Nerd's Eye View blog

The Future Of (Post-CFP Advanced) Education For Financial Advisors – An Open Letter To Incoming American College President Bob Johnson To End The ChFC Vs CFP War

September 29, 2014 07:01 am 37 Comments CATEGORY: Planning Profession

The relentless march of technological change is slowly taking its toll upon undifferentiated financial advisors, casting a bright light of transparency on questionable products, commoditizing simple investment transactions and even somewhat more complicated portfolio construction, and forcing advisors to move up the value chain to providing real, substantive, high-quality financial advice to justify their cost. Yet at the same time, the push towards providing financial advice to solve complex problems creates a demand for advanced educational programs to provide advisors the knowledge they need to deliver those solutions.

Despite the opportunities created by this changing environment, though, the recent announcement by the American College of changes to its flagship ChFC program spent as much time continuing to fight its ill-fated ChFC versus CFP designation wars as it did talking about its own program – an odd juxtaposition given that the CFP marks now have 50% more designees than the ChFC, 5 times the consumer awareness, and for all the recent criticism that the CFP Board has taken regarding the enforcement of its compensation disclosure rules at least it has an enforcement mechanism to publicly sanction its designees or even revoke the certification, unlike the American College.

Against this backdrop, today’s blog post is about both the future of advisor education for all the institutions that teach financial advisors, and is an open letter to the American College in particular, its new leadership, and its board of directors, to take advantage of the unique opportunity presented with the organization’s transition to incoming CEO Bob Johnson to finally move past its ill-fated ChFC versus CFP designation wars, its hypocritical criticisms of the CFP marks that the organization itself teaches, and strategically reposition itself to support the emerging need for deeper post-CFP specializations and niche educational programs for financial advisors... or leave the door open once again for other institutions to step up.

Weekend Reading for Financial Planners (Sep 27-28)

September 26, 2014 02:44 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the shocking announcement that Bill Gross is leaving PIMCO 41 years after founding it and taking over as the bond manager for the Janus Global Unconstrained Bond Fund, it what appears to have been a "voluntary" departure just days before PIMCO was going to fire him anyway for "increasingly erratic behavior" and threats from multiple PIMCO executives that Gross must be fired or they would leave instead.

In further notable news this week, the SEC announced that it is investigated how PIMCO has been pricing illiquid securities in its BOND ETF and suggesting that its returns may have been overstated (the investigation has also been attributed as a contributing but not primary factor in Gross' departure), an article about a recent NASAA proposal that state-registered investment advisers may soon be required to establish a succession and business continuity plan (public comment period closes on October 1st), a summary of FPA's current membership and revenue situation (declining for several years but now stabilized) as shared with the media at last week's annual conference, and an announcement from the CFP Board that it will be launching a "Career Center" with a job board, internship listings, and more, to encourage young people to enter the financial planning profession.

From there, we have several technology and practice management articles this week, including a discussion of the current technology offerings from the "Big Four" custodians and what they're working on rolling out in the coming year, the increasingly challenging environment for smaller RIAs to find a custodial platform that will work with them after Scottrade Advisor Services recently increased their minimums and introduced a significant platform fee for smaller advisors, a profile of the new management at Scottrade that suggests their goal is to turn the "Big Four" into the "Big Five" with rapid growth for Scottrade, and reviews of the new Junxure Cloud CRM (which advisor technology guru Joel Bruckenstein describes as having been "worth the wait") and also the Oranj practice management and marketing technology platform.

We wrap up with three interesting articles: the first describes the ongoing rise of the "virtual advisor", a human advisor who uses technology and video chat to work with clients efficiently and cost effectively (and remotely) in a "location independent" practice; the second is an "expose" on the too-close relationship between the Federal Reserve Bank of New York and the banks it oversees (especially Goldman Sachs) as illustrated by a "whistleblower" Fed examiner who recorded 46 hours of conversations highlighting the issue; and the last is a look from venture capitalist and Wealthfront founder Andy Rachleff about why VC firms will plow extraordinary amounts of money into companies that are not currently profitable (hint: it's all about the potential of future compounding growth).

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including some highlights from this week's Finovate (financial services technology innovation) fall conference, and the Advicent (maker of NaviPlan) acquisition of Dutch financial planning software company Figlo! Enjoy the reading!

IRS Notice 2014-54 Acquiesces On Splitting After-Tax 401(k) Contributions For Roth Conversion

September 24, 2014 07:01 am 81 Comments CATEGORY: Taxes

While most people who contribute to a traditional 401(k) plan receive a tax deduction for their contributions, some 401(k) plans allow participants to make additional after-tax contributions over and above the deductible thresholds, up to the annual defined contribution plan limit. For those who have already maxxed out other available tax-deferred growth options, the after-tax 401(k) plan was better than nothing.

Upon retirement, though, many retirees sought to take advantage of rules that allow them to roll over their pre-tax 401(k) assets and take their after-tax contributions back, taking the two checks that the plan administrator provides them but rolling them both over – the pre-tax portion to a traditional IRA, and the after-tax to a Roth IRA in an effective tax-free Roth conversion. And the strategy only become more popular after the Pension Protection Act of 2006, which further opened the door to direct Roth conversions from 401(k) plans, and therefore the potential to directly convert “just” the after-tax check.

After years of fighting the strategy and claiming that the pro-rata rule should still apply to such conversions, the IRS has issued IRS Notice 2014-54, reversing its prior position and acquiescing to taxpayers who wish to roll over their 401(k) funds and proactively allocate their pre-tax amounts to the traditional IRA and the after-tax portion to a (tax-free) Roth conversion. While the rules are technically not applicable until 2015, the IRS has even acknowledged that it would be “reasonable” to rely on the approach now, making an open season for the strategy to split out after-tax 401(k) contributions for conversion effectively immediately.

In fact, it appears that the new IRS rules are so open in this regard, that they not only permit the free conversion of after-tax 401(k) contributions into a subsequent Roth IRA, but the availability of this conversion makes it more appealing than ever to make after-tax contributions into a 401(k) plan in the first place (at least after first obtaining the employer 401(k) match and maxxing out available pre-tax or Roth contribution limits). Will the new rules lead to a resurgence of higher-income individuals making after-tax contributions to a 401(k) plan, after maxxing out available alternatives, for the sole purpose of preparing to complete a future tax-free Roth conversion of the contributions down the road?

The Succession Planning Mirage And The Rising Need For Exit And Continuity Planning Of Lifestyle Practices Instead

September 22, 2014 07:01 am 10 Comments CATEGORY: Practice Management

As the average age of financial advisors creeps higher each year, and grows closer and closer to the traditional age of retirement, a growing chorus of voices have warned of the looming onslaught of advisors retiring, the lack of young talent to take over their firms, and thus a wave of advisory firms that will come up for sale resulting in a competitive a buyer’s market that will make advisors regret having waited to sell. Yet despite what has been portended by demographics, the wave of selling has not come, advisory firm merger-and-acquisition activity has remained relatively flat for years, and if anything the drive for larger firms seeking inorganic growth through acquisitions and tuck-ins has led increasingly towards a seller’s market, despite nearly all predictions to the contrary.

Given that industry studies still find the overwhelming majority of advisors have no succession plan (and aren’t taking the steps to create one), it raises the question of whether the entire succession planning crisis may actually be a mirage… for the simple reason that most advisors would be financially better off staying in their practices than selling them anyway, and many find their advisory work a professional vocation so personally fulfilling they wouldn’t want to leave it anyway… especially if the practice can be adjusted to better accommodate their later years’ lifestyle preferences.

Thus, while succession planning may remain relevant for a small subset of firms that really wish to pursue such a strategy and are prepared to execute it, perhaps it’s time for the companies that support financial advisors and the industry at large to recognize that the majority of advisors need support for exit and continuity planning, not succession planning. The focus should be on how to redesign a firm into a lifestyle practice, with ways to ensure that clients are well served even if an advisor stays in their practice until the very end, and that an advisor’s spouse or heirs might even receive some “terminal” value to the practice once they are gone (in addition to enjoying the cash flow from the business along the way)… rather than continuing to collectively attempt to “guilt” advisors into leaving a practice that they don’t want to personally or financially let go of anyway!

Weekend Reading for Financial Planners (Sep 20-21)

September 19, 2014 01:52 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the recent "Fiduciary Leadership Summit" in Washington DC, hosted by TD Ameritrade and the Institute for the Fiduciary Standard, highlighting "war stories" of consumers injured by gaps in the fiduciary duty for brokers and an interesting response by former regulator Robert Plaze that perhaps the best outcome is not a uniform fiduciary standard for all but simply that the brokerage industry needs its own standalone regulatory reforms. Also in the news this week is a new NASAA working group that will look at revising broker-dealer fee disclosures for consumers after acknowledging that today's fee disclosure documents are too long and confusing, and a recent survey by Gallup that finds "creating a financial plan" is one of the few financial issues that consumers consistently do rely on professional advice more than friends and family.

From there, we have several practice management articles this week, including one from United Capital CEO Joe Duran that the golden age for (small independent) RIAs may soon be ending with rising competitive forces putting the big squeeze on profits and margins, a response to Duran's bleak outlook from RIABiz's Brooke Southall who suggests that many of these competitors (from robo-advisors to Vanguard's Personal Advisor Services) are still ultimately just a drop in the bucket compared to the sheer size of the consumer investor marketplace, and a discussion from Mark Tibergien about whether some advisors actually need to get better at having the conversation with clients about raising fees instead.

We also have several more technical articles this week, including: a discussion of what the "true diversifiers" in a portfolio really are, and whether they're even necessary if there's a risk-managed approach to the equities themselves; a review of a recent T. Rowe Price survey suggesting that retirees may actually be more flexible and adaptable in their retirement spending than is commonly believed; and the last looking at the current use of Monte Carlo analysis, suggesting that perhaps one of our greatest problems is not the limitations of the tool itself but that many of today's Monte Carlo software tools do not provide a sufficient range of reporting on the outcomes beyond just the (insufficient) probability of success/failure alone.

We wrap up with three interesting articles: the first looks at how much of the disagreement amongst even the true finance experts may stem from the fact that our experience with investing and the markets can be dramatically impacted by the year in which we happen to be born (and therefore the investment returns and volatility we witness during our early formative years), and that many finance disputes may simply be a representation of two experts whose views are heavily biased and colored by their own (birth-year-sensitive) personal history and experience; the second looks at how the real significance of the robo-advisor trend may not be their actual competitive threat, but simply that they highlight what quality technology and a great client user experience looks like, and how lacking today's tools for advisors really are; and the last is an analysis from Wealthfront about the behavior of investors in active mutual funds versus index funds during market volatility, finding that passive investors are less prone to portfolio turnover during market volatility and suggesting that despite their lack of human advisors to hand-hold clients, many of today's (passively-based) robo-advisors may experience witness less client churn during the next bear market, not more.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including a summary of the first (Orion-Advisor-Services-sponsored) "hackathon" which brought together programmers from numerous advisor tech companies to try and build the best new useful relevant technology tools and integrations for advisors in just 48 hours! Enjoy the reading!

Valuation-Based Tactical Asset Allocation In Retirement And The Impact Of Market Valuation On Declining And Rising Equity Glidepaths

September 17, 2014 07:01 am 11 Comments CATEGORY: Retirement Planning

For retirees who are more concerned about running out of money in retirement than leaving a large inheritance behind, the optimal retirement asset allocation strategies shift from focusing on wealth maximization and owning as much in equities as you can tolerate (to provide the greatest return on average), to approaches that do a better job of preserving wealth in adverse scenarios (even if it costs excess upside when times are good).

This retirement approach of focusing on minimization to spending risks over maximization of wealth accumulation has led to a wide range of retirement asset allocation and product strategies, including the use of annuities with guarantees, bucket strategies with cash reserves, and most recently the “rising equity glidepath” approach where portfolios start out more conservative early in retirement and become progressive more exposed to equities over time as bonds are spent down in the early years.

The caveat of risk minimization strategies, though, remains the simple fact that most of the time, they turn out to be unnecessary, as the risky event never actually manifests. As a result, tools like Shiller CAPE that allow advisors to understand whether clients are more or less exposed to a potential decade of mediocre returns (which brings about the “sequence-of-return risk” in retirement) can be remarkably effective at predicting when it’s necessary to focus on risk minimization in the first place, and when wealth maximization may be the more prudent course.

In fact, as it turns out, market valuation measures like Shiller CAPE can actually be so predictive of the optimal asset allocation glidepath in retirement, that the best approach may not be to implement a rising equity glidepath or a static rebalanced portfolio at all, but instead to adjust equity exposure dynamically based on market valuation from year to year throughout retirement. While this kind of tactical asset allocation approach is not necessarily a very effective short-term market timing indicator, the results suggest nonetheless that it can help to minimize risk when necessary, take advantage of favorable market returns when available, and have some of the best of both worlds – albeit with the caveat that markets can still deviate materially in the short run from what valuation alone may imply regarding long-term returns!

Effective Succession Planning For Financial Advisors And The Problems With Advisor Compensation Based On Revenue Sharing

September 15, 2014 07:01 am 6 Comments CATEGORY: Practice Management

For years, industry commentators have been anticipating an “onslaught” of retiring baby boomer advisors who will begin to engage in succession planning en masse and sell their firms over the next decade. Yet year after year, the baby boomers get older, and the sellers don’t materialize; with an astonishing paucity of sellers to external buyers and an abundance of buyers, it remains a seller’s market for financial advisory firms.

Yet in a new book, David Grau (founder of FP Transitions, a firm that has potentially already been involved with more advisory firm sales than any other consultant or service provider in the industry today) makes the compelling case that for advisors to be focused on big headline external sales to third parties misses the real opportunity – an internal succession plan executed over a period of years or even a full decade, that ultimately delivers radically more to the founder than a third-party external sale ever could.

In order to harvest the greater long-term value from an effective succession plan, though, Grau points out that advisory firms are still too attached to the wirehouse-style “eat what you kill” revenue-based compensation, that simultaneously destroys value for the business owner and disincentivizes the next generation of owners from wanting to be successors in the first place. Instead, Grau suggests that firms need to shift from compensation based on top-line revenue to a greater focus on compensation built around bottom-line profits, that can ultimately help to both focus the business on maximizing its value, and truly incentivize the next generation of advisor owners to want to step up, buy in, and contribute towards – and be rewarded for – enhancing that long-term value.

Weekend Reading for Financial Planners (Sep 13-14)

September 12, 2014 02:57 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a call for better regulation of financial planning as a distinct calling unto itself, recognizing that in Massachusetts it's harder to get a license to be a cosmetologist than it is to become a financial planner! There's also an article discussing the recent rumored-to-be-on-a-fast-track NASAA regulatory proposal (now in comment period) that may require state-registered RIAs to adopt more substantive business continuity and succession plans for the protection of their clients.

From there, we have a few interesting new studies and articles on the so-called "robo-advisor" trend, including a Gallup poll that finds investors still prefer dedicated human advisors to financial website solutions by a 2:1 margin (and more affluent individuals favor the human solutions even more), a Spectrem Group study that finds for consumers who do plan to work in an online environment that the robo-advisors may actually be slightly preferable to human advisors engaged virtually (though there may be enough interest for both to succeed), and an interesting discussion from Mark Hurley about how ultimately the technology-will-replace-advisors threat isn't really any more dangerous today than it was in 1999 (when similar comments were made) and that ultimately much of the technology that backs today's robo-advisors will likely end out being used by the rest of the financial services industry (rather than continue to compete with it).

We also have several investment articles this week, including: a look at how some advisors are starting to adopt small allocations of Bitcoin into client portfolios; how Bitcoin does not really function (yet?) as a true currency but as a non-liquid investment asset may still improve risk-adjusted returns for portfolios (at least based on the historical track record for the virtual currency, which may or may not persist in the future); a fascinating look from Howard Marks of Oaktree at how true risk is more about the possibility of permanent loss of capital than about volatility, but that the truer measure of risk is also surprisingly difficult to quantify and apply effectively; and a discussion from Jason Zweig of the Wall Street Journal at the behavioral finance phenomenon of "shared attention" and the fact that who you choose to listen to and follow and get your information from can have a surprisingly powerful effect (good or bad) on your (investment) results.

We wrap up with three interesting articles: the first looks at how the only real way to stay competitive in today's environment is to be a continual learner, or else face stagnation and boredom that can undermine yourself and your company; the second discusses the five essential skills that planners must learn (as distinguished from the technical knowledge we must have to be competent) if we truly want clients to implement our financial advice (hint: it's all about the key skills that create true rapport and trust); and the last is a piece by industry commentator Bob Veres that takes an interesting look at the current regulatory environment and suggests that the real problem is not that we need to apply a new fiduciary standard to brokers but simply that the SEC has allowed the brokerage industry to drift too far from where it once was and should just do a better job enforcing the rules that were originally written which require a clear(er) separation of brokerage firms and investment/financial advice in the first place. Enjoy the reading!

Why Individuals Should File And Suspend Their Social Security Benefits – Reinstatement Of Voluntary Suspension Versus Retroactive Benefits

September 10, 2014 07:01 am 22 Comments CATEGORY: Retirement Planning

The Social Security file-and-suspend strategy has been used primarily for couples to coordinate the delay of individual retirement benefits (earning delayed retirement credits) while making a spouse eligible to begin his/her spousal benefits. It can also be used as a partial form of "undo" for a retiree who started benefits early, and later wishes to suspend them (at full retirement age) to earn delayed retirement credits (a benefits increase that can partially or fully offset the decrease triggered by electing benefits early in the first place).

However, the strategy to file and suspend can also be used as a proactive planning strategy for individuals, because it creates an opportunity for the retiree to subsequently "undo" the decision to delay and "retroactively" claim benefits back to the date they chose to file and suspend (e.g., full retirement age). Thus, for someone who is approaching age 66 and isn't certain about whether it's a good idea to delay or not, choosing to file and suspend allows them to wait until age 70 to make the final decision, enjoying the benefits of the delay if it still makes sense to do so, but having the opportunity to go back and claim benefits at 66 if there's a change in health or circumstances.

The key distinction is that while the standard Social Security rules only allow an individual to file for up to 6 months' worth of retroactive benefits, the file-and-suspend rules allow for a "reinstatement of voluntarily suspended benefits" that can undo the suspension going back anytime during the suspension period. Thus, choosing to file and suspend can effectively replace the normal 6-month retroactive benefits rules with a more favorable set of reinstatement rules, that at worst will simply leave the individual delaying until age 70 as was planned in the first place, but with the flexibility to change their mind for a few years along the way!

Financial Advisor’s Guide To New SEC Money Market Fund (MMF) Rules And Their Fiduciary Implications

September 9, 2014 07:01 am 1 Comment CATEGORY: Investments

This summer the SEC finally issued its long-awaited new Money Market Fund (MMF) rules, with the hopes of avoiding a future run on money markets similar to what happened during the 2008 financial crisis when the Reserve Primary (money market) fund "broke the buck" due to its holdings in short-term Lehman bonds and the Treasury and Federal Reserve had to intervene in the MMF marketplace to stem the panic by providing a series of temporary guarantee programs to protect shareholders.

After applying some modest initial reforms in 2010, and considering a wide range of potentially more significant money market reforms going forward - from floating NAVs to allowing for redemption fees and gates during times of crisis - the SEC has ultimately adopted a combination approach. As Duane Thompson explains in this guest post, the new rules from the SEC will provide for floating NAVs for institutional money market funds, redemption fees (up to 2%!) and gates (limiting investor liquidations) for retail and institutional funds that can be imposed by fund boards during times of financial stress, and reduced limitations for money market funds that invest purely in government bond holdings (so-called "government money market funds") due to their reduced riskiness (though governmental MMF boards can still potentially apply redemption fees and gates if necessary). Fortunately, the new rules also require money market funds to hold greater liquidity buffers (reducing the risk of problems in the first place), and dramatically reduce the permitted use of derivatives in many types of MMFs.

Nonetheless, the end result of these reforms may potentially be a significant shift into government money market funds to avoid these potential limitations, and while consumers and institutions may ultimately still prefer what will likely be the slightly higher yields of non-government money market funds, the decision to use them - and face the floating NAVs, or redemption fees and gates that may apply - will have significant implications regarding money market fund due diligence obligations for advisors. In fact, greater money market fund reporting requirements may leave advisors with little excuse for not having done effective money market fund due diligence in the future!