Nerd's Eye View blog

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?

How To Run A Financial Advisory Firm Like A Robo-Advisor

February 24, 2014 07:01 am 14 Comments CATEGORY: Technology & Advisor FinTech

Over the past year, the financial advisory world has witnessed the emerging rise of the "robo-advisor" - technology-driven investment advisory services that substitute "expensive" humans for low-cost highly-scalable software and algorithms that seek to deliver much of what advisors do with respect to portfolio construction today, but at a fraction of the cost.

Underlying the robo-advisor model, though, are insights that are relevant to any financial advisory firm. For instance, the core building blocks of robo-advisors - a systematized investment process, supported by programmed technology automation to implement the portfolio - is not actually unique to robo-advisors at all. Any advisor - human or robot - can use these tools, and they already exist!

In fact, it turns out that many financial advisors already deliver everything that robo-advisors do, and more; advisory firms have been increasingly shifting to model-based portfolios for years, and "intelligent" rebalancing software that replicates virtually everything a robo-advisor already does has been around for nearly a decade, as has been shown indirectly by Morningstar's "gamma" research. Which means in the end, robo-advisors may be less of a threat to traditional advisors, than simply an acknowledgement that inefficient advisors that don't systematize and utilize technology will be increasingly threatened by those who do - whether robot, or technology-augmented human.

Weekend Reading for Financial Planners (Feb 22-23) – Practice Management & Tech Edition!

February 21, 2014 02:33 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current "Practice Management and Tech" installment of "Weekend Reading for Financial Planners" - this week's edition kicks off with the latest announcement by the SEC of its new "Never Before Examined Initiative" and the details of its push in 2014 and the coming years to ramp up the pace of examinations on SEC-registered investment advisers who have been registered for at least three years but have never actually been examined. The new initiative will include both a general risk assessment of the potential threats the RIA's business poses given its model and how it is structured, along with a more focused review of key examination areas.

From there, we have several practice management articles this week, including a look at a younger advisor who decided to build his business by buying a practice rather than just building it one client at a time, a growing advisor network called "Protected Tomorrows" for advisors who wish to serve special-needs clients (with a training program to get advisors who wish to work in the niche up to speed), a discussion from Angie Herbers about the importance of having a clearly articulated direction for your firm (and how to communicate to employees if you really don't have a clear direction in your own mind as the firm owner!), and a great reminder from Mark Tibergien that while compensation can play a role in managing your staff it should not be used as a primary motivation tool and is not a substitute for more active employee management.

We also have a number of advisor technology-related articles this week, including a detailed review of the new portfolio risk analytics tool RiXtrema, the new "socially-powered" advisor CRM Wealthbox, the relaunched cloud-based version of Money Tree financial planning software, and an overview of several popular (and one new) advisor tech tools to improve the operational efficiency of your practice and your staff.

This week's reading wraps up with three interesting articles: the first is a great reminder that in today's world where your website is increasingly your first impression to clients (even those referred to you), it's absolutely crucial to have a good photo/image of yourself (so if you don't have a professional headshot, spend a few hundred dollars and get one!); the second looks at how, when it comes to employee performance, the bell curve is not a very good description of the landscape, as in practice the distribution is more like a "Power Law" where there are a larger number of good performers, most employees are actually slightly below average, and the truly subpar employees actually may be fewer than anticipated (but more extreme as well); and the last article provides a great reminder that there's a real difference between doing "data gathering" with clients (which is purely quantitative) and having a real "discovery" process that learns more about who they are and what motivates them, which is crucial to actually being able to help clients implement your recommendations.

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!

FAStech, Software Debuts, And A Robo-Advisor: Another Successful T3 Advisor Tech Conference

February 17, 2014 07:01 am 2 Comments CATEGORY: Conferences

Last week, the 9th annual Technology Tools for Today (T3) conference was underway at the Anaheim Hilton, at the doorstep of the Anaheim Convention Center and Disneyland. This year’s event was the largest ever, slightly edging out last year’s total with nearly 600 attendees, including both advisors themselves, and a wide range of advisor tech companies and their representatives.

As the conference continues to grow, T3 is increasingly the conference for advisor tech companies to be seen at; several players timed key announcements to the conference, from a big integration announcement by SEI, to Pershing’s new NetXInvestor platform, to a new account aggregation dashboard offering from MoneyGuidePro. In addition, numerous brand new advisor tech software companies revealed their software debuts at the conference, from a Personal Financial Management (PFM) tool, to a new simple web-based advisor CRM, and more. This year's T3 event also featured a new "FAStech Cup" advisor tech competition for up-and-coming tech-savvy financial planning students, a strategic shift that means in the future the T3 conference may not only be a location for advisor tech tools but also new hires who know how to use them!

Overall, the mood of the conference was very upbeat, notwithstanding some internet problems at the beginning and a looming east-coast snowstorm at the end that led many attendees to depart a few hours early. As virtually all major software tools have now transitioned to the cloud, and the number of integrations continues to proliferate, this year’s T3 conference seemed to mark a turning point where the challenge of advisor technology decisions is less and less about finding software at all, and increasingly about the difficulty of navigating a complex patchwork of integrations and choosing from an ever-wider array of potential solutions!