board winds closer towards a potential trial date, estimated legal costs for the organization continue to mount, and what started out as a dispute regarding a disciplinary action for one certificant may end out being a multi-million dollar expense for the CFP Board by the end.

Yet what’s really at stake for the CFP Board is not just the expense of pursuing a lawsuit – and potentially paying additional damages if found guilty, and more damages if others who have been disciplined by the DEC return to challenge their outcome, too – but the risk of a legal stigma against it for being found guilty in a court of law of breaching its contract with CFP certificants by failing to promulgate clear rules and enforce them consistently. Such a stigma that could haunt the organization for the foreseeable future as it attempts to establish the CFP marks as the minimum standard for a financial planning professional in the eyes of regulators, legislators, and the public.

Of course, if the CFP Board had an unequivocally clear case for defending itself and its actions, it would be only natural for the organization to protect its interests by pursuing the case to its bitter end. Yet with a litany of embarrassments for the organization in trying to enforce its compensation disclosure rules over the past 2 years – culminating most recently in the resignation of its own Managing Director of Professional Standards (a concerning vote of no-confidence from its own key employee?) – the CFP Board may be at more risk of losing than it is willing to publicly admit.

Unfortunately, the Camarda case has progressed so far that at this point, even settling will still be a very potentially expensive proposition for the CFP Board, and with so much in sunk costs it may seem like proceeding to trial is the inevitable conclusion. Yet with the benefits of winning so outweighed by the adverse consequences of a loss, and the CFP Board’s compensation disclosure challenges over the past year raising the concern that the CFP Board might not prevail in its defense, the question arises: should the CFP Board really be taking the risk, or will its Board of Directors intervene to protect the organization’s long-term interests?

You can view the CFP Board's official response to this post at the end of this article.

Weekend Reading for Financial Planners (Dec 20-21)

December 19, 2014 03:31 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with two news stories about the CFP Board, the first that disciplinary chief Michael Shaw (who had responsibility around both the compensation disclosure rules, and the ongoing Camarda lawsuit) has left the organization without an immediate replacement named, and the second that the results are in from the CFP Board's first computer-based exam, which scored results reasonably in-line with prior exams (suggesting it was not actually easier in the shorter computer format), but appears to have boosted the number of exam-takers back to a 2-year high.

Also in the news this week is the approval of a Congressional study to analyze the potential link between financial stress and military suicide (which could eventually lead to the Department of Defense expanding programs to provide financial planning for soldiers in a few years), the latest projections from Cerulli that RIAs will continue to pick up significant market share from wirehouses in the coming few years, and a Fidelity benchmarking study that finds advisors continue to struggle with marketing and business development.

From there, we have a few practice management articles this week, from a warning that advisors should be taking steps now (while times are good) to defend their businesses against the next market downturn, to a look at "compensation theory" and why slowing growth at many advisory firms may be a result of (mis-matched) compensation incentives, the things to consider when a large advisor team at a broker-dealer is considering whether to break away, and some things to watch out for if you're looking to sell your advisory firm in exchange for shares of stock in the acquiring firm (especially if it is promising an uncertain liquidity event in the distant and unknown future).

We wrap up with three interesting articles: the first is a review of the Strategic Coach program from an advisor who went through it and more-than-doubled his (already significant) income in just 3 years; the second looks at the emerging concept of "policy-based financial planning" where the goal is less about helping clients make decisions in difficult times and more about establishing policies up front that make it easy to implement the "right" decisions automatically if/when the difficult times come; and the last raises the question of whether the CFP Board has been launching "too many" initiatives lately, that may be positive for what they are doing and meant to accomplish, but shouldn't come at the cost of the CFP Board losing focus on its core purpose of supporting the CFP marks, including ensuring that there is a clear and fair enforcement process backing them.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, covering his selections for the Best Financial Advisor Technology of 2014 in the categories of Back-Office Technology, Client-Facing Technology, and Innovation of the Year! Enjoy the reading!

Tax Extenders Reinstated Temporarily, But ABLE Act Of 2014 Will Permanently Change 529 Plan Landscape For Special Needs Beneficiaries

December 17, 2014 07:01 am 25 Comments CATEGORY: Taxes

Late last night, the Senate passed H.R. 5771, known as the Tax Increase Prevention Act of 2014 or more simply as the “Tax Extenders” legislation. Having already passed the House of Representatives two weeks ago, the legislation will soon go before President Obama and should be signed into law within the next few days.

In its final form, the legislation “patches” the tax extenders for one year, retroactively reinstating a wide range of provisions that technically lapsed at the end of 2013, to now be available for the current 2014 tax year. This includes the popular rule allowed those over age 70 ½ to make a qualified charitable distribution (QCD) from an IRA, satisfying the current year’s required minimum distributions while simultaneously completing a charitable bequest and excluding the IRA distribution from income entirely for tax purposes, with just enough time left to complete a QCD before year end. However, as a temporary extension, we will find ourselves in the same boat - lapsed tax extenders, waiting for a retroactive reinstatement - again in 2015!

Notably, though, the Tax Increase Prevention Act legislation also included the Achieving A Better Life Experience Act of 2014 (also known as the ABLE Act of 2014), which will create a new Section 529-ABLE account to be used not for educational purposes but to allow for tax-free growth for a special needs beneficiary (without disqualifying the beneficiary from most Federal or state aid programs). And while the tax extenders section of the legislation is temporary – adding just one year to the life of the tax extenders – the new ABLE Act provisions as permanent, and will change the landscape of using special needs trusts and planning for special needs beneficiaries for many years to come.

How Technology Is Turning The Typical Advisor AUM Fee Schedule Upside Down

December 15, 2014 07:01 am 7 Comments CATEGORY: Practice Management

The “traditional” AUM fee schedule for an advisory firm has graduated breakpoint as asset levels rise, a tacit acknowledgement that it doesn’t really take twice the work to service a client with twice the assets, and that investment management (and/or with broader financial planning and wealth management services) is fundamentally an expensive service that gets cheaper with “volume” discounts as clients invest more.

By contrast, today’s “robo-advisor” platforms simply charge a flat low AUM fee. While robo-advisors provide only a limited scope of services for that price point – not directly competing against a comprehensive advisor – the nature of charging a low price for a commoditized service implies that advisors can only charge more by explicitly offering additional value-add services (e.g., financial planning and wealth management) for an additional fee, that rises with the client complexity and depth of client service.

While the reality is that none of today’s “robo-advisor” platforms are actually profitable, and their business model is heavily subsidized by venture capital while they try to achieve scale, the difference in fee structures highlights a fundamental difference that will likely remain relevant for years to come: is investment management and supporting financial planning and wealth management services an “expensive” service that gets (relatively) cheaper to provide at larger asset levels, or actually a “cheap” service where higher net worth client can buy value-added services for an additional cost?

Weekend Reading for Financial Planners (Dec 13-14)

December 12, 2014 02:31 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with some industry regulatory news, including the potential that Congress may soon approve NARAB (creating the National Association of Registered Agents and Brokers) to better facilitate multi-state insurance licensing, and that the SEC is considering whether to require large RIAs to have a business continuity and succession plan in place (following on a similar proposal by NASAA earlier this year for state RIAs to be subject to such a rule as well).

Also in the news this week are a number of articles related to year-end planning, both for advisors and clients, including a discussion of the rules for determining when a charitable gift is made and "delivered" for end-of-year charitable donations, an overview of why almost 10% of ETFs are actually making long-term capital gains distributions this year despite their typical tax-efficiency, some tips for advisors giving gifts to clients about mistakes to avoid, and some guidance about how to execute good employee performance and compensation reviews.

From there, we have a few investment-related articles this week, including: a discussion of how nontraded REITs really work, their potential conflicts of interest, and why advisors should perhaps be wary of them; a look at a new AQR "alternatives" fund that actually seeks to capture the return premium by investing in risk factors without taking on the underlying risks of the investments; and a look at the explosive growth of "securities-based lending" for higher net worth individuals - often as an alternative to more traditional mortgage lending - and the problems that it may create the next time there's a market downturn.

We wrap up with three interesting articles: the first looks at how as service professionals we tend to underestimate the value of the component parts of what we do, leading us to package together a "value beast" that may be so complex to explain and difficult to deliver that it would have been better to just provide clients the component parts instead; the second provides a reminder that when there's an elephant in the room - like recent market volatility - it's always better to acknowledge the elephant and talk about the issue than to ignore it and wait/hope it goes away; and the last provides an interesting look at how even 5-year periods of returns can drastically differ from what financial theory expects for stocks, bonds, and commodities, yet over the long haul (e.g., multi-decade time periods) financial theory still holds up far better than we typically give it credit for.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including coverage of the 2014 Advisor Tech Survey, Fidelity's collaboration with LearnVest, and a new "Direct Indexing" solution from Wealthfront! Enjoy the reading!

Understanding The New Once-Per-Year 60-Day Rollover Rules For IRAs And The Exclusion For Trustee-To-Trustee Transfers

December 10, 2014 07:01 am 38 Comments CATEGORY: Retirement Planning

The rule allowing IRA distributions to be rolled over within 60 days to avoid taxation has been around as long as IRAs themselves have existed, whether used simply to facilitate the transfer of an account, to fix a distribution mistake, or for those who want to use their IRA as a form of “temporary loan” to be repaid in a timely manner. However, to prevent abuse, Congress did enact a rule that limits 60-day rollovers to only being done once every 12 months, which the IRS has historically applied on an IRA-by-IRA basis.

In the recent case of Bobrow v. Commissioner, though, the Tax Court expanded the interpretation of the once-per-year rollover rule, changing it from applying one account at a time to instead being applied on an aggregated basis across all IRAs, effectively killing a popular form of sequential-rollovers-as-extended-personal-loan strategy.

The IRS has declared that it will begin to enforce the new aggregation-based IRA rollover rules in 2015, with a special transition rule that will still allow old 2014 rollovers to cause a 1-year waiting period for just the accounts that were involved and not all IRAs. Nonetheless, going forward advisors and their clients will need to be more cautious than ever not to run afoul of the rules when engaging in multiple 60-day rollovers over time… or better yet, simply ensure that IRA funds are only moved as a trustee-to-trustee transfer to avoid the rules altogether!

The Battle Of Advisor Dashboards And Client PFM Portals – Advisor Technology As The Engine Or The Interface?

December 8, 2014 07:01 am 7 Comments CATEGORY: Technology & Advisor FinTech

With the migration of advisor technology solutions over the past several years from local servers to existing in the cloud, the ability for software to be continuously digitally connected has led to a massive rise in software integrations, allowing an ever-increasing amount of data to flow through the "Big 3" technology hub for advisors, going more and more efficiently from one software platform to the next.

Yet as information and data flows more freely across the advisor technology stack, it is becoming increasingly frustrating for advisors to need to log into so many different software packages to manage their business, and for clients to have several different portals to access their document vault, their financial plan, their investment account information, and more. If the software is becoming more integrated, will there soon be a single centralized dashboard for advisors to manage their practices and monitor key performance indicators, and a single portal for clients to effectively manage their personal financial information?

The convergence towards a single advisor practice management dashboard and a single client portal, though, raises the question of where exactly these software tools will be anchored. Should client portals be built around client vaults, or planning software, or portfolio reporting? Should advisor dashboards be built within financial planning or portfolio accounting software, or the advisor CRM instead? Ultimately, it remains to see where the winners will come from – or if an entire new software category for advisors may soon emerge – but for advisor technology companies, they may soon come to the crossroads about whether the purpose of the software is to be the engine that powers and manages the data, or the portal to interface with it.

Weekend Reading for Financial Planners (Dec 6-7)

December 5, 2014 02:45 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the results from the industry's top annual financial advisor technology survey, co-produced by Joel Bruckenstein and Financial Planning magazine, highlighting some of the notable changes in the advisor technology landscape, from up-and-comers Riskalyze and Orion Advisor Services, to the ongoing dominance of MoneyGuidePro financial planning software, how incredibly fractured portfolio accounting and performance reporting software continues to be, and which broker/dealers and custodians have the highest (and lowest) technology satisfaction scores amongst their advisors.

There are several additional advisor-technology-related articles this week as well, from an announcement from Fidelity that they will be partnering with "robo" platform LearnVest (following on the heels of their recent Betterment Institutional partnership as well), to an interesting interview on the future of financial planning (software) from InStream Wealth CEO Alex Murguia, and lastly a "new" entrant to the portfolio accounting software world for RIAs called WealthTouch that his historically worked with ultra-high-net-worth clientele but is now looking to come "downstream" to clients with "just" $5M of assets.

From there, we have a number of retirement and planning articles this week, including: a discussion of how annuitization can effectively serve the same "hedging" function as a hedge fund for retirees (but at a fraction of the cost); how delaying Social Security has a natural "bias" in favor of delaying for affluent clients; a look at whether the risk-reduction benefits of individual bond ladders over bond mutual funds may be overstated; an interesting research-based proposal to help shore up Social Security by offering retirees who delay a choice between higher benefits or a(n actuarially fair) lump sum alternative; and a new study from the Journal of Financial Planning showing that, controlling for other factors, those who use a comprehensive financial planner really do appear to save more effectively for retirement than self-directed investors (or those who use an "advisor" who doesn't really do comprehensive planning).

We wrap up with three interesting articles: the first reports on the "surprise" announcement just days before the big MarketCounsel Summit conference that opening keynoter Tony Robbins, who in recent weeks has declared himself the new "voice of independent advisors" will actually be delivering a generic not-RIA-specific speech and will not be allowing any journalists to cover or write about what he says in his 2-hour keynote session, raising at the least a significant amount of confusion about what impact he really intends to bring to the industry; the second is a fascinating research study about the real risks and opportunities involved in holding concentrated stock positions, which have historically provided both a surprising number of "golden swan" events (a large number of improbably good financial outcomes) but also a stunning 40% chance of permanent impairment of capital (a 70%+ decline in value that never recovers); and the last is an intriguing article looking at how "robo-advisor" platforms may co-exist with advisors, where technology solves "simpler" problems and advisors focus on the more "complex" ones, and that the biggest winners may be the "bionic" (or "cyborg") advisors who blend together the human and the technology.

Enjoy the reading!