Nerd's Eye View blog

Weekend Reading for Financial Planners (Mar 15-16)

March 14, 2014 02:25 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a big series of announcements from the CFP Board this week, including the potential establishment of a new "Center for Financial Planning" to promote academic research, and the anticipated launch of a new CFP-Board-and-John-Wiley-partnership academic Journal to further support financial planning research. Also highlighted in the news this week is discussion of continuing efforts to get "user fees" legislation sponsored in the Senate to improve Investment Adviser oversight, and an interesting move by Merrill Lynch to hire a new director of advisor training/development who is "young, black, and female" - a notable distinction from the older white male stereotype of Wall Street - though debate is already stirring about whether the hire signals a real shift in Merrill Lynch's diversity and development efforts or is simply a token step given their recent discrimination lawsuits.

From there, we have a few technology-related articles this week, including two regarding best practices in recording video for your website and getting more active on YouTube, and one looking at overall trends in advisor technology after the Technology Tools for Today conference last month.

We also have a trio of more technical financial planning articles, from a discussion of some of the latest research on the best asset allocation glidepaths in retirement (should equity exposure decrease as you age, or actually rise?), to a look at whether or how much international diversification helps to support safe withdrawal rates (answer: it helps some, but not as much/often as you might have expected), and also a look at how the increasing focus on delaying Social Security benefits in retirement really is a new phenomenon (the value of delaying really has increased significantly over the past 20 years, due to both changes in the rules, rising longevity, and the general decline in real interest rates).

We wrap up with three interesting articles: the first looks at how spending on houses and cars remains eerily similar across wealth levels, hovering at about 50% of total household income at high and low income levels (though notably as low as 30% in other countries!); the second is a great discussion by investment guru Cliff Asness about the current state of the efficient markets hypothesis, and the virtues and flaws of the arguments both for and against EMH; and the last is a discussion of the latest entrant to the robo-advisor space - WiseBanyan - which is offering not just low-cost portfolio management solutions, but is entirely free, and while it's unclear whether the company itself will survive (it does eventually have to figure out how to make money somehow!) it does raise the fundamental issue of whether some clients will start to question just how much value they're really getting from their advisor for the typical 1% AUM fee.

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!

Mailbag: Retirement Projections, Monte Carlo Software, And Longevity Assumptions For Retirees

March 13, 2014 07:01 am 4 Comments CATEGORY: MailBag

Many readers of this blog contact me directly with questions and comments. While often the responses are very specific to a particular circumstance, occasionally the subject matter is general enough that it might be of interest to others as well. Accordingly, I will occasionally post a new "MailBag" article, presenting the question or comment (on a strictly anonymous basis!) and my response, in the hopes that the discussion may be useful food for thought.

In this week's MailBag, we look at some issues with Monte Carlo retirement plan projections, cash-flow versus goal-based planning software, and the appropriateness of using arbitrary-age life expectancy assumptions (e.g., all clients assumed to live to age 95) versus more client-specific or entirely randomized life expectancy in the Monte Carlo projection.

Segmenting Retirement Planning for the Wealthy, The Middle, And The Poor

March 12, 2014 07:01 am 10 Comments CATEGORY: Retirement Planning

As the US continues to struggle with its retirement savings woes, a wide range of solutions have been proposed to try and address the problem, with varying degrees of success and adoption. From defined benefit and defined contribution plans, from nudges to mandatory contributions, there is little consensus on the best way forward.

In a new paper, behavioral finance researcher Meir Statman makes the case that the primary reason many proposals have fallen flat is that they do not properly segment prospective retirees, as the needs and issues – and potential solutions – are substantively different depending on whether the target is the wealthy, the poor, or the middle. And even amongst the middle, the needs of the steady earners and savers is far different than those who may have the income by are struggling to save due to spending.

Once viewed from this perspective, Statman finds that many of our current solutions become more clearly ineffective – for instance, annuities don’t help the wealthy and upper-middle who don’t need them, and don’t help the poor and much of the lower-middle who can’t afford them. In turn, Statman suggests that perhaps a better solution is to actually implement a form of mandatory retirement savings – already implemented or being rolled out in many countries around the world – as those who are having trouble making the choice to save may find it “easier” when it is no longer a choice at all, while the wealthy and steady-middle that financial planners already save may be little impacted as they were already likely to save already!

Has The CFP Board Rendered Compensation Disclosure Meaningless For Consumers?

March 10, 2014 07:01 am 12 Comments CATEGORY: Planning Profession

Over the past year, a series of revelations about the CFP Board's compensation disclosure requirements have significantly shifted the landscape in how CFP certificants must explain their compensation to prospective and current clients. While the CFP Board maintains that "nothing has changed" since the rules were formally enacted over 5 years ago, the fact that large numbers of advisors continued to find themselves out of compliance - with another potential shoe soon to drop - suggests that whether the organization admits it or not, the CFP Board has changed the rules of the game.

In fact, the CFP Board's current framework is so expansive in the compensation that must potentially be included, that virtually all advisors in today's environment end out being in one broad bucket labeled "commission and fee", which groups together not only advisors who earn 1% in commissions with those who earn 99% of income in commissions (despite the clear difference in actual business model!), but even renders "commission-only" advisors who earn 100% commission income as "commission and fee" because they work for a firm that "could" generate a fee (along with requiring a number of advisors who earn 100% of income as fees to declare themselves "commission and fee" if they "could" earn a commission as well). The end result: when nearly all advisors must use the same compensation disclosure label of "commission and fee" to define a wide range of actual compensation structures from 0% commissions to 100% commissions, the very purpose of compensation disclosure begins to lose its meaning, value, and clarity for the public that the CFP Board purports to serve.

While the CFP Board maintains that it cannot "fix" or change its rules without a long drawn-out rulemaking process, arguably the reality is that it already changed its rules without such a process to reach the point we're at now. In addition, the fact that the CFP Board eliminated its own "salary" compensation category just over 6 months ago, makes it clear that when it comes to interpreting and adjusting its own definitions, the CFP Board does have latitude to fix its own mistakes. Yet, mysteriously, the CFP Board has yet to be held accountable for the problematic definitions it is now using. With CFP certificant stakeholders reporting behind-the-scenes that they are afraid to speak out for fear of retribution (justified or not), and the FPA and NAPFA apparently abdicating their advocacy roles on behalf of members to take a back seat to the CFP Board, it remains unclear what will finally push the issue. Will someone have to file complaints against a thousand CFP certificants in violation of the CFP Board's own problematic rules, effectively "throwing those CFP certificants under the bus", just to force the CFP Board to pay attention? Will its Board of Directors finally take a more active accountability role to intervene and preserve the enforcement integrity of the organization?

Weekend Reading for Financial Planners (Mar 8-9)

March 7, 2014 02:02 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a recent investigative reporting effort from the Wall Street Journal that found FINRA's BrokerCheck system is failing to provide consumers information about bankruptcies and even criminal charges of brokers, in some cases because brokers simply fail to report them and in others because the broker-dealer doesn't record the incident (even in situations where the broker-dealer was named a party to the suit!).

From there, we have a number of practice management articles this week, including an overview of some of the latest trends in compensation for advisor employees (where base salaries are declining but incentive compensation is rising, with total pay up significantly in recent years), a look back at recent M&A activity amongst advisors from Schwab Advisor Services naming 2013 "the year of the tuck-in", a look at how adoption of e-signatures is beginning to accelerate, a good overview of some of the "unsung" custodians beyond the Big 4 (Schwab, Fidelity, TD Ameritrade, and Pershing) that are looking to grow and attract advisors (often by trying to offer superior tools and technology), and an interesting survey that found advisors who were worried how clients would react if they outsourced their investments but did so anyway found clients were far more "OK" with the transition that they had first feared.

We also have a few investment articles, including a good discussion of the Shiller "CAPE" P/E10 ratio and why it's still credible (and the warning signs it is flashing), how the financial services industry's transition to AUM on a massive basis (from the rise of RIAs to the shift of wirehouses to the AUM model) may be setting a "relentless bid" under today's stock market, and an intriguing look at whether we may be approaching the point where Vanguard is actually getting so big that it could actually stifle competition or even pose systemic risks.

We wrap up with three interesting articles: the first looks at whether the real blocking point to advisors engaging in succession planning might be less about the financial value of the firm and more about the fear of losing the "psychic income" our rewarding work provides to us; the second explores how an increasingly consumer-centric world will put new pressures on advisory firms to create even more client-customized and convenient experiences (while trying to maintain efficiency); and the last is from marketing guru Seth Godin about how Girl Scouts are trained to talk about the features and benefits of buying Girl Scout cookies instead of asking a simple question that evokes an emotional response (a problem that has some disturbing parallels to how we often "sell" financial planning as well). 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!

Are The Tax Deferral Benefits Of Low Turnover Investment Strategies Overstated?

March 5, 2014 07:01 am 15 Comments CATEGORY: Taxes

The basic benefit of tax deferral on investment growth is relatively straightforward: by not paying taxes, money that would have otherwise gone to the government instead can remain invested for future growth. To the extent the money will ever be spent, the taxes must eventually be paid, but as long as additional growth can be generated in the meantime, that is a value for the investor. As a result, investors often focus on deferring capital gains, and reducing the rate of portfolio turnover.

Yet a deeper look at the actual economic value of tax deferral reveals that most of the benefit is actually lost with even low levels of turnover. An investment that changes just once a decade actually forfeits more than half of the tax deferral benefits over the span of 30 years, and for a portfolio with dividends as well, a mere 10% turnover forfeits more than 2/3rds of the tax deferral value. In a lower return environment, the true tax deferral benefit of extending the average holding period of an investment from 2 years to 5 years - chopping the portfolio turnover rate from 50% down to 20% - is actually less than 5 basis points, which can be made up in the blink of an eye through a lower cost investment change or a mere day's worth of relative returns (not to mention weeks, months, or years)!

In turn, these results suggest that in the end, investors may be grossly underestimating the damage that's done by having any portfolio turnover, and grossly overestimating the value of trying to add several years to the average holding period of an investment. Of course, high turnover investing has other costs as well, and the results don't necessarily mean that rapid trading will be fruitful. Nonetheless, the limited value of tax deferral even for an investor with a decade-long average holding period suggests that investors should be highly cautious not to sacrifice prudent investment decisions upon the altar of low-turnover tax efficiency, and that it may even be time to reconsider asset location decisions and whether equities should be held in tax-deferred accounts instead.

How Financial Advisors Can Use LinkedIn As More Than Just A Passive Digital Resume

March 4, 2014 07:01 am 9 Comments CATEGORY: Marketing

As the message about the importance - and value - of social media gets out, an increasing number of advisors are beginning to join social media sites, with LinkedIn reported as being by far the most popular amongst advisors for business. Yet a deeper look at advisor use of social media platforms suggests that for many, they may be doing little more than just showing up, and their LinkedIn presence is little more than having written out their resume in digital form (with, not surprisingly, quite limited results, if any!).

In this guest post, public relations and advisor marketing consultant Kevin Dinino shares some thoughts about more intermediate and "advanced" LinkedIn tools and strategies, and how they can be applied in the context of advisors. From adopting LinkedIn Groups for networking, with a study group, or as the advisory firm's company intranet, to the Advanced People Search capabilities and even the Volunteer Marketplace, there's a lot more to LinkedIn for advisors beyond just listing out the details of your current job description and work history!

So if you've heard that other advisors are generating business from LinkedIn but feel like you're missing out despite having created a LinkedIn profile, hopefully this article will give you some ideas about how to take your social media marketing efforts to the next level. Or alternatively, if you have perhaps been tinkering a little on LinkedIn already, but don't feel like you're making any headway, perhaps you'll find a few new tools and strategies to try out!

Best Practices In Client Communication For Financial Advisors

March 3, 2014 07:02 am 4 Comments CATEGORY: Practice Management

Communicating with clients effectively has become increasingly challenging in today’s world, not because it’s difficult to find a way to communicate with clients but because there’s often uncertainty about how much communication is appropriate, and by what means/channels. Are in-person meetings best, or are phone calls preferable? Is email better than a phone call? Where do one-to-many communications like newsletters and social media fit in?

A recent Australian study of how clients prefer to be communicated with from their advisors sheds some interesting light on the challenge. The results suggest that while meetings still dominate as a primary mode of communication, there is a great deal of variability about where those meetings should occur (in advisor’s office or elsewhere), how formal they should be, and where email, phone calls, and other communication plays a role. And notably – though perhaps not surprisingly – there are material differences in communication preferences amongst Baby Boomer, Gen X, and Gen Y clients.

Notwithstanding these challenges, though, the study supports a great deal of other research suggesting that effective client communication remains a key for client satisfaction, retention, and referrals. And amazingly enough, not only is getting the “right” communication channels an enhancement to the client relationship, but even just communication in clients more ways – across more channels – shows an increase an client satisfaction!

Weekend Reading for Financial Planners (Mar 1-2)

February 28, 2014 01:43 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with an interesting review of the recent Technology Tools for Today (T3) conference by industry commentator Bob Veres, who observes a number of new trends emerging in the world of advisor technology (perhaps most notably, that it's becoming less about advisor tech itself, and more about the advisory firm's ability to implement it effectively!). There's also a discussion from RIABiz on technology trends impacting the world of advisors in the RIA space in particular.

From there, we have a number of practice management articles this week, including a great discussion of what it costs to get a good advisor website these days (as well as the factors that impact the cost, and some vendors to consider), some tips for advisors looking to do more content marketing, a good list of tips on hiring advisors and mistakes to avoid, and an interesting look at how most advisors eschew mentioning religion in the context of financial planning but a few are having great success by doing the exact opposite and carving out a religion-based planning niche.

We also have a few more technical articles, from the latest research about what actually leads to a happy retirement (a healthy level of activity and health itself appear to be the overwhelming drivers, and a "relaxed" retirement is often a less happy one!), to an interesting investment-based analysis of Social Security (finding that a good decision to delay Social Security for a long-lived client is the equivalent of buying an immediate annuity with a nearly-equity-like but "risk-free" return at life expectancy!), and an interview with retirement taxation guru Natalie Choate who warns about increasing IRS scrutiny on Prohibited Transactions in retirement accounts.

We wrap up with three interesting articles: the first is a new research study covered in the Wall Street Journal that finds the tendency to buy deep-value stocks or chase high-growth investments may not just be a matter of knowledge and experience, but could actually be part of our individual genetic wiring; the second article is from Gen Y advisor Sophia Bera, about what she's done to truly differentiate her firm's website and build a successful online practice; and the last is an article that looks at how the growing impact of technology and the web is simultaneously allowing small niche players to find an audience/customers/clients but is also leading to a concentration where the biggest hits/successes are even bigger, which raises interesting questions about whether in the end the internet will help small firms survive and thrive or lead to a "winner-takes-all" outcome where the largest firms overwhelming dominate! 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!

Crafting A Withdrawal Policy Statement For Retirement Income Distributions

February 26, 2014 07:01 am 12 Comments CATEGORY: Retirement Planning

Helping clients stay the course in the midst of market volatility is a challenge for any advisor, and one that is only exacerbated when those clients are taking retirement cash flow distributions. As the retirement research has shown, when market volatility occurs in the midst of ongoing withdrawals, there is a "sequence risk" that too many bad returns in a row can deplete the portfolio before the good returns finally show up.

While planners do their best to help clients stay invested, retirement researcher and financial planning practitioner Jon Guyton suggests that the best approach may be to craft a "Withdrawal Policy Statement" (WPS) for clients. Similar to an Investment Policy Statement (IPS), the goal is to articulate a series of parameters and guidelines about how retirement withdrawals will be funded from the portfolio, to clarify how to respond when a market calamity strikes and determine, in advance, what steps will be taken to keep the plan on track.

Of course, the reality is that any such changes that are planned in advance could simply be decided in the moment as well. Yet given how emotional a scary market environment can be, Guyton makes a compelling case that having a WPS in place may help to ensure that clients don't do anything rash. After all, we might all say we have a plan to deal with a market decline, but is it really a plan if the guidance about how to fund withdrawals in the midst of market volatility hasn't been written out in advance?