Nerd's Eye View blog

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!

Weekend Reading for Financial Planners (Feb 15-16)

February 14, 2014 02:01 pm 6 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with an announcement by FINRA that it is re-proposing its rule that would require all broker-dealers to include a link on their websites to BrokerCheck so consumers can check up on the regulatory record of their prospective advisors; the move has been and remains controversial, as consumer advocates suggest it may still not be thorough enough (the links may not necessarily be required on every single part of an advisor's website and digital presence), while others note that it may increase the number of requests to FINRA for expungement of prior regulatory infractions as they receive more attention.

From there, we have several technical financial planning articles this week, including updated rules on the employer "pay or play" insurance mandate that will delay the rollout for some firms another year until 2016 (and provide some leniency to the rest on the thresholds where the penalty will apply), and a look at the recent CBO report projecting that Obamacare will reduce worker hours by the equivalent of 2 million jobs not because firms will lay off employees but because early retirees will have more financial planning flexibility to retire early with greater access to health insurance. There's also a look at whether peer-to-peer (P2P) platforms like Prosper or Lending Club might have a role in generating higher yield for clients, some research on how delaying Social Security is similar to buying TIPS bonds but at much better real yields, and how the idea of not saving for college in order to qualify for financial aid may be a myth that produces far more harm than benefit.

We also have several practice management articles this week, from some ideas about how to improve your seminar marketing approach (hint: focus more on the time you spend before and after the presentation, and not just on the presentation itself), to how to craft a "pitch book" to communicate your services to prospective clients, to a discussion of how to address clients that are being "overserviced" by not cutting the work that you do for clients but figuring out in collaboration with them how to charge more for what you do.

We wrap up with three interesting articles: the first is a profile of a new advisor CRM software called Wealthbox that debuted at the T3 Advisor Technology conference this week; the second is a profile of financial planner Harold Evensky, an advisor and advisory firm owner who has long been a leader in the financial planning profession, and is now shifting to focus more of his time developing and advocating for research that will be more relevant to financial planning practitioners; and the last is an interest discussion by industry commentator Bob Veres on whether in the end oversight of RIAs - when you include oversight of the custodians they use - may not actually be much less than the oversight of FINRA-regulated advisors after all. 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!

IRS Opens Temporary Window For Retroactive Portability Of Estate Tax Exemption In Rev Proc 2014-18

February 12, 2014 07:01 am 3 Comments CATEGORY: Estate Planning

The potential for portability of a deceased spouse's unused exemption amount (DSUEA) to a surviving spouse was a significant change that emerged from the fiscal cliff legislation in 2010. However, early adoption of portability was limited, due both to a lack of awareness of the rule by many of those who needed it, and the fact that the portability rules were just "temporary" and faced future sunset in the fiscal cliff of 2012 until subsequently made permanent under the Taxpayer Relief Act of 2012... and by that time, it was already too late for many who might have wished to claim portability.

To provide relief for this unfortunate situation, the IRS has issued Revenue Procedure 2014-18, which will allow any decedent who passed away in 2011, 2012, or 2013 to have an extension to file an estate tax return and claim DSUEA portability for the surviving spouse. However, the relief provision reopening portability for anyone who died in the past 3 years is temporary; the Form 706 estate tax return must be filed by the end of 2014 to claim this "retroactive" portability, or the window will once again be closed for good.

For many surviving spouses, this opportunity for retroactive portability is an appealing relief provision to get a "free" second chance to claim portability and carry over a decedent's unused estate tax exemption amount; the only requirement is that a Form 706 estate tax return now be filed. In situations where the surviving spouse has also since passed away, the potential for retroactive portability could actually result in an immediate and significant estate tax refund. And notably, for same-sex spouses - who couldn't file for portability in 2011, 2012, or most of 2013 because the marriage wasn't recognized in the first place - the new relief provisions of Rev. Proc. 2014-18 offers the opportunity to go back and claim portability for a same-sex surviving spouse who never had the opportunity in the first place!

The Five Stages Of Growth In A Financial Planning Firm

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

As the world of financial advice continues to grow and evolve, advisory firms are increasingly going through a series of consistent stages in the growth of their firm. There's a start-up phase with rapid growth, followed by a capacity "wall" where the individual advisor just can't handle any more clients. The capacity wall is cleared by converting from a solo advisory firm into a multi-advisor ensemble, with years of potential continued growth as the firm reinvests into its infrastructure. Eventually, though, the ensemble practice hits another wall, as the sheer size of the firm is so large that even the collective efforts of all the advisors and partners is not enough to sustain its growth rate, leading to the fifth and final phase: the establishment of a brand and truly scaled marketing.

What's significant about this progression is not just the fact that the growth pattern happens so consistently, with a series of faster and slower growth phases, but that the walls occur at consistent points as well, and require an able-to-be-anticipated series of steps to navigate them and reach the next stage. In practice, these stage nuances may be masked by the tailwind of market returns (or the headwind of a bull market), which provide an additional level of volatility to an advisory firm. Nonetheless, by focusing on the underlying organic growth rate of new clients and asset flows, the pattern remains clear.

Ultimately, advisory firms that recognize the stages of growth will be best positioned to navigate the inevitable walls that come. But the real challenge of this landscape is to recognize that the firms in the last stage of growth may actually be the best positioned of all, potentially putting a "growth squeeze" on the wider base of smaller advisory firms still struggling to reach the next stage. For those firms that are smaller and wish to stay that way, it will still be possible to enjoy a profitable lifestyle practice. But those in the middle stages may need to navigate carefully, or risk being unable to get past the final growth wall. And in the long run, the largest firms with a visible brand and scaled marketing may actually grow so large and effectively, that it begins to change the growth landscape itself in the future!

Weekend Reading for Financial Planners (Feb 8-9)

February 7, 2014 01:55 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the CFP Board's announcement this week of its newest "fun, edgy and creative" commercial for the ongoing $10M/year public awareness campaign. As incoming CFP Board chair Ray Ferrara recently took the leadership mantle, there's also an interview with Ferrara about the CFP Board's strategic initiatives, including an ongoing focus on growing the ranks of CFP certificants (to 81,000 by 2017), and a restatement that the CFP Board believes its compensation disclosure definitions are clear and do not need to be adjusted (despite the ongoing disparity between its own fee-only definition and that of NAPFA). And wrapping up the news this week was the SEC's announcement of its 2014-2018 strategic plan, which includes an intention to "continue to analyze" a potential fiduciary rule... and the potential that if the SEC is "just" in the analysis stage, that there may be no rule coming at all in the near future.

From there, we have a number of practice management articles this week, including: how to keep your data private from prying eyes when working on your laptop in public; a new tool to help you do a "Do It Yourself" valuation of your practice (with far more accuracy than traditional industry rules of thumb); an interesting discussion of how advisors create value for clients, focused around the three core areas of Planning, Implementation, and Monitoring; and some ideas about how to create a better client experience (a la "the Disney experience"). There are also two technical articles this week, the first discussing a recent IRS announcement that it will grant a reprieve for those who missed the opportunity for filing a portability election since it was first established at the end of 2010, and the second reviewing a recent Tax Court case that illustrates the hazards of using IRA dollars to invest in a personal business.

We wrap up with three interesting articles: the first looks at a big change coming to the credit card system to combat rising credit card fraud - by October 2015, the entire US system will be switching from the current swipe-and-sign approach to the structure used in most of the rest of the world, where credit cards have security chips and purchases are authorized by an individual PIN in addition to the swipe action; the second article provides a fascinating deep dive into how exactly to best deliver an apology in a business like financial planning where mistakes are inevitable and will happen (but how you handle it determines how big or small the problem will ultimately be!); and the last is an interesting article from practice management consultant Angie Herbers who notes that while advisory firms are often founded by visionary owners, it takes an "integrator" to really make the business grow and come to life... though ultimately once the integrator takes over, replacing the founding visionary with the next generation can actually be the hardest step of all for the long-term viability of the firm. And be sure to check out the latest advisor tech news with Bill Winterberg's "Bits & Bytes" video segment at the end!

Enjoy the "light" reading!

Wealthfront Tax Loss Harvesting White Paper – A Case Study In How Not To Calculate Tax Alpha

February 5, 2014 07:01 am 25 Comments CATEGORY: Taxes

The benefits of reducing current tax liabilities through tax loss harvesting are widely acknowledged - so much, that the IRS developed the 30-day "wash sale" rules to prevent taxpayers from abusing the strategy. Yet less widely understood is that there's one crucial caveat to tax loss harvesting - that taking advantage of the loss also reduces the cost basis of the investment, potentially exposing the taxpayer to a gain in the future that can wipe out some, most, or all of the tax benefit, and in the extreme with today's four capital gains tax brackets actually drive up future tax rates and leave the investor worse off than having done nothing at all.

Notwithstanding these issues, many investors and advisors continue to overstate the benefits of tax loss harvesting, and now "robo-advisor" Wealthfront is doing so as well, with its "Tax-Loss Harvesting White Paper" that purports Wealthfront can increase an investor's wealth by an extra 1%/year, annualized, indefinitely, through its daily tax loss harvesting strategy. Unfortunately, though, the reality is that in a review of its strategy, Wealthfront - like so many others - is confusing tax savings with tax deferral, and in the process may be drastically overstating its benefits by a factor of 10:1, and for its typical investor the true annual benefit may be a mere 1/25th of what their "white paper" claims purport.

Again, this is not to say that tax-loss harvesting is useless, and in reality while many advisors have been automating tax-loss harvesting just like the robo-advisors for almost a decade, Wealthfront's particular tools to implement loss harvesting are unique, especially in how it is able to quasi-pool investor assets to drive the transaction costs down to nothing for its clients (facilitating tax loss harvesting at very small thresholds on a nearly continuous basis!). Nonetheless, the flaws of the Wealthfront tax-loss harvesting white paper also provide a clear example of the problems with trying to come up with a generalized algorithm for an individual's specific and unique tax circumstances, and overall provides an unfortunate case study in how not to calculate tax alpha and try to apply its benefits for a wide range of clientele.