Nerd's Eye View blog

Weekend Reading for Financial Planners (August 30-31)

August 29, 2014 02:22 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with an interesting lawsuit that has been filed by "whistleblower" David Danon against Vanguard, suggesting that it is abusing its unique corporate structure to avoid any Federal and state income taxes that should be paid (to the tune of $1B of foregone Federal taxes in the past decade), in addition to implicitly giving it an unfair competitive advantage as a result.

From there, we have a few investment-related articles this week, including a discussion of whether the era of the stockpicker may be definitively coming to an end as Vanguard approaches $3 trillion of AUM and the expansive march of investment tools and technology makes "everyone" such a capable investor that there's not enough alpha left to go around, the emerging price war between established financial services companies (and financial advisors) and technology companies (e.g., robo-advisors) who are driving down the cost of a pure passive strategic portfolio that is regularly rebalanced, and a fascinating article finding that low-cost active managers really may be providing value (including Vanguard's own active funds) and that the real issue is not about active vs passive but simply high-cost versus low-cost.

We also have several technical financial planning pieces, from a great discussion by David Blanchett and Wade Pfau about how most of the criticisms of Monte Carlo are not actually faults of Monte Carlo but simply flaws in how our typical Monte Carlo tools are designed and used (and could be solved with better software tools and assumptions), to a look at the re-emergence of "jumbo" reverse mortgage loans after "smaller" HECM reverse mortgages have dominated the landscape for 5 years (though the new loans may still be too expensive to be competitive). There's also a good summary of the recent Social Security Trustees' Report, highlighting that Social Security is not as bad off as most suggest!

There are a couple of practice management articles as well, including how advisors can take advantage of the "small data" opportunities in their practices along with the "big data" solutions that are being built for them, some tips about processes/procedures to implement to avoid HR headaches as an advisory firm owner, and a nice guide on how to onboard a new employee in an advisory board.

We wrap up with three interesting articles: the first looks at whether the financial services industry needs to get better about communicating more visually and putting some "glamour" into solutions (without being abusive); the second is written by a so-called "0.01%er" about the problems with income inequality and making an interesting case for why a significant increase in the minimum wage could be good for both the middle class and capitalism; and the last paints a sad but disturbingly accurate picture of just how "strange" the financial services industry really is, in a country where doctors must attend medical school and lawyers must pass the bar - and even becoming a taxi driver in London requires passing a test that can take years of practice - but in financial services, "managing money requires little more than a desire to manage money" (and a very rudimentary licensing test)!

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including big changes for online data storage for users of Dropbox and a look at whether the latest Google Apps are making Microsoft Office less necessary than ever! Enjoy the reading!

Why Social Security Dependent Benefits For A Child Can Make It A Good Deal To Start Early And NOT Delay

August 27, 2014 07:01 am 65 Comments CATEGORY: Retirement Planning

For prospective and current retirees who are concerned that "unexpected" or extreme longevity may lead them to run out of money, there are few strategies more effective than the decision to delay Social Security benefits. The tradeoff - where payments are not received now, in exchange for higher payments in the future - is similar to buying an income annuity, or investing in a bond ladder that will begin liquidating in the future... except that the implicit "pricing" of the decision to delay Social Security is far better than any commercial annuity or bond yields available today.

The caveat to the approach, however, is that Social Security dependent benefits may also be available for those in their 60s who still have young children in the home - an increasingly common situation, between couples who start a family later and the rising divorce rate that has also led to a greater frequency of second marriages with young children. And the availability of dependent's benefits can significant diminish the benefit of delaying Social Security; while delaying does increase the individual's own benefits in the future, along with potential survivor benefits, waiting may also permanently forfeit children's benefits that won't be available down the road (as the children may be too old by the time the retiree reaches age 70).

In light of this situation, planning for Social Security benefits with "young" children in the home (those under age 18) needs to be done more carefully. In some situations, the children may be so close to 18 that it's still worthwhile to delay. In other scenarios, the opportunity to file-and-suspend at age 66 - starting both spousal benefits and activating dependent benefits as well - may be the best way to go. But in many situations, the potential dependent and spouse's benefits are so large - even with the "maximum family benefit" limitations - that the best strategy, even in the long run, is to start benefits as early as possible (especially if the Earnings Test will not apply!).

Why Spend Money On Marketing When You Can Get Paid To Market Your Advisory Firm?

August 25, 2014 07:01 am 4 Comments CATEGORY: Practice Management

Traditional marketing like advertising can be expensive – so expensive, that few advisors ever engage in such tactics, relying instead on less expensive marketing approaches like generating referrals from existing clients and centers of influence, or focusing on a niche where the advisor can build a brand and demonstrate expertise that attracts niche clients to them through an inbound marketing strategy.

Another alternative, though, is to deliberately craft a limited scope solution for clients, valuable enough that clients will pay for it, while giving the advisor the chance to demonstrate their expertise and begin to establish a relationship. For instance, offer clients the opportunity to get a customized, individualized Social Security analysis to help facilitate their Social Security timing decision for a flat $200… and then offer clients who find the meeting valuable the opportunity to work with the advisor on an ongoing, comprehensive basis, at the advisor’s usual “full solution” cost.

The end point of such an approach is that many “clients” will just pay for the lower tier service and stop before becoming top tier clients, only while a few will choose to pay for the advisor’s full comprehensive solution. However, in an environment where advisors already do “approach talks” and “introductory meetings” with prospective clients – for free, and while trying to avoid giving any “real value” for fear of giving away too much of what clients are supposed to pay for – arguably the tactic of simply trying to deliver value and real solutions from the start can be equally or more effective in demonstrating expertise and establishing a relationship… except now, the advisor is actually getting paid to market themselves!

Weekend Reading for Financial Planners (August 23-24)

August 22, 2014 02:55 pm 3 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the interesting announcement that TD Ameritrade has launched a program that will refund advisory fees for clients in their Amerivest managed account if their portfolio is down for two consecutive quarters, following on a similar "accountability guarantee" program launched by Schwab late last year, and raising the question of whether such fee rebates may be an emerging trend and/or competitive threat against advisors or just a lightweight marketing promise that few clients will actually ever exercise.

From there, we have several practice management articles this week, including: tips and techniques for better growing referrals from Centers of Influence (hint: make it about just serving current clients better first, and referrals second); why the industry needs to back off its urgent pleas to advisors about succession planning and recognize that it's simply not what most want to do; a look at the consequences of "dithering" about engaging in continuity planning as an advisor; and a review of two new designation programs recently launched to help advisors bone up on their Social Security planning techniques.

We also have several investment articles, from a Rob Arnott discussion about what "smart beta" should mean (and how to better distinguish the legitimate smart beta strategies), to a discussion from Robert Shiller about the sustained elevation of cyclically-adjusted P/E ratios over the past 20 years and whether it's a permanent or temporary phenomenon, to the recent announcement that Vanguard is now closing in on a whopping $3 trillion of AUM (and its Total Stock Market Index recently become the world's largest mutual fund as well). There's also an article about how "expensive" it actually is to pay insurance premiums on a monthly or quarterly basis rather than annually, with markups equivalent to APRs in the (sometimes high) double digits!

We wrap up with three interesting articles: the first looks at how many financial planners fail to engage prospective clients by appealing too much to their rational side alone and not recognizing that many buying decisions - including the selection of a financial advisor - has a significant emotional component; the second explores how a simple "client service calendar" can become a tool to help communicate an advisor's ongoing value to current (and even prospective) clients; and the last provides a nice reminder about all the ways that financial planners can add "alpha" to a client's life beyond just adding to portfolio returns.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including the explosive growth of Laser App which now has 115,000 advisors using 32,000 "paperless" online forms! Enjoy the reading!

Why A Roth Conversion May Be A Bad Idea Even If Taxes Are Higher In The Future

August 20, 2014 07:01 am 30 Comments CATEGORY: Taxes

With years of ongoing Federal budget deficits and a large and growing national debt, there is a common perception that "at some point" tax burdens must rise to address the issue. While the timing is not certain, the belief that higher tax rates may be inevitable has become a strong driver for many advisors and clients to do whatever they can to manage that future tax exposure. And one of the most popular strategies: take the tax exposure off the table altogether, by contributing to Roth accounts and doing Roth conversions, with the goal of paying taxes now when rates are lower and not in the future when they may be higher.

A closer look at paths to tax reform that can address Federal deficits though, reveal that while tax burdens in the aggregate may be higher in the future, marginal tax rates will not necessarily be higher. In fact, most tax reform proposals, from the bipartisan Simpson-Bowles to the recent proposals from Representative Camp, actually pair together a widening of the tax base and an elimination of many deductions with a lowering of the tax brackets! In addition, proposals to shore up Social Security and Medicare often involve simply raising the associated payroll taxes that currently fund them... tax increases that would result in a higher tax burden on workers, but no increase in the taxation of future IRA withdrawals. And the US remains one of the only countries that does not have a Value-Added Tax (VAT), which could also increase the national tax burden without raising marginal tax rates.

In the end, the simple reality is that there are many paths to higher tax burdens in the future that don't necessarily involve higher marginal tax rates on IRA withdrawals. Which means ultimately, advisors should be very cautious about doing Roth conversions - especially conversions at rates that are 33% or higher - and the best possible thing to do with a pre-tax IRA may simply be to continue to hold it, and wait for tax burdens to increase... because when paired with a compression of tax brackets that leads to lower marginal tax rates, not converting to a Roth could actually be one of the best long-run tax savings strategies around!

Is GIPS Compliant Performance Reporting Becoming A New RIA Differentiator?

August 18, 2014 07:01 am 8 Comments CATEGORY: Practice Management

Historically, financial advisors that help clients with their investment decisions have attempted to differentiate themselves by everything from the merits of the products they offer and the companies they represent, to their expertise and experience, to the personal financial advice they can deliver outside of the portfolio. Yet despite how standard it is in the institutional world, surprisingly few RIAs that work with consumers actually aim to differentiate with their actual performance results and track record... due in no small part to the difficulties in standardizing the process of reporting results on a wide range of clients with different needs, different goals, and different timing of when they became a client.

To create some consistency in performance reporting, the CFA Institute has helped to establish Global Investment Performance Standards (GIPS). While the process has primarily been adopted by institutional advisors so far, it appears some RIAs are deciding that in an era of increasing competition, actually being willing to stand by a performance track record and be accountable for it can be an effective differentiator - especially in a world where standardization of investment process and technology to implement model portfolios consistently for clients really does make it feasible to do so.

Ultimately, it remains to be seen how widespread the trend of RIAs adopting GIPS compliant reporting will become, especially since the costs are not trivial - in terms of both staff time, necessary technology infrastructure, along with consulting and even third-party verification. But arguably it doesn't take a lot of advisors choosing to do so before the pressure is on everyone else to go through with it as well; few advisors will want to be in a competitive position for a client as "the only one" who isn't willing to share their performance track record, where a lack of transparency and unwillingness to be accountable for results can easily be interpreted as hiding poor performance. On the other hand, the reality is that some advisors may find that once a consistent performance reporting standard is applied by following the GIPS compliance rules, their results really aren't competitive... which itself may be an interesting force that impacts the industry in the coming years as well!

Weekend Reading for Financial Planners (Aug 16-17)

August 15, 2014 01:25 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts out with some new research from the CFP Board about why it is that so many students who go through financial planning programs don't sit for the CFP exam... and find that the sheer cost of both the exam itself (at $595) and the typical exam review class along with it, may be a key impediment, especially given that so many young planners still have limited income and may be digging out from their student loans; students who ended out at firms that paid for the test on their behalf were significantly more likely to follow through on the exam and become CFP certificants.

From there, we have a few practice management articles this week, including: an overview of the latest results from the FA Insight practice management study showing that advisory firms are enjoying record productivity and profit margins but may be too complacent about future growth challenges; a good overview of the challenges to consider for advisors who are thinking about "breaking away" from a broker-dealer (considering everything from needing access to capital, to complying with the Broker Protocol); and a good overview about how to get started in building a social media following once you've set up your initial accounts.

We also have several investment research articles this week, from a look at the value of continuous tax loss harvesting (which may be far less valuable than commonly believed, over just executing loss harvesting transactions once a year when rebalancing), to a discussion from Vanguard about whether indexing is getting "too big", and a look from Morningstar's fund flows finding that actively managed funds are only seeing inflows in a few specialized areas (international funds, allocation and target-date funds, and alternatives) with 2/3rds of all net flows going to index funds.

There's a trio of retirement-related articles too, including the upcoming launch of a big Federal government program to encourage phased retirement (which could become a template for the private sector as well), some tips for advising clients on Medicare decisions, and a good discussion by retirement researcher Wade Pfau about the circumstances in which the "4% rule" may be too high, or too low.

We wrap up with three interesting articles: the first raises the question of what it means to fulfill an investment adviser's fiduciary duty when there is no human advisor relationship and the portfolio is implemented by a "robo-advisor"; the second looks at the various threats that have been a danger to advisors over the decades (including most recently, the robo-advisors) and concludes that the natural outcome of these threats is not the 'death' of advisors but their forced evolution to continue higher up the value chain; and the last is an in-depth article looking at the severe racial diversity problem in the world of financial planning, and some of the efforts that are slowly getting underway to try to tackle the issue.

Enjoy the reading!

Accelerating The Rising Equity Glidepath, With Treasury Bills As Portfolio Ballast?

August 13, 2014 07:01 am 23 Comments CATEGORY: Retirement Planning

Conventional wisdom suggests that retirees should own a “moderate” amount of equity exposure at the time of retirement – to help their portfolio grow and keep up with inflation for a long time horizon – and then slowly decrease their exposure to equities over time as they age and their time horizon shrinks. However, recent research has suggested that the optimal approach might actually be the opposite, to start with less equity exposure early in retirement when the portfolio is largest and most exposed to a significant market decline, and then “glide” the equity exposure slightly higher each year throughout retirement.

As it turns out, though, a better approach may be to accelerate that rising equity glidepath a bit further; after all, the last bit of equity increase in the last year of retirement isn’t really likely to matter. Instead, the better rising equity glidepath approach is to just increase equities in the first half of retirement until it reaches the target threshold, and then level off. For instance, instead of gliding from 30% to 60% in equities over 30 years, glide up to 60% over 15 years and then maintain that 60% equity exposure for the rest of retirement (assuming it’s consistent with client risk tolerance in the first place).

Notably, accelerating the glidepath also reduces the amount of time that the portfolio is “bond-heavy” – a particular concern for many in today’s low-interest-rate environment. In the end, though, it may be even more effective to simply take interest rate risk off the table by owning short-term bonds instead; while such an approach leads to less wealth “on average”, in low-return environments rising equity glidepaths using stocks and Treasury Bills can actually be superior to traditional portfolios using stocks and (longer duration, e.g., 10-year Treasury) bonds, even though Treasury Bills provide lower yields!

Financial Planning and Building An Advisory Firm With An Abundance vs Scarcity Mindset

August 11, 2014 07:01 am 20 Comments CATEGORY: Practice Management

For some clients, the focus of financial planning is just about protecting the limited resources they’ve got. For others, it’s about maximizing the potential of what their financial resources and their lives can become. The mindset of clients as they approach the world can have a significant impact their behavior.

Yet this mindset of abundance versus scarcity is not unique to clients; in fact, as financial planners our view about the world also shapes our behaviors. For instance, some become active as volunteers in the industry to get involved, give back, and even network for referrals, while others see little purpose in getting involved in a professional association with “the competition” – even though the reality is there are still more than enough clients out there for everyone.

The challenge is that, just as with clients, an excessive fear of scarcity – whether its assets and financial resources, or potential clients for the advisory firm to grow – can actually lead to outcomes that result in scarcity. Extremely conservative investment clients can actually find that inflation undermines their own financial goals, and advisors who are so fearful that there are too few clients can end out wasting time trying to convince mismatched prospects to work with them (even though it won’t be a good fit in the end). So what’s your mindset, and how does it shape your (business) behavior?

Weekend Reading for Financial Planners (August 9-10)

August 8, 2014 02:24 pm 4 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the upcoming "Fiduciary September" events being facilitated by the Institute for the Fiduciary Standard, as both the SEC and the Department of Labor continue their fiduciary rulemaking considerations. Also this week was the CFP Board's Program Directors conference, which highlights the latest successes (registered programs are up 13% in the past 4 years, with bachelor's programs up 40%) and also the ongoing challenges (schools are still struggling with improving student enrollment, retention through the program, and follow-thru to taking the exam); the CFP Board is exploring new initiatives to try to support programs and shore up these shortfalls.

From there, we have a few retirement articles this week, including the latest research from Morningstar's David Blanchett on weighing immediate annuities against the new breed of longevity annuities, a discussion of an emerging trend for states to consider launching automatic-enrollment IRAs after Federal legislation continues to stall, and a deep look at the various enrollment periods that must be considered for clients who are either enrollment in Medicare now or plan to delay but want to enroll in the future without incurring a financial penalty.

We also have several practice management articles, from a look at a new bank that is lending to advisors to facilitate acquisitions and internal succession plans (to the tune of $100M in loans in just the past 18 months!), to some tips for associate advisors who feel like they've hit a wall and can't figure out how to advance themselves to a lead advisor position, to how our psychological tendency to want to reciprocate and repay debts can be used to grow a business. There's also an article on the crucial importance for advisors to have not just a succession plan for the long run, but a continuity plan in the short run, to avoid leaving clients in the lurch if there is an unexpected health event - told from the perspective of Dan Candura, a financial planner who recently found out at age 64 that he has inoperable prostate cancer and had no continuity plan in place.

We wrap up with three interesting articles: the first is a discussion from advisor tech guru Joel Bruckenstein about the challenges in the advisor tech industry that "keep him up at night", including complacent advisors underinvesting in technology and vendors that are still doing a poor job at integration amidst a lack of industry data standards; the second is a look from the Wall Street Journal at an increasing number of advisors who charge "termination fees", raising the question of whether such practices are appropriate, or even legal for fiduciary advisors that may be putting an undue burden on unhappy clients; and the last is from industry commentator Bob Veres, exploring how "unusual" advisory firms really are from most "normal" types of small businesses, and the unique challenges that advisors face in navigating and growing their businesses successfully.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including the latest offering from yet another robo-platform-for-human-advisors solution! Enjoy the reading!