Nerd's Eye View blog

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.

Are Profit Margins For Financial Advisors Too Generous, Or Are AUM Firms Actually Not Profitable Enough To Survive The Next Bear Market?

November 17, 2014 07:01 am 14 Comments CATEGORY: Practice Management

While early adopters of the assets-under-management (AUM) model got started in the late 1980s or early 1990s, the model only really began to become widely adopted in the early 2000s. Yet as the AUM model has become increasingly popular, and firms have had time to build, the “typical” advisory firm has grown significantly, from an average of only $25M of AUM in 2002 to more than $200M of AUM in 2013. And with an average profit margin of about 22%, the typical advisory firm owner with an AUM practice is enjoying record take-home pay.

Yet the caveat is that as advisory firms on the AUM model have grown, their growth rates seem to be slowing, a combination of both the ongoing crisis of differentiation for advisory firms, and the simple fact that as the firm gets bigger the denominator of the growth rate fraction is difficult to overcome; after all, adding “just” $4M of new assets a decade ago would have been double-digit organic growth, yet the same new asset flows yielded barely a 4% growth rate for a typical firm in 2009 and would be less than a 2% growth rate for the average firm today!

The significant danger of this situation is that advisory firms with now-low growth rates will not be able to grow through the next bear market as they have in the past. And in fact, at an average profit margin of “just” 22% and the risk that the next bear market could lop off 25% or more from a firm’s assets and revenue, the reality is that not all advisory firms may even survive the next downturn! Or at least, not without laying off significant staff or forcing owners to stop taking any profits and actually plow money back into the firm just to ensure its survival. To say the least, the next bear market may be the worst one ever for advisors and their firms!

These risks – which seem somewhat inevitable, given that a market downturn will eventually happen, and so many advisory firms are too large to just grow their way through it – mean advisory firms should be focusing, now, on whether they have sufficient flexibility to their overhead costs, other means to stabilize revenues, or enough profit margins to absorb the next market decline when it comes. While many have been critical that advisory firms are “too profitable” and due for some competition in today’s environment, the reality is that judging profit margins after a 5-year bull market may not be the best measure, and in fact the greatest risk for most firms may be that their profit margins are still too small to withstand the next bear market when it comes along!

Weekend Reading for Financial Planners (Nov 15-16)

November 14, 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 recent interview with the CFP Board where it reiterated its focus on growing the number of CFP certificants (as there are still more CFP professionals over the age of 70 than under the age of 30!), but also that the organization is committed to not lowering its standards in the process of pursuing growth. Also in the news this week are some highlight articles of the recent T3 Enterprise conference for advisor technology in large firms (which included some new product launches relevant for independent advisors, too).

From there, we have a few practice management articles this week, including an interesting look from the latest FA Insight benchmarking study showing how the challenges that advisory firms face are quite different depending on the size of the firm (reinforcing the notion that what got the firm to where it is may not move it forward from there), a discussion from Philip Palaveev about what advisors should be thinking about when they consider whether to merge with another advisor and form an ensemble firm (or not), a profile of some advisor study groups and their value (even and especially for firms that are already growing), and a discussion of how financial planning software is starting to change to allow planning to be done quicker and faster.

We also have several more technical articles, from a new study showing that long-term care needs may be more frequent but much shorter duration than typically thought (which raises the question of whether today's long-term care insurance is the right type of coverage), to a discussion of IRS Announcement 2014-32 which discusses transition rules to the new once-per-year IRA rollover rules taking effect in 2015, and a look at the new Society of Actuaries 2014 Mortality Table that could impact everything from more favorable RMD calculations for retirement accounts to making lump sum pension rollovers more valuable for those who wait a few more years.

We wrap up with three interesting articles: the first looks at how once you include the volatility of career earnings for Millennails and the relative stability of Social Security and pension income for Baby Boomers, the reality may be that the ideal portfolio should actually be quite similar for young adults and retirees; the second discusses how it's not enough for advisors to have clients who are "satisfied" but that ideally clients should be "engaged", which requires advisors to adjust from thinking about what they offer to clients and instead consider what they can create with clients instead; and the last looks at how it can actually be a good business idea to wear the same kind of outfit every day (and yes, it will give you insight into why I always wear a blue shirt!).

And also be certain to check out the videos at the end from Bill Winterberg, highlighting some of the news and buzz from this week's T3 Enterprise advisor technology conference! Enjoy the reading!

Managing Sequence Of Return Risk With Bucket Strategies Vs. A Total Return Rebalancing Approach

November 12, 2014 07:01 am 35 Comments CATEGORY: Retirement Planning

If there’s one fundamental takeaway that’s been drawn from the research on safe withdrawal rates, it’s the fact that market volatility really matters during the retiree withdrawal years. Even when long-term returns average out in the end, if the sequence of volatile returns is unfavorable, there is a danger that ongoing distributions during the “bad” years early on could deplete the portfolio before the “good” years ever show up.

As a result, many advisors and their clients use strategies that will avoid taking distributions from asset classes like equities during down years – for instance, setting aside “buckets” as a reserve against market crashes, and/or creating a series of “decision rules” that might simply state outright that equities will only be sold if they’re up, otherwise bonds are liquidated instead, and cash/Treasury bills will be used if everything else is down at once.

Yet when such a decision-rules strategy is paired with simple rebalancing, it turns out that the outcome is no better than merely managing the portfolio on a total return basis without the decision rules at all! The key, as it turns out, is that rebalancing alone already has an astonishingly powerful effect to help avoid unfavorable liquidations, as the process systematically ensures that the investments that are up (the most) are sold, and the ones that are down (the most) are actually bought instead! Which means in the end, we may not be giving rebalancing nearly the credit it deserves to accomplish similar – or even better – results than buckets and decision rules alone, and that such approaches are better purposed as explanatory tools for clients than actual systems for generating cash flows in retirement!

Using Kolbe, MBTI, & Other Personality Profile Tools To Advance Your Career As A Financial Advisor And Help Build Your Advisory Team

November 10, 2014 07:01 am 11 Comments CATEGORY: Personal/Career Development

Being a financial advisor is complex, whether in an employee role working with clients, or as an entrepreneur building an advisory firm. Success requires drawing on a wide range of strengths and talents, to the point that as an advisory firm grows, it’s eventually necessary to hire more people and build teams to round out the services provided and ensure that everything is getting done that needs to be done.

Unfortunately, though, for many advisors building a team is difficult, for the simple reason that as human beings we tend to like and build rapport with those who are very similar to us… yet in most cases, the best hires we can make (or partners we can work with) are those who have complementary skills that support us, not a skillset that merely duplicates what we already do. In other words, the people we tend to most want to hire are the people just like us who we should really not be hiring (unless you're really, truly trying to hire your replacement)!

Accordingly, an increasingly common “best practice” for hiring and building teams is to use various types of “personality profiles” – assessment tools that help us to better understand our strengths and weaknesses, and the strengths and weaknesses of others, to build teams where the whole can be worth more than the sum of the parts.

At the same time, though, personality profiles can also help us reflect upon our own strengths and abilities, understand if our own career track has gotten off track, or whether our businesses need to be reshaped to put in a different position where we can play a more productive role. The simple goal of it all in the end – by spending as much time as we can focusing on our strengths and doing what we do best, the happier we will likely be, and the more success we can find!

In point of fact, I am often asked how I’m able to be so productive in everything that I do amongst my various businesses… and the answer is that I’ve spent a great deal of time and energy over the past several years trying to continually reshape my roles to play to my strengths, and to manage my weaknesses by hiring staff to delegate to, or partners to work with. In today’s article, I highlight some of the personality/work-style profiling tools – from Myers Briggs (MBTI), to Kolbe, to StrengthsFinder – that have helped me to find the path that I have… and I hope they’re helpful to guide you to find your highest and best use, too!

Weekend Reading for Financial Planners (Nov 8-9)

November 7, 2014 03:01 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with an article highlighting the recent dispute between the CFP Board and (former) CFP certificant Nigel Taylor, who surrendered his CFP certification after an allegation that his firm was in violation of the "fee-only" compensation disclosure rules... and has, in the process, highlighted a critical concern regarding whether the CFP Board has the same scope to enforce its compensation disclosure rules against a firm in the way it does against individual CFP certificants.

From there, we have a large number of practice management and career development articles this week, including: how the effort that potential employees put into the process of applying for a job with you may be more important than their resume and background and experience in the hiring decision; a pair of articles that provide suggestions and tips on how to hire (young) advisors, and build a process around doing so; how advisory firms must learn to shift from focusing on rainmakers to grow and instead adopt firm-wide marketing strategies that allow everyone to participate and support the growth process; tips for young advisors who find themselves rising in their firms and becoming a Millennial manager for the first time; a look at how many young advisors are adopting a "career portfolio" by diversifying income streams across multiple business and freelance endeavors; suggestions on how to evaluate whether your client service team is actually doing a good job servicing clients; and a look at how different "mercenary or missionary" cultures in advisory firms can impact their growth and success over time.

We wrap up with three interesting articles: the first looks at how the financial blogger conference FinCon may be a good template for how advisor conferences need to change to gain better engagement and attendance from young planners; the second look at why it is so difficult to get new clients to make a change to a new advisor, and how the biggest key to success may not be about better communicating your value (although that matters too!) but simply showing them how you will make the process of change itself as easy and hassle-free as possible; and the last provides an interesting reminder that while it's important to be conservative in helping clients to their financial goals, planners should be cautious not to superimpose their own risk and concerns as planners onto their clients' lives, or the advisor risks causing the client to leave a large inheritance but fail to enjoy their wealth with the time they had to enjoy it!

And also be certain to check out the videos at the end from Bill Winterberg, highlighting some of the news and buzz from this week's Schwab IMPACT conference! Enjoy the reading!

Goals-Based Financial Planning Is Impossible Without First Evaluating The Possibilities

November 5, 2014 07:01 am 18 Comments CATEGORY: General Planning

From the rapid growth of goals-based financial planning software like MoneyGuidePro, to the recent announcement that even legendary wirehouse Merrill Lynch will be focusing on a goals-based planning approach, financial planning is on the rise, and is increasingly focusing around an approach of identifying and understanding client goals, and then crafting a plan to help the client succeed in achieving them.

Yet at the same time, the reality is that in practice the goals-based approach doesn't always go as smoothly as hoped. Some clients haven't crafted their goals yet in the first place, while others have goals that are wildly unrealistic and force planners to be the bearers of bad news. Often the goals-based planning process can get mired down in countless iterations of alternative "what if" plans, culminating in a giant physical tome that clients aren't committed to and is never read again after being presented away.

But perhaps the fundamental problem with goals-based planning is simply that it puts the cart before the horse; clients shouldn't be selecting the goals to pursue until they understand what the possibilities are in the first place! Which means in turn, perhaps the best thing that can be done with financial planning software is not use it as an analytical tool to craft a plan to achieve hypothetical goals that may or may not even be realistic, but instead to use the software interactive with clients to explore the possibilities of multiple scenarios and understand the trade-offs just to arrive at what the goals should be in the first place. Once the possibilities have been selected, realistic goals can be chosen, and then a more productive series of financial planning recommendations can be delivered for implementation!

What (Traditional) Financial Advisors Can Learn From Venture Capitalists And Robo-Advisors About Lifetime Client Value

November 3, 2014 07:01 am 7 Comments CATEGORY: Practice Management

As financial advisors increasingly shift from their transactionally-based roots to providing ongoing financial advice (and being paid an ongoing fee for doing so), the value of getting a new client is changing dramatically. While in the past the “value” of a client was little more than the commission earned on the transaction they did, in a world where many advisory firms retain 95%+ of their clients, the lifetime value of a client over time could be as much as 20X that amount!

In fact, the lifetime value of an ongoing client relationship is so high, that advisory firms could arguably spend far more on marketing, business development, and (extra) services for clients at no cost, simply to accelerate client referrals, growth of the business, and to increase retention rates that further improve the lifetime value of the client and the economics of the business. Yet despite this opportunity, the typical advisory firm spends barely more than 2% of its revenue on marketing, and often charges separately for each “value-add” service (which can actually discourage clients from taking advantage of it!) to ensure clients are similarly profitable each and every year.

By contrast, the “robo-advisor” firms have been heavily focused on just reinvesting into the solutions they provide clients to stir word-of-mouth (i.e., referral) marketing and improve client retention, and are raising significant funding from venture capital firms that recognize advisory services are so profitable in the long run because of the high lifetime client value that it doesn’t matter if these firms generate no profits in the near term as long as the growth continues! Of course, most “traditional” advisory firms don’t have access to the capital that robo-advisors do, but the point still remains that perhaps today’s financial advisors could learn something from robo-advisors and their venture capital funders about recognizing the significance of high lifetime client value and how to (re-)invest in their advisory firms for long run business value and not just short-term profitability!