Nerd's Eye View blog

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!

Evaluating The Tax Deferral And Tax Bracket Arbitrage Benefits Of Tax Loss Harvesting

December 3, 2014 07:01 am 16 Comments CATEGORY: Taxes

Tax loss harvesting is a popular tax planning strategy, especially as the end of the year approaches and investors consider their potential capital gains exposure. Yet for many investors, the benefit of tax loss harvesting is overestimated, as harvesting a loss generates current tax savings, but also reduces the cost basis of the investment, triggering a potential gain in the future that may offset most or all of the loss harvesting benefit!

Nonetheless, even if a harvested loss creates a future gain, there is still an opportunity for tax deferral in the meantime, which can create a modest but non-trivial economic benefit for tax loss harvesting. The benefits are further amplified – sometimes greatly so – if there is a potential that gains in the future will be taxed at a lower rate than losses harvested today, with the caveat that if brackets go the other direction, tax loss harvesting not only loses its positive value but can actually be wealth destructive!

To the extent that tax brackets changes are anticipated favorable, though – or at least, that rates will hold steady – some benefit to tax loss harvesting remains, and can be maximized with portfolios that hold a wide range of diversified positions (creating more loss harvesting opportunities), have ongoing contributions (again creating more loss harvesting opportunities), and are checked frequently for losses to harvest (as only trying to harvest losses in December can miss out on even greater intra-year loss harvesting opportunities!). And for those who are not at risk for adverse tax bracket changes, the tax loss harvesting opportunity is especially appealing in today’s environment, with transaction costs (including trading fees and bid/ask spreads) as low as they've ever been, and more opportunities than ever to own investment alternatives that minimize tracking error while navigating the wash sale rules!

A Buyers Take on Succession Planning in The Financial Services Industry

December 2, 2014 07:01 am 4 Comments CATEGORY: Practice Management

In recent years, there has been an increasing focus on succession planning, and an explosion in the number of consultants providing advice on merger and acquisition deals, and metrics about the deals themselves. Yet thus far, almost all of the guidance and "best practices" offered regarding succession planning focus almost exclusively on the veteran planner who is selling the business, and doesn't necessarily consider the buyer's perspective.

In this guest post, advisor Daniel Zajac shares his thoughts on succession planning from the "other" side of the deal - as a 32-year-old buyer looking at purchasing the firms of retiring advisors. From common deal terms like size of down payment and the relevance of earn-outs and employment agreements, to the relative importance of "good fit" over finding the right/best price in the first place, Zajac's perspective provides some helpful color and contrast to the "traditional" advice on advisor succession planning.

So whether you're an advisor who may someday be thinking about selling your practice - and wants to gain some insight into a buyer's mentality - or are a younger financial planner yourself looking for a better understanding of whether buying a practice is a good way to get started as an advisor (and what to think about if you're going to go that route), I hope that this article provides some helpful food for thought!

How Can Financial Advisors Differentiate Their Services Across Segmented Client Tiers?

December 1, 2014 07:01 am 3 Comments CATEGORY: Practice Management

The importance of segmenting clients into different tiers (e.g., A, B, and C clients) has long been discussed in the industry, along with different ways to segment those clients on criteria ranging from revenue and profits to referrals and the ease of working with them. The concept is relatively straightforward: to improve the efficiency and profitability of the firm by appropriately matching the depth and level of services to the client’s value to the firm.

Yet despite the prevalence of the advice to segment clients, there is remarkably little written about how exactly to differentiate those tiers of service. After all, if financial planning is “holistic” by nature, it’s not exactly conducive to higher and lower service tiers. A doctor that just does “half a check-up” for C patients would be guilty of malpractice, and for many financial planners there is concern of similar risks to do a less-than-complete job for clients!

Nonetheless, the reality is that there are ways to effectively segment clients, without giving bad or “incomplete” advice – either by simply defining and limiting the scope of the engagement in the first place, adding more services or perks for top-tier clients (as opposed to “taking away” from bottom-tier clients), or just differentiating in how those services are delivered and how much additional support is provided along the way. In the end, we even look at a sample of what a segmented client service offering might look like when it’s all put together.

Weekend Reading for Financial Planners (Nov 29-30)

November 28, 2014 02:04 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with an announcement that the CFP Board and Rick Kahler have reached a resolution regarding his publicly controversial "fee-only" situation, with the odd conclusion that Kahler can avoid declaring that he receives any commission compensation directly or through a related party by transferring his commission-based business to... his wife, who inexplicably is not being treated as a related party. Also in the news this week was an updated regulatory notice associated with the Department of Labor's fiduciary proposal, suggesting that the next draft is still on track for release in January.

From there, we have a number of practice management this week, including a discussion of how advisors might plan to adapt (in advance) to survive the next big market downturn, a look at how advisors can create a "shock plan" to plan in advance for potential shocks to the business, a guide for advisors looking to change broker-dealers about how to do it properly to maximize the retention of clients and minimize business disruptions (to the extent possible), and an interesting profile of an independent RIA Wetherby Asset Management that has grown to over $4B of AUM in just over 20 years with a whopping $10M client minimum yet even while nearly 75% of its staff are under the age of 40.

We also have a couple of technology articles this week, including a review of the new financial planning software Advizr, a look at some advisor technology tools being adopted on mobile devices, and a (favorable) early look at the major client portal overhaul coming for the Black Diamond portfolio performance reporting software.

We wrap up with three interesting articles: the first is a detailed look from the RIA's perspective at the recent Barrons cover story on Schwab CEO Walt Bettinger that suggests the company is still conflicted about the fact that it is simultaneously the largest independent RIA custodian and also a massive consumer retail brand; the second looks at client trust, and makes the interesting point that just because clients do business with an advisor doesn't mean they fully trust the advisor (which may explain why the clients still have other outside advisors, and are not referring despite saying they are "happy" clients); and the last explores how the amount of available alpha in the investment markets may be shrinking, despite the fact that active managers have more tools and resources that ever at their disposal, because paradoxically the higher the average skill level of all active managers, the harder it is for any one of them to materially outperform.

Enjoy the reading, and Happy Thanksgiving!

Mechanics Of The 0% Long-Term Capital Gains Tax Rate And Harvesting Capital Gains For A Free Step-Up In Basis!

November 26, 2014 07:01 am 48 Comments CATEGORY: Taxes

For “lower income” individuals whose income falls within the bottom two ordinary income tax brackets, the Internal Revenue Code applies a 0% long-term capital gains rate to the extent their gains also fall within the lower two brackets. However, the 0% rate only applies as long as the income actually does fall within those lower brackets – which means “too much” in capital gains will eventually cross out of the 0% rate and into the higher tax brackets.

Nonetheless, the potential for 0% long-term capital gains rates means that for those who are eligible, the best thing they can do every year is not harvest capital losses – the “typical” capital gains strategy – but instead to harvest gains! By selling investments that are up, and buying them back again immediately (without any wash sale rules to navigate!), the taxpayer can effectively get a step-up in basis on current investments without any (Federal) tax liability!

Of course, the caveat to this strategy is that while long-term capital gains may be eligible for 0% rates for lower income individuals, it is still income itself, potentially impacting certain deductions and tax credits, and the taxation of Social Security. In addition, harvesting capital gains must be coordinated with other strategies, like partial Roth conversions, which can potentially drive up long-term capital gains rates and make capital gains harvesting less effective. Still, though, the potential to claim a free step-up in basis is not one to be missed, for any years where income is low enough to take advantage of the rules, whether due to just having income low enough to qualify, having a “temporarily” low income year due to a job loss or change, or simply looking to harvest capital gains once retired when wage income is gone and required minimum distributions have not yet begun!

Will Financial Planners Be Forced To Reduce Or Unbundle AUM Fees As The Price Of Beta Goes To Zero?

November 24, 2014 07:01 am 5 Comments CATEGORY: Practice Management

As ETFs and indexing makes the raw cost of “owning the market” cheaper and cheaper, the question arises of whether or how advisors can continue to justify an ongoing AUM fee for an investment portfolio. For some, the cost is justified by the alpha or portfolio-related “advisor gamma” value-adds that are provided; for others, the benefit is the inclusion of financial planning services; and for the rest, the benefit may just be to help protect clients from themselves and their self-imposed “behavior gap” on returns.

Yet the reality is that AUM fees are far more relevant for some of these services – like portfolio-related alpha – than others, and in some cases while some AUM fee is justified there is significant pricing pressure (e.g., providing portfolio-related gamma like automated rebalancing, tax-loss harvesting, and asset location). In some cases, the advisor provides so little actual portfolio-related value that the financial planning fee may become unbundled altogether.

Notwithstanding the potential pressure to unbundle, though, a look at the landscape of the financial services industry suggests that, if anything, the trend remains towards AUM fees. The shift towards fee-based revenue has been increasingly adopted by even the largest firms, from wirehouses to Schwab Private Client to Vanguard Personal Advisor Services – often bundled together with comprehensive financial planning services that are either very low cost, or entirely free because their impact on retention rates and increased lifetime client value alone justifies their cost to deliver. Which means in the end, even the declining cost of beta may not be enough to end the AUM fee… though the fact that a huge swath of Americans cannot be served by AUM fees – because they don’t have the assets in the first place – means a wider range of financial-planning-fee-for-service models may be inevitable anyway!

Weekend Reading for Financial Planners (Nov 22-23)

November 21, 2014 03:02 pm 3 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with coverage of the newly shortened computer-based CFP exam that was administered for the first time this week, and also an announcement by the CFP Board in its recent business webinar that the public awareness campaign, and the additional $145/year fee that funds it, is expected to continue "indefinitely" (as long as the campaign results continue to be positive). In addition, the FPA also released this week a new study about advisors and growth, finding that advisory firms are struggling to achieved their growth goals, with only 9% of all firms reporting that their business development efforts are "very effective" in achieving their goals.

From there, we have a number of technical articles this week, including: a discussion of the current status on Social Security benefits for same-sex married couples; how early retirees can maximize premium assistance tax credits for getting health insurance during the "gap" years from retirement until Medicare eligibility; some key details to know about how non-transparent "active" ETFs will work; a discussion of what kinds of assumptions are (and are not) reasonable when clients are pitched on equity-indexed universal life strategies; a new court case in Pennsylvania on "filial support" that raises the question of whether long-term care facilities may become more aggressive in pursuing adult children for the unpaid expenses of their indigent elderly parents; and a summary of the current state of dependent care accounts, and the opportunities they provide, even though they are not often utilized.

We wrap up with three interesting articles: the first provides a good overview of some of the latest research on whether money really can buy happiness or not (hint: it's not just about having wealth, but about how it is spent); the second explores some new research on the behavioral biases that impact not only investors, but also advisors and even fund managers; and the last is a (not entirely positive) review of the recent Tony Robbins book that finds the book may not have as clear of a fiduciary message in practice as it purports in theory.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including the launch of a new financial planning software solution called Advizr, a new "robo-planning" solution iQuantifi, and more! Enjoy the reading!

Allocating A Portfolio In The Context Of Human Capital And The Rest Of A Household’s Total Balance Sheet

November 19, 2014 07:01 am 7 Comments CATEGORY: Human Capital

While portfolio management understandably focuses on how best to allocate a portfolio, the reality for many (or even most) investors is that their financial assets may not even be the majority of their total net worth, compared to other assets like real estate, the (illiquid) value of their pensions and Social Security, and for those who haven’t retired yet, their human capital. In fact, for younger workers, their human capital – or the present value of their future earnings from employment – may actually be the largest asset they own!

Yet the reality is that assets like human capital, illiquid pensions and Social Security, and even real estate (especially if in the form of a primary residence) are not easily traded or altered; in other words, whatever you’ve got, and the risk it entails, is largely what you’re stuck with. In turn, this suggests that if the individual is going to try to optimize the risk and return of their total net worth – across all these different “asset classes” – that the portfolio is the one that should change to accommodate the rest, because it is the most malleable.

And in fact, recent research from Morningstar suggests that, when viewed on this basis, the optimal portfolio allocations for many investors really do shift, potentially quite significantly! Human capital, in particular, plays a significant role, given that both the growth rate potential and the volatility risk can vary quite a bit from one industry to the next, and different industries themselves have varying correlations to different segments of the market and (financial) asset classes. Which means, in the end, that advisors who are not considering these other balance sheet risks – especially for the human capital of their working clients – may be significantly over- or under-risking the client’s total household balance sheet over time!

A Birthday Celebration, An FPA NexGen Graduation, And A Moment Of Rebirth

November 18, 2014 11:15 am 53 Comments CATEGORY: Nerd's Eye View

It is with mixed feelings that today I face my 37^th birthday – a unique milestone for me, as it marks the maximum age threshold for NexGen, a group I helped to co-found 10 years ago (with the original inauspicious name of "Mouseketeers"!), and for which I was perhaps the most ardent advocate for having a maximum age as a requirement for membership. Now, a decade later and with no small amount of irony, I find myself being “forced out” – or as I like to put it, “graduating” – under the very age-based rule I fought so hard to keep in place early on. For me, today is a day of change, of transition, and of rebirth as I close the book on one decade of my life, and open to the next.