Nerd's Eye View blog

What Is The Difference Between A Robo-Advisor And Getting Online Financial Advice?

July 14, 2014 07:01 am 5 Comments CATEGORY: Practice Management

As the financial services industry slowly but steadily becomes more tech-savvy and technology-enabled, including the adoption of online models for the delivery and implementation financial advice, the line of where human financial advice ends and "robo" automation begins is becoming increasingly blurry. Or simply put, what's the difference between a "robo-advisor" providing online financial advice, and any number of human advisors who do the same thing virtually using online meeting and collaboration tools like Skype, GoToMeeting, and web-based financial planning software?

Given that both humans and robo-advisors can deliver advice in an online medium, ultimately the key distinction is not actually about being online at all, but about how the industry itself is crafted and delivered: in the end, does the advice the client gets come from a human, or a (human-designed) computer algorithm? The difference matters not only in terms of the advice itself, but also the underlying cost structure; as the robo-advisors themselves advertised in their early days, a key reason for their ability to deliver low-cost solutions to consumers was their elimination of "expensive" human financial advisors.

In the end, it remains to be seen whether or what forms of financial advice consumers will prefer to receive from an algorithm versus another human being (especially given some of the potential cost differences between the two), though what's becoming clear from the attempts of both in the online world is that building trust online to get clients in the first place is difficult in a low-trust industry like financial services; simply put, online financial advice is not an "if you build it, they will come" kind of business. Nonetheless, some of the lines about where each can excel are now being drawn, as robo-advisors increasingly focus on narrow, specific problems that can be addressed with technology and an algorithm alone - commoditizing those solutions in the process - while (virtual) human advisors are increasingly driven to financial planning as the "anti-commoditizer" by providing a more comprehensive financial advice solutions that delve into the complex realities that consumers face when viewing their holistic financial picture.

Weekend Reading for Financial Planners (July 12-13)

July 11, 2014 03:34 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the results of the latest RIA Benchmarking Study from Schwab, finding that business continues to be very good in the world of RIAs, with more than 1/3rd of firms doubling in the past 5 years and profits at all-time highs (since the survey began in 2006). In fact, ironically business for RIAs seems to be so good, that in a separate story Schwab is reported to be expanding their own offering, raising both the pricing (despite the emerging low-cost "robo-advisor" trend) on their internal Schwab Private Client offering up to 0.90% and the depth of advice provided to Schwab clientele, in a move that makes Schwab Private Client look increasingly similar to (and a potential competitor to?) the independent RIAs that custody with Schwab as well.

From there, we have a few technical articles this week, including a summary of what's changed (and what still hasn't) in planning for same-sex couples in the year since the Windsor decision from the Supreme Court, a coming change to the reverse mortgage rules for couples that will protect some consumers but take away planning choices from others, and an interesting look from Nobel Prize winner Robert Merton at the current state of retirement planning in the US and how our shift from defined benefit to defined contribution plans may have dangerously shifted how we think of what's "safe" and "risky" in the world of retirement income in the first place.

We also have several practice management articles, from tips about how to find your first clients if you're just starting your firm as a new advisor, to some "lessons from the trenches" of an advisor who just went through his first year as a solo practitioner, to some recent research about how advisors (and investors) anticipate communication to change in the coming years (think: big rise in video conferencing), and a look at how advisors who are approaching or hitting "the wall" of client capacity can step back and figure out how many clients they really have capacity to handle in the first place.

We wrap up with three interesting articles: the first looks at how we can make better investment decisions by deliberating reading information from and surrounding ourselves with people who disagree with us (forcing more deliberate thought about whether our investment views are really valid or not); the second, in celebration of last week's Independence Day, looks at the story of Haym Solomon, the broker who perhaps exemplified the best of what Wall Street can achieve by becoming the financier that ensured the United States had the funds necessary to field an army and win the Revolutionary War; and the last discusses an interesting new study looking at what does and doesn't lead to greater happiness in retirement, suggesting that the amount of wealth and income really needed for happiness may be far less than most people expect (which means retirement might not be so far off for most baby boomers after all!).

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including a new "Technology Spot Audit" service for advisors who need some help figuring out where they stand with their own software solutions! Enjoy the reading!

Why The New Qualified Longevity Annuity Contract (QLAC) Regulations Don’t Mean Much For Retirement Income… Yet?

July 9, 2014 07:01 am 32 Comments CATEGORY: Retirement Planning

In recent years, a new form of retirement income annuity solution has been gaining visibility: the longevity annuity. A "cousin" to the more familiar immediate annuity, the goal of the longevity annuity is similar - to provide income for life - but the payments do not begin until years (or even decades) after the purchase. As such, these "deferred income annuities" can provide significantly larger payments when they do begin - e.g., at age 85 - in light of both the compounded interest and the mortality credits that would accrue over the intervening time period.

However, a fundamental complication of the longevity annuity is that if retirees want to use retirement account dollars but the payments might not begin until as late as age 85, there is a direct conflict with the required minimum distribution rules that compel payments to begin at age 70 1/2. To address this challenge, the Treasury has issued Treasury Regulations under 1.401(a)(9)-6 that resolve this conflict, declaring that as long as a longevity annuity meets certain requirements, it will be deemed a "Qualified Longevity Annuity Contract" (QLAC) and automatically be deemed to satisfy the RMD rules even though payments don't begin until later.

While the new Treasury Regulations may be a boon to annuity companies that wish to sell longevity annuities, though, it's unclear whether the new rules will real impact anytime soon, for the simple reason that longevity annuity purchases have been growing but still represent barely 1% of all annuity purchases; to say the least, consumers have not been banging down the door to buy such contracts, in their IRAs or otherwise. In fact, given that most consumers are reluctant to buy immediate annuities where they surrender their lump sum liquidity to receive payments for life, it's unclear why they would feel better about a similar contract with payments that don't begin for decades! And in the end, the actual internal rate of return on longevity annuity payments - even for those who live to age 100 - is not necessarily very compelling yet compared to available investments or even delayed Social Security alternatives. Nonetheless, when interest rates eventually rise, and as longevity annuity pricing becomes more competitive, the payout rates for longevity annuities will likely rise as well... and the new Treasury Regulations do at least open the door to longevity annuities inside of retirement accounts if they eventually become more compelling!
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7 Reasons Your Associate Advisor/Paraplanner May Already Be Looking To Leave

July 8, 2014 07:01 am 6 Comments CATEGORY: Practice Management

One of the most common challenges that advisory firm owners face is the fear that paraplanners or associate advisors they hire will just stay with the firm long enough to get trained, and then leave to start their own practices. And the reality is that such "Hire, Train, and Leave" scenarios do occur from time to time. Yet the reality is that all too often, this fear actually becomes a self-fulfilling prophecy; after all, if you limit your investment of time, effort, and training into your new advisor and don't give them opportunities for advancement out of fear that they'll leave, it virtually ensures that they will!

In today's guest blog post, Alan Moore - a "young" Gen Y advisor himself and co-founder of the XY Planning Network that helps young planners develop viable businesses working with their young peers - lays out some of the most common reasons that today's paraplanners and associate advisors are breaking away from the firms they started with to launch their own instead. And as Alan reveals, the common reasons articulated for why advisors leave really are often driven by firm owners who, in the process of fearing that their advisors might leave, may actually be accelerating the outcome they're trying to avoid!

Fortunately, the reality is that many of these challenges are avoidable; by investing in young advisors and giving them opportunities to grow and advance and serve the clients they wish to serve, they will have little reason to leave and instead can become productive and successful members of the advisory team. In fact, for many firms struggling to figure out how to bring down the average age of their clientele, working with young advisors - who often wish to work with their own young peers - creates win-win opportunities for both the advisor and the advisory firm, though executing effectively will require many advisory firms to open up to the reality that the business model that has worked best for serving retiring baby boomers may not be the right business model for serving the young clients of the future!

Why It’s A Bad Idea For Most Advisors To Pursue Their Clients’ Next Generation Heirs

July 7, 2014 07:01 am 12 Comments CATEGORY: Practice Management

As the legend goes, when bank robber Willie Sutton was asked why he robbed banks, his answer was "because that's where the money is." Similarly, it's really no surprise that in recent decades, financial planning has become increasingly focused on serving baby boomers as they transition into retirement; once again, "it's where the money is." And as the age wave continues and baby boomer retirees will inevitably begin to pass away in large numbers in the coming decades, many industry consultants are already recommending that advisors shift their focus to where the money will be next: in the hands of their clients' children and grandchildren, with whom advisors had better begin to craft relationships and expand services now, or risk losing their assets as their clients pass away.

Yet the ironic reality is that while financial planning is focused on clients, a business that shifts its focus to the clients' next generation descendants simply because they will someday becomes heirs to the assets is arguably becoming more focused on the client's pot of money than on the actual clients themselves! After all, imagine a high-quality nursing home that decided, due to the death of its affluent clientele, it was going to pursue a strategy of making its accommodations more appealing to the children and grandchildren of its elderly residents. Does anyone really think that a young person will choose to live in their (grand)parent's nursing home, regardless of whether the facility is "tech-savvy" and has "young staff they can relate to"? Of course not. And why would it be any different for a financial planning firm engaging in the same strategy!?

Ultimately, the point here is not that advisory firms should never serve a younger clientele. In fact, as financial planning is so baby-boomer-centric, there is a tremendous opportunity to reach a grossly underserved Gen X and Gen Y demographic! But if the goal is to serve a younger clientele, advisory firms should really focus on serving younger clients, taking the necessary steps of segmenting the advisory firm, its pricing, its staff, and its services, to meet the needs of that clientele, and not simply pursue them because that's where their (former) client's pot of money landed! And for firms that aren't really ready to create a new segment of their business to serve younger clients properly, the simple solution to dealing with attrition of retiring clients is not to pursue their pot of money to the next generation, but to simply stay focused where they are and find new retiring clients instead!

Weekend Reading for Financial Planners (July 5-6)

July 4, 2014 02:06 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with an interesting new advisor survey showing that the number of face-to-face client meetings being held is already starting to decline, with some meetings being replaced with communication alternatives from larger social events to email and newsletter distributions to regular contact via social media; the end result is client communication that is more frequent and more timely but also more targeted for relevance and allowing the advisor to be more efficient.

From there, we have several practice management articles this week, including a review by Bob Veres of the recent FPA NexGen conference and the major themes emerging from young advisors, a look at what motivates young Millenial employees from the perspective of a "robo-advisor" who hires them to build the company's technology platform, tips from practice management consultant Angie Herbers about how advisors must learn to recognize that what was effective to get them to where they are may not work to get to the next level, a guide from the Journal of Financial Planning about how to actually build a strategic business plan for your existing advisory firm step-by-step, and a great cover story from Financial Planning magazine about the rising trend of wire fraud targeting advisors and what to do about it.

We also have a few investment-related articles, including a discussion of how much advisors and their clients may be giving up (and may have lost already in the past several years) by investing in short-term bonds waiting for interest rates to rise, a study by Wade Pfau about whether it's reasonable to haircut long-term returns when doing straight-line financial planning projections to account for sequence-of-return risk, and some ideas about how to implement a covered call strategy for clients who want to protect against risk or generate more "income" cash flows for retirement.

We wrap up with three interesting articles: the first looks at a recent survey of 700 advisors about how they define success and what it takes to get there (key points include that having the right mindset is essential, but success is most commonly defined by levels of personal engagement, client engagement, and team engagement in the firm); the second is a reminder that while there are clearly many things that computers and robots can do better than humans, there is still a lot that humans do better; and the last is a fascinating look at whether we perhaps don't give enough credence to rules of thumbs and instead rely far too much on impossibly complex analyses that don't actually improve (and may even worsen) the outcome.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end! Enjoy the reading!

Why It Rarely Pays To Wait On Taking Withdrawals From A Variable Annuity GLWB Rider – A Case Study

July 2, 2014 07:01 am 17 Comments CATEGORY: Annuities

Variable annuities with "living benefit" riders that provide retirement income guarantees have been increasingly popular over the past 15 years, and especially in the aftermath of the financial crisis of 2008. The basic idea of such Guaranteed Living Withdrawal Benefit (GLWB) riders is relatively straightforward: to allow policyowners to remain invested in the markets with a chance for upside, while still having a guaranteed floor (in the form of a benefit base against which withdrawals can occur) that itself may grow over time (e.g., at 5%/year). Yet this potential for the benefit base and associated guaranteed income payments to increase over time itself raises a challenging question for retirees who own annuities with GLWB riders: is it better to begin withdrawals sooner rather than later, or let the guarantees continue to grow and withdraw later instead?

While it seems that many retirees prefer to do the latter and wait - perhaps in no small part due to the confused belief that their cash value is guaranteed to grow at 5%/year, when in truth it's simply their benefit base against which withdrawals can be taken - a deeper analysis reveals that in the end, most retirees with a GLWB rider may do little more than pay a lot in annuity costs to receive a guarantee to just spend their own original contributions and nothing more. The challenge lies in the simple fact that because GLWB riders extract any withdrawals against the policyowner's own cash value first, often the time horizon it takes to actually reach the point where the policyowner has worked through their own cash value and into the insurance company's pocket via the guarantee is actually longer than the client's own life expectancy! In other words, most clients are just receiving their own money back and may literally die before ever seeing a dime of the insurance company's money under a GLWB rider!

Accordingly, it turns out that for those who do have annuities with GLWB riders, the best course of action may actually be not to wait, and instead to tap the annuity for permitted withdrawals as soon as possible (to the maximum allowed under the contract). If the funds being withdrawn aren't needed, they can be moved on a tax-deferred basis via a 1035 exchange, or rolled over to an(other) IRA (in the case of a qualified annuity); nonetheless, the simple fact remains that, with only a few exceptions, the best way to maximize the value of a GLWB rider is to not wait and let it grow at all, as the benefit increases just aren't enough to offset the shortened time window of life expectancy that results from waiting in the first place! Instead, the best course of action is to actually try to deplete the annuity as quickly as possible, in an attempt to reach the point where the policyowner can get a "return" from the insurance company (and not just the policyowner's own original funds) to earn a benefit for the annuity expenses that are being paid all along!

Succeeding As An Introverted Financial Planner Amidst The “Extrovert Ideal”

June 30, 2014 07:01 am 18 Comments CATEGORY: Personal/Career Development

The past century in the US (and much of the western world) has witnessed the rise of the "Culture of Personality" where Americans increasingly focus on how others perceive them; the extroverted ideals of charisma, salesmanship, and an outgoing nature as celebrated as key traits of leadership, and introverts are... well, encouraged to be more like extroverts.

Yet a growing base of research suggests that the extroverted ideal may not be all it's cracked up to be. While extroverted leaders tend to have bigger salaries than introverts, they don't necessarily produce better business results, and in fact some suggest today's increasing focus on extroverted leadership may be leading to an increased amount of risk-taking and reward-seeking behavior (behaviors correlated to extroversion) amongst the highly extroverted executives of some of the biggest companies in the world. In turn, a recent new book entitled "Quiet: The Power of Introverts In A World That Can't Stop Talking" makes the point that perhaps we should get better at recognizing the value of introverts as well.

Notwithstanding the rise of the introverts, within the context of financial planning in particular, it seems that the extrovert ideal still reigns supreme, given the focus of financial planning as a "relationship business" that necessitates extensive interaction and deep bonds between advisors and clients. Yet even here, the reality is that despite misconceptions, introverts are not necessarily shy, and introversion is not necessarily about being antisocial but simply about interacting differently in social environments; in fact, the preference of introversions for more intimate one-on-one settings suggests that introverts might even be especially well suited to form the deep personal connections that support some of the best financial planning relationships!

As a strong introvert myself (yes, it's true!) I find the growing research around introverts to be quite fascinating, and the more I look around the more I find that financial planning may be populated with far more introverts than anyone might have first suspected. But in the end, whether you're an introvert yourself, or simply trying to figure out how to better work with, manage, or relate to one, Susan Cain's "Quiet: The Power of Introverts In A World That Can't Stop Talking" is a fascinating read with a fresh perspective on what introverts can bring to the table, and how introverts can try to function better in what - at least for now - is still a very extrovert-centric environment.

Weekend Reading for Financial Planners (Jun 28-29)

June 27, 2014 02:01 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts out with a big announcement by NAPFA that the fee-only organization is capitulating to the CFP Board on the definition of "fee-only" and will be changing its membership criteria to align with the CFP Board's own compensation definitions, eliminating the previous option for members to have an up-to-2% stake in a commission-related entity.

There are also several other regulatory-related articles this week, including FINRA's decision to withdraw proposed Rule 2243 that would have required brokers to disclose to clients the compensation they receive for switching broker-dealer firms (though the rule may be re-proposed later this year), a warning from Laurence Kotlikoff that the SIPC protection consumers rely upon for their brokerage accounts in the event a broker-dealer fails may be less secure than most believe, and a discussion from industry commentator Bob Veres about whether Wall Street has drifted too far away from its fundamental societal purpose of helping businesses to access capital through the capital markets.

From there, we have a few practice management articles this week, including a look at where and how digital marketing fits within the context of a typical advisor's referral marketing efforts, a discussion of financial services technology startup Motif Investing and its efforts to impact the ETF marketplace for consumers and advisors, and a look at how Amazon and Google may start to disrupt the delivery of financial services products by offering basic term life insurance directly to consumers with online portals and local kiosks where medical examinations can be completed on the spot for nearly-immediate coverage.

We also have a few more technical articles, from a discussion of the different ways that advisors are trying to adapt the 4% rule (and some of the caveats of trying to do so), why retirees who think they might ever need a reverse mortgage in the future should consider establishing one now instead, and how the real problem with accumulators trying to save may be less about our spending habits on coffee and brand names vs generics and more about our unrealistic expectations about how much house, car, and education we can afford.

We wrap up with three interesting articles: the first is written by a venture capital firm about how they view the opportunities and pitfalls for creating a company to "disrupt" financial services; the second is a fascinating look at the recent Pew Research study on political polarization that finds the country really is becoming more polarized (though not necessarily more extreme), and that the trend may get worse before it gets better; and the last highlights a series of "TED"-style talks from the recent Raymond James national conference, where successful advisors who have built strong advisory firms share their own insights and experiences.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end! Enjoy the reading!

An Inherited IRA Is Not A “Retirement” Account For Bankruptcy Protection Under Clark v. Rameker Supreme Court Case

June 25, 2014 07:01 am 4 Comments CATEGORY: Retirement Planning

The bankruptcy code exists to ensure the orderly resolution of situations where the debts and obligations of an individual exceed their assets and their ability to pay their creditors. As a matter of public policy, though, the function of bankruptcy is not merely to facilitate the liquidation of an individual's assets to satisfy their debts, but also the determination of what assets should be protected/exempted even in bankruptcy to allow them to maintain a basic standard of living, in recognition that truly forcing people to liquidate all of their assets to satisfy their debts may simply leave them impoverished wards of the state, ultimately relying on the government and fellow taxpayers for support. Accordingly, the bankruptcy code often protects key assets like a personal residence/homestead, along with retirement accounts.

In the new Supreme Court decision of Clark v. Rameker, though, the courts have acknowledged that while the bankruptcy code is intended to protect the retirement accounts of debtors, it is not meant to protect the inherited IRAs that debtors may have been bequeathed by someone else who, by definition, will clearly no longer be using it for their own retirement. Noting that inherited IRAs do not permit contributions, have ongoing distribution requirements regardless of age and retirement, and have no early withdrawal penalties associated with them, the unanimous Supreme Court decision acknowledged that inherited IRAs are effectively "freely consumable" by the beneficiary, and thus should be freely available to the creditors of the beneficiary as well.

For those who were counting on the bankruptcy code to protect an inherited IRA, the Supreme Court decision will now leave them exposed. From a proactive planning perspective, the Clark decision will likely make it far more appealing for spousal beneficiaries to roll over inherited retirement accounts rather than leaving them as inherited IRAs, and non-spouse beneficiaries may increasingly prefer to inherit retirement accounts via a trust on their behalf, taking advantage of the "see-through" trust regulations to ensure the inherited IRA can still stretch its distributions to the trust itself. On the other hand, the acknowledgement by the Supreme Court that a retirement account effectively ceases to be a preferential account (for asset protection purposes at least) after the death of the original owner also raises the question of whether Congress' recent proposals to curtail the use of stretch IRAs altogether and force most beneficiaries to use the 5-year rule may soon come to pass as well!