Nerd's Eye View blog

Weekend Reading for Financial Planners (Oct 25-26)

October 24, 2014 02:01 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a new study from the Financial Planning Coalition that finds barely 1/3rd of those advisors who hold themselves out as "financial planners" are actually doing financial planning, and that therefore regulators need to be more proactive in overseeing financial planners and how they hold out to the public to reduce the confusion. Also included in this week's news was a study from Cerulli Associates which finds that while the wirehouses have taken criticism for focusing on high net worth clientele, they really are providing the most comprehensive range of services to those HNW clients, beyond advisors at independent broker-dealers or RIAs.

From there, we have a number of practice management and technology articles this week, including a look at what advisors need to consider when adopting "e-signatures" for clients who want to sign documents electronically, a fascinating look at the challenges that large RIAs (e.g., $1B+) are facing in their efforts to grow to $5B and beyond (and what they need to do to take the next step), a review of the latest release of Redtail CRM, and a discussion of how InStream Solutions is transforming financial planning software from just a tool to analyze client situations to a firmwide tool to manage and oversee what advisors are recommending across all their clients.

We also have a few more technical articles this week, from a review of what "collaborative divorce" is all about and why divorcing clients should consider it (and also how advisors can actually do work as a "financial neutral" in a collaborative divorce specialist!), a study looking at how retirees spend their time in retirement (finding that most of their time is spent doing inexpensive leisure activities, and household activities that could actually reduce their cost of living in retirement!), and a great discussion of how young adults have so much job instability that perhaps they should be invested in an especially conservative manner with their portfolios and not aggressively as the conventional wisdom suggests.

We wrap up with three interesting articles: the first looks at the rising number of CPAs entering financial planning, and whether they could help fill the dearth of young talent in the profession; the second examines the latest benchmarking studies for financial advisors, and suggests that advisors may be too complacent about the potential impact the next bear market could have (and that they're underestimating how reliant they've become on market growth to sustain their current growth rates); and the last looks at how even though all the buzz of the industry is about the threat of "robo-advisors" that the real trend that is currently underway has been the rise of "phono-advisors" - mega financial services firms delivered financial planning through call centers that already have more than 100(!) times the AUM of today's robo-advisor platforms!

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including a recently announced Microsoft vulnerability (don't open any suspicious emails with Powerpoint presentations attached!), and a look at advisor tech consulting firms now offering cybersecurity audits for advisors to identify any risks to client data! Enjoy the reading!

Financial Independence In Lieu Of Retirement, And Other Phrases That Should Be Banished From Retirement Planning

October 22, 2014 07:01 am 29 Comments CATEGORY: Retirement Planning

As the research into behavioral finance has shown, the words we use and how concepts are framed can have a powerful impact on how we see the world and consider the opportunities that may lie before us. A strategy can go from being appealing to terrifying (or vice versa!) based solely on how it’s explained. And in the context of retirement, there are a lot of words and phrases that may unintentionally be hampering our efforts to have a productive planning conversation.

For instance, with the rise of Monte Carlo analysis, it’s become increasingly popular to talk about the probability of success, leading retirees to naturally want to minimize the probability of failure as much as possible, given the catastrophe that implies. Yet the reality is that for most retirees, a “failure” doesn’t just mean running off the retirement spending cliff, but instead a gradual spenddown of assets that necessitates adjustments along the way to get back on track. So what happens if “probability of failure” is reimagined as a “probability of adjustment” instead, to reflect what actually happens in the real world? All the sudden it doesn’t seem so bad; it simply raises the question of how much of an adjustment will be necessary, and when or under what conditions.

Similarly, the focus of generating retirement spending from retirement “income” creates other unnatural distortions, as retirees potentially stretch for income (especially in low-yield environments!) and introduce new risks, not to mention possibly confusing-yet-appealing-sounding retirement “income” products that are actually just returning principal and not income at all! If we talk about retirement “cash flows” instead, and move away from an income-centric conversation, it opens the door to looking more holistically at the retirement portfolio and how it can support retirement spending.

But perhaps the most crucial change in our language of retirement planning is simply to rename “retirement” itself. After all, when the concept of “retirement” was originally created, it wasn’t really meant to be an entire multi-decade phase of life without work, and recent research has found that stripping away work can for many retirees leave them devoid of purpose altogether, actually reducing happiness and well-being! Of course, that doesn’t necessarily mean “retirees” want to do their current job; it simply means they may want to choose work that is independent of the financial compensation it provides. So maybe it’s time to rename the goal of retirement planning altogether, and to recognize that “financial independence” from the need to work for money is the real goal of saving and investing?

Best Practices For Buyers Acquiring A Financial Advisory Firm In A Seller’s Market

October 20, 2014 07:01 am 2 Comments CATEGORY: Practice Management

As the average age of advisors creeps older every year, the industry has continued to predict an impending wave of advisors retiring and looking to sell their practices, leading to a massive buyer’s market for advisory firms. Yet thus far, data from FP Transitions suggests the number of buyers still outnumbers the sellers by a whopping 50:1, and the succession planning “crisis” has been little more than a mirage.

Nonetheless, a recent survey conducted by Aite Group and published by NFP Advisor Services suggests that advisory firm acquisitions may be happening far more than anyone realized, but are occurring primarily within wirehouses and large insurance-affiliated broker-dealers, and just not as much in the independent broker-dealer and RIA channels. On the one hand, this may be driven by the fact that large firms have had even more incentive to ensure a smooth transition to allow the parent firm to retain the clients; on the other hand, large firm acquisitions may also simply be driven by the fact that they are a closer-knit community and the majority of acquisitions seem to occur primarily through the existing personal contact network of the acquirer!

In addition, the Aite/NFP study also provides a rather unique glimpse into “what’s working and what’s not” in the world of advisory firm acquisitions, by comparing and contrasting the characteristics of deals and their subsequent implementation between firms that were happy with their acquisition, and those who later regretted it. The results paint a fascinating picture, with some firms patiently cultivating a network of potential firms to acquire, patiently evaluating and slowly vetting, but ultimately paying top dollar for quality firms and acting quickly to integrate the clients once the deal is consummated. By contrast, the study also finds that while many firms are discovering opportunities that “fall into their lap” when a firm approaches them to be acquired, often for a price that’s on the cheap, that these reactive deals are actually leading to the most problematic implementation, the lowest retention, and the worst satisfaction levels after the fact, despite their appealing price!

Weekend Reading for Financial Planners (Oct 18-19)

October 17, 2014 02:01 pm 2 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 the "robo-advisor" Betterment has launched an Institutional platform that will partner with Fidelity to offer a "robo" solution for advisors to use with their (smaller) clients.

From there, we have a number of practice management articles this week, including a look at new compensation models being explored by advisors who are looking to get away from the AUM model (or serving clients who simply don't have the assets to work on an AUM basis in the first place), examinations from two recent benchmarking studies about what top performing firms do that are different than the rest of the pack (including differentiating themselves with niches and specialization to support their pricing, and using "non-professional" support staff to enhance the productivity of their lead advisors), and an interesting article by Bob Veres looking at the wide range of changes being recommended to advisors and sharing his own take about what is and is not really important for advisors to focus on right now.

We also have a few more technical articles this week, from a review of target-date funds finding that many are becoming increasingly aggressive and equity-centric in the current low bond yield environment (with one fund as high as 94% in equities for someone in their 40s!), to an interesting profile of economic and retirement policy researcher Jeffrey Brown (who may not be familiar to most advisors but probably should be!), to an interview with Nobel price winner Bill Sharpe who has been increasingly focusing his current research time on the complex challenge of retirement planning. There's also an article looking at how, despite all the ongoing fears, health care inflation for seniors appears to be slowing, as the latest announcement of Medicare Part B premiums will be $104.90/month again for the third year in a row.

We wrap up with three interesting articles: the first is a comparison of popular risk tolerance tools FinaMetrica and Riskalyze, finding that one seems to be far better as a sales and prospecting tool for clients but the other may be more defensible in court; the second provides some tips on efficiency and productivity based on the latest research of behavioral finance expert Dan Ariely; and the last is a profile of venture capitalist and technology innovator Marc Andreesen, who created the first popular web browser and backed Twitter, Facebook, and AirBnB, and now sees opportunities for similar disruption in financial services (especially around how big banks charge for facilitating credit card and banking transactions, as "crypocurrencies" like Bitcoin gain momentum).

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including his take on the recent announcement that Betterment Institutional will partner with Fidelity, and how amidst the SEC's push for better cybersecurity with advisors they lost 200 of their own laptops with potential client data (oops!)! Enjoy the reading!

Why You Should Only Buy Insurance Protection And Annuity Guarantees Expected To Lose You Money (On Average)

October 15, 2014 07:01 am 7 Comments CATEGORY: Insurance

While no one likes to pay more in insurance premiums than they have to, an important fundamental principle of insurance is that in the end, there must be enough premiums (plus growth) to cover potential future claims (plus overhead and profits for the insurance company). Insurance coverage that is “too” cheap is actually risky, and coverage that is “expensive” is actually the most secure!

In fact, one of the most significant caveats to considering any form of insurance (or annuity) guarantee at all is if the insurance is not going to lose you money on average, it’s actually something to avoid. In other words, insurance guarantees should never be expected to make money on average for the policyowner, or the insurance company will lose money until it inevitably goes out of business and the guarantee will be gone anyway!

As a result, decisions to purchase insurance and/or seek out guarantees should always be viewed from the perspective of seeking to trade a small known loss to avoid a big unknown loss instead. The goal is not to finish with more money on average, but simply to shift the range of outcomes in a manner that increases the number of small losses and reduces the exposure to big ones that may be unrecoverable. So the next time you’re considering a type of insurance or annuity guarantee with a client, make sure you know why and how the coverage and guarantees are expected to lose money… and then decide if the trade-off is worthwhile anyway! And if you can't figure out how the guarantee will lose you money on average, it's a strong indicator that either you're missing a key detail and/or the guarantee is overpromising something it can't deliver, or the guarantee itself may be a mirage that the insurance company cannot possibly make good on in the end!

The Ongoing Crisis Of Advisor Differentiation: Once-Unique Value Propositions Are Now Advisor Table Stakes

October 13, 2014 07:01 am 6 Comments CATEGORY: Marketing

The essence of a unique value proposition is to answer the consumer question “what is it the value that you offer, and why should I buy it from you?” In other words, what is it that you uniquely do that can’t be gotten anywhere else, unless doing business with you? In an increasingly competitive advisory firm environment, having a clearly defined unique (and compelling!) value proposition is essential to getting clients to do business with you and not someone else.

Yet in a recent new study on advisor value propositions, Pershing Advisor Solutions finds that in reality, most advisor value propositions are not actually all that unique, nor are they necessarily delivered in a very compelling manner. Instead, advisor value propositions are rife with industry-specific jargon, and what are apparently intended as “differentiators” often describe what are little more than “table stakes” – the minimum required just to have a seat at the table and be considered a potential solution at all, but certainly not a unique and differentiated one that helps the advisor stand out from the competition.

In the past, providing customized, individualized advice solutions specific to client needs form a trusted, experienced, credentialed advisor may have been an effective way to stand out in a competitive landscape filled with “stockbrokers” and “insurance agents”. But going forward, the Pershing study results highlight that not only do advisors need to better describe the value they do provide, but they will also need to more clearly focus on how they can truly differentiate themselves beyond the minimum table stakes, whether it’s by delivering a genuinely unique client experience, providing services and solutions that really cannot be found elsewhere, or simply focusing in on a particular type of clientele that allows the firm to go deeper in its services and solutions than what any generalist can match.

Weekend Reading for Financial Planners (Oct 11-12)

October 10, 2014 02:01 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the latest in the ongoing saga of the CFP Board's compensation disclosure woes; the latest news is that another CFP certificant was accused of violating the fee-only rules by also owning an insurance company, but has avoided a CFP Board investigation by dropping his CFP marks, "resolving" the issue but raising questions about how this was even possible (as it violates the CFP Board's own Terms of Service to drop the CFP marks with a pending disciplinary issue) and potentially setting a dangerous precedent that encourages other CFP certificants to simply break the rules and then drop their marks if a complaint is ever filed so they can avoid any public discipline.

From there, we have a few practice management articles this week, including one article that looks at tactics firms are taking to attract talent given the shortage of young advisors coming into the business, another that reviews Fidelity's recent "Recruiting Redefined" study that finds the greatest challenge for bringing in talented young advisors may be the product-sales-centric focus of much of the industry and the fact that most college students aren't even aware of a potential career as a comprehensive financial planner, a third article that provides a good reminder of how establishing a succession plan with an existing staff member can avoid communications breakdowns that damage the firm, and a final article that explores how for firms that have focused on holistic advice and not "sales" the challenge now may be on to shift the firm's culture to promote more business development or face declining growth rates as the founders eventually wind down their own efforts.

We also have a few more technical articles this week, including a tale of woe from the tax court about how not do try to invest in real estate using your IRA, an article about the unique situations where it actually does make sense for a married couple to file tax returns separately and not jointly, a discussion of the importance of not just digital asset planning in general but especially for small businesses where digital assets can have significant value, and a nice retrospective look from the Journal of Financial Planning at the so-called "4% rule" as this month is the 20th anniversary of Bengen's seminal research article.

We wrap up with three interesting articles: the first looks at the rise of "prize-linked savings accounts" that pair together small savings accounts or CDs with a "bonus" lottery ticket for a small monthly prize to encourage savings behavior (as even if the person doesn't win, they still saved!); the second looks at the rise of patent trolls in the context of online financial planning and investment advisory tools and whether the "robo-advisors" may face a patent challenge; and the last discusses why a fiduciary standard is crucial to clean up the industry, as when standards are otherwise too low a few "bad actors" can actually drive away the good and legitimate businesses to the long-term detriment of consumers.

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 that Schwab may soon be rolling out a "robo-advisor" solution of its own (that would potentially be available to advisors using their platform!), a new digital estate planning assistance tool, and more. Enjoy the reading!

Qualifying A “See-Through” Trust As An IRA Designated Beneficiary – Conduit Or Accumulation?

October 8, 2014 07:01 am 7 Comments CATEGORY: Estate Planning

An IRA owner has the right to name whoever they wish to be the beneficiary of their retirement account. However, because Congress did not want to allow IRAs (and other retirement accounts) to continue indefinitely, after the original IRA owner passes away there are required minimum distributions (RMDs) that must be taken by the beneficiary, forcing the account to be liquidated over time.

Fortunately, though, Congress does allow those post-death RMDs to be drawn out slowly over the life expectancy of the beneficiary, at least where the beneficiary is a “designated” beneficiary that is a human being with a life expectancy to be stretched across in the first place. But a significant problem arises in the case of trusts named as beneficiary of an IRA – it’s impossible to stretch out RMDs over the life expectancy of an entity that is just “a piece of paper” and isn’t alive in the first place! As a result, leaving a retirement account to a trust potentially loses the ability to stretch the distributions out after the death of the original owner.

The good news, however, is that the Treasury Regulations actually do allow an IRA inheritance trust in certain circumstances to be treated as designated beneficiaries eligible to stretch post-death RMDs over life expectancy, by looking through the named trust to the underlying beneficiaries and using their life expectancies instead. The caveat, though, is that qualifying for “see-through” trust treatment requires the trust to be drafted properly, consider crucial decisions like whether to be structured as a “conduit” or “accumulation” trust, and at best may still entail the trade-off of less favorable income tax treatment to achieve other financial and estate planning goals!

The 8 Best Conferences For Financial Advisors In 2015

October 6, 2014 07:01 am 18 Comments CATEGORY: Conferences

As someone who will speak at almost 70 conferences this year, I've participated in nearly every major conference available for financial planners. Given that there are so many conferences, though, I know it can be incredibly difficult for most advisors to select the right conference for themselves each year, and I am often asked for recommendations about what I think the "best conferences" are to attend. Of course, what is "best" will vary from one advisor to the next, depending on their own needs and what they're looking for!

Accordingly, in 2012 I started to craft my own annual list of what I consider to be the "best-in-class conferences" for financial planners (in the US, and now with a suggestion for our international readers as well!), separated into categories for advisors to match to their needs. This year's conference categories are: Best Technical Content, Best Estate Planning, Best for Advisor Technology, Best Investment Management, Best for Advanced Practitioners, Best Overall Value, Best International Conference, and Best Practice Management. Excluded from the list in 2015 is "Best Virtual Conference" for the simple reason that increasingly, more and more existing conferences are becoming available for virtual attendees, eliminating the need for standalone virtual events!

Of course, the reality is that the conference season isn't even quite over yet for 2014; nonetheless, as we head further into the fall season, it's time to start planning for next year, especially since some January conference early bird registrations close soon! So I hope you find the details of this list (including some conference discount codes for readers of Nerd's Eye View!) useful for you to use as your own guide in setting your conference budget and selecting events to attend for yourself and/or your team for 2015!

Weekend Reading for Financial Planners (Oct 4-5)

October 3, 2014 02:01 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with some regulatory announcements, including ongoing efforts by FINRA to implement its "CARDS" analytical tool that would monitor investment activity in clients' accounts across the entire industry looking for inappropriate broker trades and recommendations, and a discussion of the potential paths the SEC may soon take to update the "accredited investor" definitions for the first time since 1982 (and raising the question of whether income and net worth are even appropriate measures to determine an accredited investor in the first place).

From there, we have a few practice management articles this week, including a prediction that the rise of the "mega-advisor" firm may soon present challenges for small independent advisors trying to compete, coverage of the recent buzz at the Deals and Dealmakers Summit that the amount of M&A activity in the industry may be 20X as much as widely reported, and a good discussion of what it really means for an advisory firm to have a true CEO (not just a founder who puts the title on their business card).

We also have a few more technical articles this week, from a New York regulator looking into whether Equity-Indexed Universal Life policies are being illustrated with unrealistically optimistic projections that aren't likely to come to fruition, to a good discussion of the events leading up to the departure of Bill Gross as advisors and clients across the country consider whether it's time to fire PIMCO from their portfolios, to an interesting discussion of the impact of time diversification and how it can legitimately lead clients to owning more equity exposure for the long run, and discussion of an emerging trend in long-term care insurance where carriers are increasingly asking about family history looking for clues about any potentially-genetically-inherited disease factors that would/should impact underwriting.

We wrap up with three interesting articles: the first looks at how to become a "super connector" as a means to build your network and advance your business/career; the second is a look at the "reverse mentoring" program being implemented with the executive committee at Pershing (and the benefits that come from getting a young, fresh perspective); and the last looks at how advisors interact with and communicate with clients, raising the challenging question of whether sometimes the biggest problem is not that clients won't act on advice, but that advisors need to learn better communication skills in how to deliver it in the first place.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including announcement of a high-profile (human) advisor firm that's launching its own online "robo-advisor" solution, to a discussion of the upcoming release of a big new version of Redtail CRM, and more! Enjoy the reading!