Nerd's Eye View blog

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!

Understanding Sequence Of Return Risk – Safe Withdrawal Rates, Bear Market Crashes, And Bad Decades

October 1, 2014 07:01 am 18 Comments CATEGORY: Retirement Planning

Watching a portfolio experience market volatility in the first few years of retirement can be terrifying to a new retiree, raising legitimate questions of whether there’s a danger that early declines plus ongoing withdrawals could lead to a retirement spending shortfall. And as the safe withdrawal rate research has shown, that danger is real – in fact, it’s been dubbed the “sequence of return” risk to retirement spending, a recognition of the reality that even if returns average out in the long run, it doesn't matter if ongoing withdrawals deplete the portfolio before the “good” returns finally show up.

Yet the caveat is that while sequence of return risk is real, it’s not necessarily just about the danger of getting a severe bear market on the eve of retirement. In fact, a deeper look at the data reveals that there is remarkably little relationship between returns in the first year or two of retirement, and the safe withdrawal rate that can be sustained in the portfolio… even if retirement starts out with a market crash.

Instead, it turns out that the true driver of sequence of return risk and safe withdrawal rates are the returns that the retiree earns over the first decade – and specifically, the real returns over the first decade, that provide an indication of whether the retirement portfolio will have produced enough real growth to keep up with inflation-adjusted spending for the rest of retirement. Fortunately, though, bad decades of returns are not entirely random, and instead can be reasonably predicted by long-term market valuation trends, providing retirees with at least a few tools to manage the dangers of sequence of return risk through adjusting asset allocation in retirement and setting a reasonable initial withdrawal rate in light of the market conditions that exist – and the potential for a bad decade of returns – when their retirement begins.

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!