Nerd's Eye View blog

Weekend Reading for Financial Planners (Mar 22-23)

March 21, 2014 03:01 pm 7 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with an interesting article noting that while the advisor industry is on the verge of shrinking as more and more advisors approach retirement age, this might actually be a good thing as we "right size" the number of advisors that consumers really need given the emerging technology solutions (e.g., "robo-advisors") available to support many who wish to do it themselves. Not that robo-advisors will topple advisors altogether, but that they may serve a broad base of consumers with simpler needs, leaving a need for fewer advisors who will continue to serve those with more complex problems.

From there, we have several practice management articles this week, including a warning that the SEC is becoming increasingly aggressive in Investment Adviser exams and may be adopting a "broken windows" approach, a review of the current state of social media compliance, a look at how giving clients "free perks" may be a remarkably effective way of generating more referrals (even though most advisors seem to strongly reject it), a nasty story of how Edward Jones "brutalizes" advisors who try to break away from the firm (from the mouth of one advisor who did so successfully, beat them in arbitration, and is now telling his story), and a look at how wirehouses are stepping up on facilitating succession planning for their advisors with deals that continue to narrow the gap between the "saleable" business value of a wirehouse and independent advisory practice.

We also have a trio of investment/retirement articles this week, including a thorough review from Morningstar of the recent leadership drama at PIMCO and whether it means advisors and their clients should be pulling money out of PIMCO funds or not, a look at why even though theoretically "forward P/E" ratios should be used to value markets in practice trailing measures like Shiller CAPE may be better, and a review of some recent research on the use of reverse mortgages and how they may be better used as a standby line of credit earlier in retirement rather than as a last resort later.

We wrap up with three interesting articles: the first looks at how bad we are at assessing risk, focusing excessively on high-profile events to the exclusion of the more mundane but often far more serious realistic risks we face (paying attention to plane accidents but not car accidents, and market crashes but not pervasive undersaving for retirement); the second provides a good reminder of how sometimes like decisions legitimately trump "rational" economic decisions, as Fed governor Mishkin and his wife purchased a home in early 2008 even as he expressed concern about the declining real estate market, because in the end he decided his married was more important; and the last looks how what financial planners can learn from FBI hostage negotiators about how to "click" more quickly with clients (hint: express something personal about yourself that makes you vulnerable).

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!

Life Expectancy Assumptions In Retirement Plans – Singles, Couples, And Survivors

March 19, 2014 07:01 am 17 Comments CATEGORY: Retirement Planning

Setting a proper time horizon is a crucial step in planning for retirement, and is typically done by making a reasonably conservative estimate of life expectancy... perhaps with a few extra years for padding, depending on a client's preferences.

Yet in many cases, planners adopt a uniform "standard" assumption for clients, without adapting it to even the most basic client circumstances, like whether the client is a single person or a married couple, despite the material difference between individual and joint life expectancies. Similarly, while the reality is that there's a high likelihood that a married couple will live several decades in retirement, the odds are overwhelming that for much of that time period, only one - but not both - of them will be alive.

As a result, it may be time for planners to begin to adopt more nuanced life expectancy assumptions for clients, at a minimum making a distinction between individuals and married couples, and with reductions in the later years for married couples to acknowledge the fact that while it's likely one may be alive, it's very unlikely that both will live through the entire time horizon. Otherwise, simply choosing an arbitrarily long time horizon for clients, paired with a high standard of Monte Carlo success, may actually result in an unnecessarily constrained retirement lifestyle!

Why The Business Danger Of Aging Financial Planning Clients May Be Overstated

March 17, 2014 07:01 am 2 Comments CATEGORY: Practice Management

In recent years, an increasing number of practice management consultants have begun to “sound the alarm” on the dangers of having an aging, retiree-centric client base in a financial planning firm. As the logic goes, retired clients are depleting their portfolios with ongoing withdrawals, and more and more will pass away as the years go by, so a planning firm with aging clients is akin to a rapidly depreciating asset.

However, a deeper look at the numbers reveals that these drawdowns in client assets may be overstated, at least in the coming decade. After all, the reality is that at a 4% safe withdrawal rate, a balanced portfolio should still be able to grow for years to come, and there’s actually a 96% chance that clients will still have all of their nominal principal left even after 30 years! Similarly, while the mortality rate is higher as clients age, the reality is that out of 100 client couples aged 65, the statistics suggest that 90% of them will still be around in 15 years!

Of course, the caveat to working with retirees is that, compared to accumulator clients, the mere fact that they’re spending and not saving with ongoing contributions is still a headwind, and obviously even the modest attrition rate for early retirees is still higher than what it would be for younger clients. Nonetheless, these statistics suggest that firms simply worried about retaining value in the coming years should perhaps focus less on catering to the next generation to reduce the average age of clients (especially if those clients can't be served profitably by the firm in the first place!), and more on simply retaining the current generation, especially by building relationships with both members of a couple to increase the likelihood of retaining a surviving widow. While the demographics of an aging client base will eventually be more of a challenge, the real impact is still many, many years away, and simply focusing on retaining widows (or not) of the current generation may matter most of all in the coming years!

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!