Nerd's Eye View blog

The Rise Of The Financial Planning Academic

April 28, 2014 07:01 am 5 Comments CATEGORY: Planning Profession

The roots of financial planning are in insurance agents and stockbrokers who sought out a way to deliver better advice and guidance to their clients. Similarly, the roots of financial planning education have long been in "adult education" certificate programs that took experienced and active advisors back to school to gain the educational knowledge they needed to sit for the CFP exam and earn their CFP certification.

Over the past decade, though, we have witnessed the emerging rise of the "financial planning academic" - pioneering students who went through the first Ph.D. program from Texas Tech (supported in large part by an early $2,000,000 grant from the CFP Board with the specific vision of supporting a growing population of financial planning academics), earned their doctoral degrees, and are now beginning to go forth and establish undergraduate, graduate, and Ph.D. programs at other universities across the country. As the trend continues and the Texas Tech/CFP Board vision is fulfilled, the number of university-based financial planning programs continues to grow, and financial planning is well positioned to gain more academic credibility.

And as the financial planning academic community continues to grow, so too are the resources serving them. From the Academy of Financial Services, to the recently (re-)introduced academic track at the FPA annual conference, to the CFP Board's latest round of recently announced academic initiatives, including a new "think tank" financial planning research center and also a new academic Journal, financial planning is well positioned to continue its drive forward towards increasing academic rigor and recognition... including not only a rising volume of college-educated financial planners but perhaps spawning some research that will slay a few financial planning sacred cows and help to advance not only the financial planning body of knowledge but how it is applied by practitioners as well!

Weekend Reading for Financial Planners (Apr 26-27)

April 25, 2014 04:14 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 news in the CFP Board's lawsuit with the Camardas... which is that there is no news, the CFP Board is "still working on" going through more than 60,000(!) documents to prepare for discovery, and that the CFP Board may have already racked up 2,000 hours' worth of legal fees at an estimated cost of $600,000, preparing for a case that hasn't even gotten underway in court yet. Given that both the CFP Board and the Camardas are asking that the opposing party pay all the legal fees, the case may potentially be spectacularly expensive for the losing party, in addition to any other ramifications from the outcome.

Beyond that news, this week's readings include several articles related to retirement research, including a look at whether "dynamic" asset allocation strategies based on market valuation may lead to more sustainable retirement income than just rebalancing to the same static portfolio each year, a discussion of the current landscape of retirement preparedness for baby boomers (which suggests that while the average baby boomer is in danger, in practice there is an increasing gap between the retirement "haves" and "have-nots"), an overview of the "2 schools of thought" on retirement income planning (probability-based versus safety-first) and the differences between the two retirement planning approaches, a study of whether small-cap value stocks are as good for retirement income portfolios as they are for accumulation portfolios, and a study on the best time to annuitize a managed portfolio for retirement income that finds at best retirees should be waiting until their 70s if not later (or never).

We also have a few investment-related articles this week, from a look at whether the commonly discussed long-term benefits from rebalancing may actually be overstated, to an examination of whether it really makes sense to own commodities futures as a diversifier or return enhancer in a world where commodities themselves theoretically just rise on average at the pace of inflation (generating no real return). There's also an article that provides some good basic due diligence questions to consider whenever you're evaluating one of the increasingly popular "tactical" managed-ETF portfolio strategies.

We wrap up with three interesting articles: the first examines some recent research from Cerulli Associates which finds, contrary to common wisdom, that being referred is only a key factor for 1-in-9 affluent investors choosing an advisor, and that (by a small margin) "reputation" is actually the most common driver of the advisor selection decision; the second is a profile in the NY Times of an investment adviser who started out 8 years ago as a stock-picker but, despite some reasonable success, ultimately decided that using ETFs and index funds and managing holistically was what clients really needed; and the last by industry pioneer Roy Diliberto on how the world would be different if he could be "King for a Day" and set things right for the financial planning profession... with a lot of changes that will resonate with today's financial planners. Enjoy the reading!

Active, Passive, Strategic, Tactical – What’s Your Investment Management Style?

April 23, 2014 07:01 am 15 Comments CATEGORY: Investments

Historically, the active vs passive divide has been primarily a question of how to invest within an asset class. Is it better to utilize an active manager who will try to outperform an index (at the risk of underperforming it), or simply buy the index itself in the form of a fund that at worst should simply “underperform” by the margin of a very small fee. Either way, most investment managers will still implement a remarkably similar asset allocation – regardless of the active vs passive divide – based on the principles of Modern Portfolio Theory.

Yet a deeper look at MPT reveals that in reality, it may have never been intended as a model for strategic asset allocation in the first place. Markowitz himself advocated in his original research that MPT should not be implemented simply by looking at long-term historical averages, but instead by adjusting the statistical analysis of risk and return based on nuances not taken into account by formal computations alone.

The end point of this dynamic is that the active vs passive divide of investment management is actually split on two different dimensions: to be active or passive within asset classes, and whether to be strategic or tactical amongst them, leading to four quadrants of investment management styles depending on which combination(s) the advisor chooses.

Ultimately, this means that going forward investment managers must be more cognizant to frame their approach based on both dimensions, and recognize clearly where they can – or cannot – add value for clients. So what’s your investment management style? Tactical active, Strategic active, Tactical passive, or Strategic passive?

Vanguard Personal Advisor Services (VPAS): The First Low-Cost “Indexing” Solution For Financial Planning Services?

April 21, 2014 07:01 am 13 Comments CATEGORY: Planning Profession

As financial planning continues its rise, more and more advisors are getting the CFP certification, and an increasing number of firms – from insurance companies to wirehouses to RIAs and everything in between – have been incorporating financial planning into their offering to varying degrees. And now it looks like a new player is entering the space, likely to make a big splash: Vanguard.

In fact, the new “Vanguard Personal Advisor Services (VPAS) offering may have the potential to do to financial planning what their launch of the index fund has done to investment management: create a core, low-cost, basic "indexing" solution to everyone, above which any advisor must rise to deliver value and justify their cost. And priced at a 0.3% AUM fee with a $100,000 minimum (that may soon drop to $50,000), the “Vanguard Financial Planning Indexing” solution may be very disruptive to both “robo-advisors” and today’s traditional advisors as well.

Ultimately, this won’t be the end of individual financial planners – in fact, Vanguard’s move, including the decision to use real human advisors who are CFP certificants and not be a "robo-advisor" – validates the importance of financial planning and the value of getting it from a real human being. Yet at the same time, the sheer size that Vanguard already has creates the potential for it to instantaneously reach the requisite volume of clients to achieve both operational and marketing scale. For individual advisors to survive and thrive, it will become more necessary than ever to gain further expertise, specialize, establish niches, and create ways to differentiate themselves from the new low-cost financial planning “indexing” Vanguard solution.

Weekend Reading for Financial Planners (Apr 19-20) – Practice Management Edition!

April 18, 2014 03:01 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - Practice Management Edition! This week's edition kicks off with the results of the FPA's latest practice management study on time management, which finds that if you feel like you're not in full command of your time and schedule as a financial advisor, you're not alone; as the results show, only about 1/3rd of advisors are feeling in control of their time these days! The FPA study provides some suggestions of "what's working" for advisors who do feel in control of their schedules, and is part of their broader rollout of practice management guidance under the new Research and Practice Institution.

From there, we have a long list of practice management articles this week, including: how to protect your practice against thieves trying to commit wire fraud against your clients (and what you must do to avoid liability for a mistaken transfer!); how to craft a social media policy for your firm and roll out social media across your employees; the "right" way to attend a conference to get value (hint: meet as many people as you can); how the key to improving your firm is about trying to improve things one step at a time, rather than delaying until there are lots of problems and trying to fix them at once (which is overwhelming and rarely works); how to manage the coming "crunch" in advisor compensation as competition heats up (key takeaway: go big or go niche); ideas in better implementing common practice management tips; some wisdom in how to ensure your prospective merger with another advisory firm goes smoothly in the long run; and recent survey of CFP certificants suggesting that at least some advisors believe the recent CFP Board "scandals" have been taking a toll on its credibility.

We wrap up with three interesting articles: the first suggests that perhaps we should back away from trying to set financial goals for/with clients, and instead try to focus on the systems and habits that will make them financially successful in the long run; the second looks at the psychology of tax refunds and some research suggesting that for clients who have difficulty saving, getting a big tax refund might not be such a bad thing after all (and in fact, bigger may be better); and the last explores how being a successful leader means at some point, leaning to say "no" and limiting how people can access your time and attention, or you will struggle to achieve your own goals and priorities. Enjoy the reading!

Is There A “Robo-Advisor” Bubble? Wealthfront, Betterment, & LearnVest Raise $95M In Capital In Two Weeks!

April 16, 2014 07:01 am 19 Comments CATEGORY: Technology & Advisor FinTech

As the buzz around the "robo-advisors" continues, this week marks another two big announcements: Betterment has raised another $32M in a fresh round of venture funding, with another $28M for Learnvest, following on the heels of $35M from Wealthfront just two weeks ago. Collectively, the three platforms have raised a whopping $95M in just the past two weeks, with the total collective funding for the robo-advisor space approaching a quarter of a billion dollars.

Yet despite all this focus, the actual business and revenue growth results for robo-advisors has been fairly meager, at least so far. The latest fundraising for these three platforms brings their total venture capital funding up to more than $150M, despite the fact that after 3-5 years the companies have been around with "exponential" growth, they cumulatively have less than $5M of revenue. Collective across all the robo-advisor-labeled platforms, actual assets under management (not just fuzzy "advisements") is no more than a few billion dollars, which at the fee schedule for these platforms likely amounts to little more than $10M of revenue for platforms that have cumulative venture capital funding in excess of a quarter of a billion dollars. Which implies, to say the least, that at least a few of these VC investments probably won't work out so well.

Nonetheless, this doesn't mean the robo-advisor trend should be ignored, despite the fact that they have little more than roughly a 1/1000th market share of household investable assets. While there's still little evidence to suggest that robo-advisors are drawing any volume of clients from human advisors, they are demonstrating how the core of constructing and implementing a passive, strategic portfolio can be commoditized for an extremely low cost. In the end, we may look back on this 2009-2014 era as one that transformed technology-driven portfolio construction the way the introduction of the index fund transformed the world of stockpickers 40 years ago. Notably, the introduction of the index fund did not eliminate the need for or value of human advisors, but it did force advisors to continue to evolve their value proposition to keep up, as today's evolving robo-advisors will likely do as well. In fact, in the end, the primary players that get "disrupted" by robo-advisors may not actually be human advisors at all, but the custodians, broker-dealers, asset management, and technology firms that support them!

Sage Scholars Tuition Rewards – A “Loyalty Points” System For Providing Wealth Management Services?

April 14, 2014 07:01 am 6 Comments CATEGORY: Practice Management

As financial planning and wealth management become increasingly popular, advisors are increasingly experiencing a "crisis of differentiation" where it's difficult to distinguish themselves from the competition. This has not only slowed the organic growth rates of many advisory firms as it gets harder to generate referrals, but made client retention all the more crucial to maintain the revenue of an advisory firm.

A new offering for financial advisors called SAGE Scholars offers a unique new way for advisors to offer a "client perk" that can help to support retention and potentially generate referrals: Tuition Rewards, which are "rewards points" clients can accrue based on the assets under management (or potentially, the retainer fees) being paid to the advisor, as a rate of 5%/year of the AUM. Which means a client with $1,000,000 of assets with an advisor can potentially accrue a whopping 50,000 points per year, which can be used as a dollar-for-dollar discount for tuition amongst a list of 323 eligible colleges and universities (up to 1 year's worth of free tuition) for any family member (including children, grandchildren, nieces, nephews, etc.).

Ultimately, the reality is that many students can already potentially earn merit-based aid and discounts from many schools, but there is little certainty about whether the discounts will really be there when the time comes. From the advisor's perspective, then, offering Tuition Rewards as a form of "loyalty points" for clients can have a high perceived value for clients who wish to stay with the advisor, and be something that potentially generates "buzz" amongst clients to drive additional referrals as well. In an environment where it's difficult to find unique "client perks" that are relevant to clients in the first place, the SAGE Scholars program represents an intriguing new opportunity!

Weekend Reading for Financial Planners (Apr 12-13)

April 11, 2014 03:07 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a strong response from CFP Board chair Ray Ferrara to last week's rather harsh editorial from Financial Advisor magazine's Evan Simonoff, focusing on all the ways that CFP Board has been growing successful in recent years, and suggesting that many of the criticisms being levied at the organization are more about what the organization once was, rather than what it actually is today.

From there, we have several practice management articles, including a good overview of what advisors should know and pay attention to regarding this week's widespread "Heartbleed" internet security bug, a look at how the SEC is turning up its attention on the growing space of hybrid- and dual-registered advisors, a review of the new software company Oranj which provides website and client "app" tools for advisors, some guidance about key areas that firms should focus on if they're planning to grow "inorganically" (e.g., via mergers and acquisitions), and a good discussion of the other key factors to consider when selling your practice besides just the valuation multiple (many of which can impact the sale even more!).

We also have a trio of more technical planning articles this week, from a good list of 24 Social Security "quirks" and planning tricks (or traps!), to a nice discussion from the New York Times about the current landscape of college financial aid and the increasing distinction between how public and private colleges determine "need" and available aid, to an overview of the current legal landscape when planning for "digital assets" and prospective legislation called the Fiduciary Access to Digital Assets Act (FADAA) that may pass later this year.

We wrap up with three interesting articles: the first looks at how, in the end, having a good website is the key to succeeding in getting clients online, and that trying to get active with social media isn't going to yield much of a result if it's not paired together with a website that can actually convert visitors to true prospects and eventually to clients; the second provides a great reminder that, as long as we're irrational human beings, there is a limit to what a "robo-advisor" or any automated solution can really accomplish, though advisors may still be underestimating how well such tools can execute what they are designed to do; and the last is a big announcement this week from "robo-advisor" Betterment that it is 'breaking ranks' with the other robo-advisors and launching Betterment Institutional, an offering to partner with and provide a version of its platform directly to RIAs, a big step that begins to blur the line between where a robo-advisor will end and a human advisor will begin.

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!

Evaluating Exposure To The Alternative Minimum Tax And Strategies To Reduce The AMT Bite

April 9, 2014 07:01 am 7 Comments CATEGORY: Taxes

While the American Taxpayer Relief Act of 2012 (ATRA) finally ended more than a decade of "temporary" Alternative Minimum Tax (AMT) patches and fixes that kept expiring and had to be renewed, the ultimate resolution of ATRA was not permanent repeal of the AMT. Instead, ATRA provided permanent "relief" by merely locking in the latest AMT exemptions from 2011, and adjusting the exemption - and everything else under the AMT system - for inflation going forward.

As a result, high-income individuals continue to be potentially exposed to the AMT, depending on exactly what their income levels may be, and the AMT adjustments and preference items that have to be added back to income for AMT purposes. Fortunately, though, a client's AMT exposure can actually be quickly evaluated by looking at a chart that maps income after deductions, and the amount of deductions that are lost for AMT purposes, to figure out what combinations of income and lost deductions will result in an AMT liability.

Notably, though, being exposed to the AMT is not always a "bad" outcome. In fact, because the top AMT tax rate is "only" 28%, in some cases high income individuals will actually want to accelerate more income into an AMT year. In an AMT environment, the primary planning opportunity is actually to manage income around the AMT "bump zone" - that span of income where the AMT exemption is phased out, temporarily boosting AMT rates (and capital gains rates!) by an extra 7%. For those below the AMT bump zone, the goal is to spread out income to stay below the zone. But for those above the AMT bump zone, it turns out the best strategy to reduce the long-term bite of the AMT may actually be to pay even more in taxes!

XY Planning Network and the Future of Getting Paid For Financial Planning

April 7, 2014 07:01 am 10 Comments CATEGORY: Practice Management

For most of its history, "getting paid" for financial planning has really been about giving away financial planning at little or no cost and making it up from the income generated by implementing the recommendations of the financial plan, first through the sale of insurance and investment products, and more recently by providing ongoing investment management services. While this has allowed for the growth of many successful financial planning firms, it also opens the door to the risk that the plan will lead to the sale of inappropriate products, and limits access for financial planning to those who have assets to manage or need to buy insurance or investment products in the first place.

To address this challenge, this month marks the launch of XY Planning Network, a new Turnkey Financial Planning Platform (TFPP) designed to help younger Gen X and Gen Y advisors who want to deliver financial planning to their Gen X and Gen Y peers, with a monthly retainer fee model that allows them to actually get paid for the advice itself and supports an ongoing financial planning relationship, without the sale of products or requiring AUM. Notably, this provides a path not only for younger consumers to finally have access to a financial planner, but also an important new career path for younger advisors who want to grow and develop a business serving their Gen X and Gen Y peers.

In fact, ultimately the launch of XY Planning Network may just be the next step in a long line of turnkey financial planning platforms that emerge, as advisors increasingly shift away from product- or asset-centric business models, towards ones that seek to get paid for financial planning itself. That doesn't necessarily mean that broker-dealers and custodians, or the associated product-based or AUM-based business models, are going to go away anytime soon. Nonetheless, the slow but inexorable transition towards actually getting paid for financial planning itself means the business models for financial advisors are changing, and so too are their needs for a very different kind of support service and infrastructure to help them be successful.