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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!

3 Ways Financial Advisors Must Change To Survive The Commoditization Of Robo-Advisors

June 23, 2014 07:01 am 12 Comments CATEGORY: Practice Management

As so-called "robo-advisors" continue to grow, offering their services to more and more consumers at a modest 0.15% - 0.35% cost, the question arises whether such services will ultimately be a threat to traditional advisors. Can human advisors survive in a world where robo-advisors commoditize the cost of passive strategic portfolio construction down to almost nothing? What can today's advisors do to fend off the threat?

A closer look at the robo-advisors, though, reveals that many of the tools and strategies they implement are not actually unique, and can be implemented effectively by human advisors as well. For instance, advisors that utilize model portfolios and implement with "intelligent" rebalancing software can already offer most of the continuous-monitoring automated rebalancing and tax loss harvesting offer by robo-advisors today. And human advisors can also go beyond just offering investments, providing a wider array of personal financial planning services, and augmenting the relationship with technology tools from account aggregation and financial dashboards to online collaborative financial planning software and "meeting" with clients via tools like Skype and GoToMeeting that allow them to maintain relationships in a highly efficient manner.

As advisors evolve, the landscape of the future may look less like robo-advisors threatening human advisors directly, and more like robo-advisors commoditizing certain parts of what today's advisors deliver, forcing traditional advisors to adapt and either get far more efficient ("do as they do"), or move up the value chain with financial planning advice and deeper relationships, or all of the above, to continue to keep their costs aligned to the value they actually deliver. While this transition isn't impossible - in fact, it's similar to the one advisors have gone through as they moved away from being paid for stock implementation with the rise of online discount brokerage - advisors who continue to lag in the implementation of technology and/or add little beyond the raw implementation of a passive strategic rebalanced portfolio may find it increasingly difficult to grow and compete at a reasonable price, while those who adopt the tools, technology, and techniques of the robo-advisor themselves - and then build on top of it with financial planning services and technology-augmented relationships - will find themselves best positioned to continue to survive and thrive.

Weekend Reading for Financial Planners (Jun 21-22)

June 20, 2014 05:01 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts out with a concerning warning that regulators appear to be shifting from "just" fining firms to actually requiring them to admit public guilt and make an example of individuals; while on the plus side, this may be good pressure on some firms to clean up their act, it also raises fears for advisory firms that making (too many) mistakes could cause them to become an example case as well. We also lead off with two interesting articles on the current independent broker-dealer landscape, including the activity of the big firms at the top, and what the small firms are doing to try - to varying degrees of success - to stay competitive amidst a competitive environment and rising regulatory/compliance costs.

From there, we have a few practice management articles this week, including a great reminder from Roy Diliberto of the reasons why some advisory firms have incredibly high (98%+) retention rates, an interview with Financially Wise Women advisor and social media activist Brittney Castro about how blogging and social media have helped to grow her practice, and a look from industry commentator Bob Veres at the emerging new trend in advisory business models: monthly retainers.

We also have a few investment-related articles, from a fascinating look at how in the long-run markets can still have better very-long-term returns in high valuation environments that low-valuation ones (e.g., the 30-year return starting in 1929 was actually higher than the 30-year return beginning in 1980!), to a discussion of whether advisors aren't giving enough acknowledgement to the value of bank CDs as a fixed income investment in today's environment (given the penalties to 'break' a CD to reinvest at higher rates is a much lower effective duration than bonds with similar yields), and some recent research on risk tolerance finding that while risk tolerance is relatively stable, investor perceptions of risk do appear to shift with the market environment in a dangerous fashion.

We wrap up with three interesting articles: the first provides tips from advisor and blogger Barry Ritholtz about how to "curate" your own feed of investment and financial information to manage the firehose of information available today; the second is a discussion from Bob Seawright lamending the lack of clear "best practices" on financial advice and the incredible inconsistency from one advisory firm to the next (which in turn can lead advisors to unwittingly fall back to delivering advice based on their biases); and the last is a look at how the rise of software is beginning to threaten many professions (not just financial planning), and how "robo-advice" of all sorts - from medicine to law to financial planning - may change the role of professionals in the coming years.

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!

Don’t Save 10% Of Income, Spend (Just) 50% Of Every Raise And Systematically Save More Tomorrow!

June 18, 2014 07:01 am 28 Comments CATEGORY: Retirement Planning

The approach of “save a percentage of your income” is a staple of retirement planning. While much debate exists about the exact ideal percentage, the concept is relatively straightforward – have savings to be one of the slices of your income pie, ideally automate the process with an ongoing percentage of your income that always gets saved first, and you’ll be well on your way to retirement.

Yet the reality is that saving something like 10% of your income also implicitly means you’re spending the other 90%, and continuing to do so over time means you'll also be saving (only) 10% and implicitly increasing your standard of living by 90% of ever raise you receive in the future. As a result, your standard of living rises as fast as your retirement savings, which means the amount needed to reach retirement gets larger and larger given the retirement costs to be supported, and in the end it’s surprisingly difficult to ever reach retirement at all as the goal forever outpaces the savings to reach it!

By contrast, an alternative approach is to try to spend “just” 50% of each pay raise you receive in the future (implicitly saving the other 50%). The end result of such an approach is that increases in the standard of living are more controlled and rise far more slowly, savings grow exponentially (to more than 20% of income within just a decade, even from a starting point of 0%!), and you can even retire early… all while feeling like your lifestyle is steadily rising as you’re still committed to spending more every year, just not increasing as rapidly as saving 10% of your income (and spending the rest)!

Summer Reading List of “Best Books” For Financial Planners – 2014 Edition

June 16, 2014 07:01 am 9 Comments CATEGORY: Personal/Career Development

Once again, the school season is wrapping up around the country, and it's time for a slowdown in the advisory business, summer vacations, and a lot (or at least a little!) more time for relaxing and reading books.

As an avid reader myself, I know I'm always eager to hear suggestions of good books to read, and I suspect many of you are often looking for ideas as well. Accordingly, I maintain a list of my top recommended books for financial advisors, and last year I launched my first "Summer Book Reading List" that was very well received, so I'm updated it again this year (at least, for those of you who are up for reading non-fiction books for fun!). The 2014 edition includes a wide range, from a few books about marketing and practice management, to a couple in the realm of psychology and behavioral finance, and a few other non-fiction reads as well.

I hope that you find this suggested reading list to be helpful... and that you share your own suggestions of what you're reading in the comments at the end of this blog post!