Nerd's Eye View blog

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!

Weekend Reading for Financial Planners (Jun 14-15)

June 13, 2014 03:01 pm 7 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts out with an interesting new industry study, that finds a significant portion of advisors underestimate and/or understate their own costs to clients, focusing solely on their own advisory fee and not on the total cost including underlying administrative, platform, and/or product/fund fees as well. Also in the news this week were lobbying efforts from the Investment Adviser Association down on Capitol Hill; the organization is putting an increasing push on supporting legislation that would increase the frequency of investment adviser exams, but do so via user fees funded by RIAs (and perhaps with an allocation from Congress as well), rather than allow investment adviser oversight to potentially be shifted to FINRA.

From there, we have several practice management articles this week, including a look at Fidelity's "Office of the Future" and how technology will (and will not) change the delivery of financial advice, a discussion of how advisors can combat ongoing compression of advisory fees (hint: go big or go specialize!), a review of how some firms are adopting a "financial planning resident" model to bring in young advisors (with an expectation that they'll only stay for 3 years and then move on and be replaced by the next resident), and a discussion of how AUM advisory firms can use options and hedging strategies to manage the exposure their revenue has to market volatility (rather than trying to convert to a retainer-based business model instead).

We also have a few more technical articles, from a discussion of the pros and cons of Target-Date Funds (while there are some valid criticisms, they are perhaps lambasted too much?), a comparison of the new "simplified" home office deduction to the actual cost method and in what situations each works best, and a discussion of how to properly structure and execute a ROBS (Rollover as Business Startup) plan for clients who want/need to use retirement account assets to fund a new business venture.

We wrap up with three interesting articles: the first is some of the latest research from Julie Littlechild on advisor referrals, who finds that asking clients for referrals may be less effective than asking them for feedback about how to improve your services (which ultimately builds a stronger bond and can lead to more referrals in the end); the second is a discussion from Mitch Anthony in the Journal of Financial Planning about how to reframe "retirement" as a transition to more meaningful work (recognizing that a large number of clients are returning to work after retiring!), and how to facilitate a conversation that balances out the "economic" (money) from the "existential" (meaning and purpose) reasons for work; and the last is a summary of the new book "Keynes's Way To Wealth" which looks at the fascinating investment experiences of the famous economist, that included two near bankruptcies and investment wipeouts before ultimately focusing more on a long-term deep-value stock investing approach that ultimately left Keynes a very wealthy man. Enjoy the reading!

Splitting A Roth Conversion Into Multiple Accounts To Isolate Investments For Strategic Recharacterization

June 11, 2014 07:01 am 26 Comments CATEGORY: Taxes

The use of Roth IRAs is increasingly popular as a tax planning strategy, especially in the years since 2010 when the income limits on Roth conversions were lifted, opening up access to Roth conversions for anyone. And although the income limits from conversions has been eliminated, the ability to recharacterize a Roth conversion remains, no longer as a mere "undo" for an accidental conversion at high income levels, but now increasingly as a proactive strategy to convert and wait and see what happens with the investment; if it's up the conversion stays, and if it's down it's recharacterized to be converted again in the future (at a lower tax cost).

However, one significant caveat of Roth recharacterizations and this kind of wait-and-see-before-deciding strategy is that Roth recharacterizations must allocate gains/losses across the account on a pro-rata basis. As a result, one cannot simply "cherry pick" the worst performing investments from a Roth conversion to subsequently recharacterize, and trying to do so can accidentally shift originally-Roth investments into a traditional IRA in the process! Fortunately, though, a special rule allows Roth recharacterizations to occur on a standalone basis, as long as the conversion is placed in a separate account in the first place.

In fact, this "separate account" rule is so favorable, for larger Roth conversions it becomes another proactive planning strategy unto itself - instead of merely converting into a single standalone Roth IRA (separate from existing Roth IRAs), complete the Roth conversion one investment/asset class at a time into a series of separate standalone Roth IRAs (separate from any existing Roth IRA and each other). By doing so, the investor can actually see the outcome of each individual Roth investment, one at a time, keeping the top performer(s) and recharacterizing the rest, with as much as a 21-month time window to see the investment results before being forced to make a final decision! While ultimately the outcome of whether a Roth conversion is a good deal or not is still driven by tax rates, being able to know the investment results, and cherry pick the top performer after the results are in, can go far in turbocharging the value of an already-beneficial Roth conversion!

Introducing The Top Advisor Blogs And Bloggers

June 10, 2014 07:01 am 8 Comments CATEGORY: Nerd's Eye View

While blogging and social media for financial advisors continues to become more popular, one of the common challenges I hear from advisors trying to get started is that they'd like to see examples of what other advisors are doing that's successful. What are some examples of blogs that have been able to get a lot of readership and traffic?

To help support this, today I'm excited to announce a new "Top 50 Advisor Blogs and Bloggers" list that we've built (powered by BrightScope) to recognize some of the most successful advisors in the blogosphere. The list captures a wide range of advisors, from those who write broadly about markets and investment and economics, to those who have niches Generation Y to Financially Wise Women to Low-Cost Investing.

So if you've been wondering what 'blogging success' looks like, click around and check out some of the advisor blogs, and see what they're doing, or go through the submission process to have your own blog considered the next time we update the list (while we tried to capture as many advisor bloggers as we could, I'm sure there are more to be considered!). Of course, in the end a blog alone does not make a business - you still have to provide services and deliver value to your clients as well! - but I hope this list is helpful to stimulate some ideas, and to recognize those who have been pioneers in the advisor blogosphere so far!

5 Financial Advisor Blogging And Social Media Strategy Lessons I’ve Learned (The Hard Way)

June 9, 2014 07:01 am 31 Comments CATEGORY: Marketing

Over the past several years, I’ve spent a lot of time immersed into the world of blogging and social media to build my business, and have been lucky enough to have a few publications recognize my efforts in this regard. Yet while I’ve certainly had some success, I’ve learned quite a bit along the way, with a combination of an education from the school of hard knocks, and the sheer ability to harness the data that you can gather from digital marketing to really see what’s working and what’s not.

After having built on this for a little over 3 years now, I’m sure there are many lessons left to learn, but I present here my own top 5 “lessons learned” so far in the world of social media and blogging, particularly as it pertains to the strategy of how to use it to build your business.

So from the reality that social media is just a means of helping people find out about your content and expertise (not an end unto itself), to the importance of focusing on a niche, to understanding how prospective clients will find you online and the role that your website plays in the process, I hope this is some helpful food for thought if you’ve been thinking about going down the road of social media and blogging yourself, or are stuck trying to figure out how to take your current efforts to the next level.

Weekend Reading for Financial Planners (Jun 7-8)

June 6, 2014 01:51 pm 4 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts out with a cautionary warning from both FINRA and the SEC that this year will be one of heightened scrutiny on cybersecurity issues, and that advisors large and small will be held accountable for the quality of their protections of firm and client data... and that there may even be a few firms that will be "made an example of" with enforcement and fines for especially lax security. On the other hand, a separate article also notes that more generally, FINRA is acknowledging that its regulatory requirements may be getting too burdensome for small firms, and that some kind of relief may soon be coming as the regulator shifts to a more surveillance-based (rather than examination-based) approach.

From there, we have several practice management articles this week, including advice from Mark Tibergien on the importance of trying to control what you can control in attracting and retaining employees (while also recognizing what may be beyond the firm owner's control), some insight from Angie Herbers on the importance of having not only a long-term 'voluntary' succession plan but also a plan in place for how to handle a more sudden unexpected succession event if there is an unexpected death or incapacitation of the firm owner, and a look at the challenges that advisors face when they consider breaking away from a wirehouse and going independent (from the time and stress costs, to the "leap of faith" that if the advisor leaves to go out on their own, that clients will follow).

We also have several investment-related articles this week, from a roundtable looking at strategies to manage against the risk of rising interest rates (and whether it's even necessary to do so), to a second article that looks at whether annuities might be an effective bond substitute to manage a fear of rising rates, to a discussion of whether REITs still have a place in the modern portfolio given their significant volatility over the past decade. There's also an interesting article looking at strategies to manage our behavioral biases, which are a challenge for clients but can be as relevant (and challenging) for advisors in their own investment process too.

We wrap up with three interesting articles: the first is some guidance for advisors who have started a new practice and are struggling to work through "the gap" between where their business is during its initial stages and where they want and aspire it to be (which requires no small amount of patience and perseverance!); the second is an interview with financial advisor Ron Carson about the issues he sees in the industry, from the importance of fee transparency to the concerning lack of succession and continuity planning that advisors have failed to put in place to protect their clients; and the last is some professional and career advice from advisor and blogger Barry Ritholtz about his own unusual path in finance, affirming the importance of continuous hard work and a recognition that "once in a lifetime" opportunities come more often than we may realize, but only help if we're ready to take advantage of them when the time comes. Enjoy the reading!

Limits To Converting Rental Property Into A Primary Residence To Plan For IRC Section 121 Capital Gains Exclusion

June 4, 2014 07:01 am 104 Comments CATEGORY: Taxes

The exclusion of up to $500,000 of capital gains on the sale of a primary residence under IRC Section 121 is one of the most generous tax preferences available under the tax code, due in no small part to the fact that most people only have occasion to sell their home and harvest such gains a few times in a lifetime.

However, for those who also invest in rental real estate, the capital gains exclusion on the sale of a primary residence creates an appealing tax planning opportunity – to convert rental real estate into a primary residence, in an effort to take advantage of the capital gains exclusion to shelter all of the cumulative gains associated with the real estate. And since the Section 121 exclusion can be used as often as once every 2 years, the planning opportunity is quite significant for those with large rental real estate holdings (or simply those who serially purchase new primary residences!).

To prevent abuse of this planning scenario, Congress has enacted several changes to IRC Section 121 over the past 15 years, preventing depreciation recapture from being eligible for favorable treatment, requiring a longer holding period for rental property acquired in a 1031 exchange, and more recently forcing gains to be allocated between periods of “qualifying” and “nonqualifying” use. Nonetheless, some opportunities remain for real estate investors who do have the flexibility to change their primary residence in an effort to shelter capital gains on long-standing real estate properties.

What Are The Key Performance Indicators (KPIs) For Your Financial Planning Firm?

June 2, 2014 07:02 am 9 Comments CATEGORY: Practice Management

As an advisory business gets started, the focal point is typically on just getting the first few paying clients in the door – the key aspect being paying clients. Simply put, it’s all about just trying to generate some revenue, and the key indicator for measuring the advisory firm is pretty straightforward: how much revenue is there.

However, as the advisory practice begins to grow, the picture gets more complex. Soon there are a range of different clients, paying varying fees for what may be a varying services. The cost to operate the business begins to rise as well, with investments into anything/everything from technology to staff. Suddenly, just look at how much money is coming in the door is no longer enough; just because there’s revenue doesn’t mean there’s profits, and there are too many clients to just keep it all straight in your head.

Accordingly, as a financial advisory practice grows, it becomes increasingly important measure and track more information about the business, so it can be managed as a business. As the saying goes, “if you can’t measure it, you can’t manage it.” Building a financial dashboard of “Key Performance Indicators”, KPIs, for financial advisors, that track key metrics of the business, its growth, and its clientele, can give you the information you need to make better practice management decisions. It's not necessarily about harnessing the "big data" insights of an entire industry, but simply the "small data" opportunities of better understanding your own business!