Nerd's Eye View blog

Weekend Reading for Financial Planners (Feb 1-2)

January 31, 2014 03:37 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a summary of the key details of President Obama's newly proposed "MyRA" accounts, a new form of "starter IRA" account for those who may only be able to save small dollar amounts. In addition, there's also some coverage of the latest AALTCI survey on long-term care insurance showing that premiums are up by 12% for females in 2014 but actually down almost 10% for males as gender-based LTC insurance pricing has taken effect. And an interesting survey of advisors in the UK after the first year of their RDR reforms - which banned commissions for advisors - finding that in fact the transition to a commission-free world has gone more smoothly than many first feared.

From there, we have a few practice management articles, including a look at how advisory firms are onboarding and training new advisors, new research on what generates referrals finding that the greatest predictor of whether clients refer may simply be that some are more "hard-wired" to do so that others, and the last a summary of advisor tech guru Bill Winterberg's keynote session at this week's TD Ameritrade conference on how advisors need to focus more on their digital presence and the first impression it may be making on prospective clients.

We also have a number of more technically-oriented articles this week. There's one that looks at how the world of estate planning is changing now that no more than 3,000 - 4,000 Americans each year are actually passing away subject to Federal estate taxes, a second that provides an interesting rebuttal to the recent criticisms about the Shiller CAPE ratio and suggesting it may still be more valid than many give it credit for, and the last is the latest for investment guru James Montier of GMO that seeks to critically debunk several recent new investment trends, from "smart beta" to "risk parity" strategies to investing in real assets.

We wrap up with three interesting articles: the first is an insightful article about blogging itself by advisor and blogger Josh Brown, who makes the important point that advisors shouldn't worry about being the first to cover breaking news and that instead trying to be last - giving the ultimate and final word on an issue - may actually be the better (and less pressured) way to go; the second is a predictive look from industry commentator Bob Veres at the advisory profession in 20 years, noting that the changes we witness may be far more dramatic than what anyone has been predicting so far (remember, 20 years ago the "internet" was little more than dialing up to America Online or CompuServe!); and the last explores whether the financial planning profession - and the regulators who oversee it - still has too much "marketing myopia" with a nearsighted focus on products and not enough on recognizing that advice itself is our primary value proposition. Enjoy the reading!

Can We Really Measure Risk Tolerance Or Does It Swing Too Wildly With Market Volatility?

January 29, 2014 07:01 am 27 Comments CATEGORY: General Planning

It is a staple of financial advising to measure a client's risk tolerance; whether out of a mere regulatory requirement to do so, or out of a best practices desire to better understand a client's comfort level with the investments (and other financial planning advice) being recommended, so process to measure risk tolerance is essential in today's world.

Yet many financial advisors severely question the value of doing so; as the saying goes, "Clients are risk tolerant in bull markets, and intolerant of risk in bear markets, so is there really that much value to going through the exercise at all?" And a recent academic presentation at the FPA Experience conference added fuel to the fire, showing a remarkably high correlation between the monthly average risk tolerance scores of a well respected measurement tool, and the monthly level of the S&P 500.

Yet a deeper look reveals that while even the best risk tolerance measuring process is not totally immune to the vicissitudes of the market, a client's true risk tolerance appears to be remarkably stable and doesn't change much at all in the midst of volatile markets. Instead, what appears to be unstable is not the client's tolerance for risk, but their perceptions of risk in the first place; in other words, clients may be loading up on stocks in bull markets not because they're more tolerant of risk, but because they don't think there is any risk in the first place. In turn, this suggests that ultimately, it may be time for financial planners to more widely adopt quality tools to measure risk tolerance, but simultaneously recognize that managing client (mis-)perceptions of risk is the real challenge that we face.

News Highlight: Judge Rules Against CFP Board On All Recent Motions And Accepts Amended Camarda Complaint

January 28, 2014 07:01 am 27 Comments CATEGORY: Industry News

On Sunday, January 26th, a decision was issued in the latest round of legal motions between the CFP Board and the plaintiffs Jeffrey and Kimberly Camarda regarding their looming public disciplinary action from the CFP Board for what it claims were violations of the compensation disclosure rules.

In a blow to the CFP Board, the judge fully accepted an amended complaint from the Camardas, which is now seeking monetary damages in addition to "just" blocking the CFP Board's public disciplining of the Camardas. In addition, the judge denied all of the CFP Board's various motions to limit the scope of the case, including requests to quash subpoenas of various individuals for deposition. As a result, the breadth of discovery for the Camardas will be fairly wide, as they attempt to substantiate their claims that the CFP Board is in breach of contract, engaging in unfair competition, has violated due process, and may even be responsible for antitrust violations and having engaged in "false advertising" by misleading the public about its standards.

Of course, the fact that the judge has ruled that the full scope of the Camarda complaint will be considered and that the full breadth of their discovery requests will be honored does not actually mean that the CFP Board has been found guilty of anything at this point. Nonetheless, given the coming depositions that must now move forward, and the information requested by the Camardas on various other CFP Board disciplinary cases, a whole lot of additional detail about the inner workings of the CFP Board is about to come to light. To say the least, this case is no longer "just" about the definition of fee-only; it's now about the legitimacy of the organization's enforcement process and the standards for all CFP certificants, and raises the question of whether the CFP Board may have made a serious strategic mistake by trying to make Camarda vs CFP Board of Standards its defining case.

How To Be More Decisive In Your Own (Investment) Decision-Making Process

January 27, 2014 07:01 am 1 Comment CATEGORY: Personal/Career Development

Making decisions is a fundamental part of life; in fact, it's almost daunting to consider how many decisions we actually make just to navigate our day-to-day lives, not to mention the weightier decisions that have to be made from time to time. Yet despite the crucial nature of making good decisions, most people have little if any framework or process around how decisions are made, except perhaps for creating basic lists of "pros" and "cons" that in practice often do little more than confirm the decision we already intended to make.

In the book "Decisive" noted authors Chip and Dan Heath take a deep dive into the research around decision-making, including both the shortcuts our brains typically take to make decisions (so that we are not rendered paralyzed by the volume of decisions to be made on a day-to-day basis) to the best practices in how to actually craft and effective decision-making process and when necessary avoid the shortcuts that may be helpful for routine decisions but can be destructive when misapplied in more important situations.

From the ideas of multitracking potential solutions to adopting a devil's advocate (or at least a culture that encourages them), what results is an excellent and inspirational book about how to change your own approach to making decisions, along with some ideas about how you might apply the concepts in your business and with your clients. As the authors clearly illustrate, even for those of us who pride ourselves on the depth of our analytical skills, the reality is that good process trumps good analysis - and notably, good process may lead to better analysis as well!

Weekend Reading for Financial Planners (Jan 25-26)

January 24, 2014 12:30 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a discussion of an interesting new trend: financial "wellness" programs, which are employer workplace financial programs oriented primarily around education (and not necessarily advice), that are on the rise and may create new demand for young planners, potentially facilitating a new career track for the profession.

There are several industry and practice management articles this week, from a study by Spectrem Group affirming the trend that consumers - especially higher net worth - are increasingly seeking out independent advisors over full-service brokers, to a profile of Schwab's increasing push into financial planning as they delivered 101 thousand financial plans last year (albeit with varying levels of complexity, and often provided for free). There's also an article on social media tips wittily titled "Why Social Media Won't Work For You" (providing guidance on those mistakes to avoid), a nice basic guide from the Journal of Financial Planning on the importance of connecting your website to Google Analytics and what to look at/for, and a good article looking at how to fix your investment committee's decision-making process by "Investment Committee Doctor" Tom Brakke.

We also have a number of more technically-oriented articles this week, including: new research from the Journal of Financial Planning co-authored by Wade Pfau and yours-truly, finding that the optimal asset allocation in retirement may actually be to start more conservatively for clients and slowly increase equity exposure throughout retirement; a look at the trends in cash value life insurance, finding that use of the product actually has declined precipitously in the past 20 years, though the ones still using it today tend to be those who are older, wealthier, and most sophisticated; and a discussion of how to use bond ladders for retirement portfolios (with the caveat that at today's low rates, there's a significant trade-off to doing so).

We wrap up with three interesting articles: the first is a list of the 3 "big issues" that advisors need to examine more carefully when planning for clients (including our spending assumptions, our expectations about the stability of careers and income of our clients, and just how disruptive technology could be); the second takes a look at how the world of financial advice may be different in 2034, when there has been an entire generational turnover of financial advisors; and the last, which I highly recommend, by famed venture capitalist Marc Andreesen, on why Bitcoin is a much much bigger deal than most (advisors) realize, and its importance goes far beyond just being a speculative crypto-currency. Enjoy the reading, and be sure to check out Bill Winterberg's weekly advisor technology "Bits & Bytes" video at the end!

AdvisorHUB Reveals Wirehouse Recruiting Deals Actually Unlock More Value Than Selling An Independent RIA?

January 22, 2014 07:01 am 2 Comments CATEGORY: Practice Management

While limited industry data has made it clear that the pace of wirehouse recruiting, and the size of typical deals, has increased in recent years, there has been remarkably little information about the terms and details of the 'typical' deal. For the most part, this is because broker-dealers have not been very public about the deals that they're offering, likely because too much knowledge limits their ability to negotiate on an advisor-specific basis for a more favorable deal. At the same time, brokers themselves are usually not very open about the deals they complete. In part, this is because many broker-dealers require them to sign non-disclosure deals to keep the terms secret, but in some cases the reality is simply that the broker doesn't want other advisors or his/her clients to know what was paid to entice a change in firms (an area that FINRA is now scrutinizing).

The end result of this environment is a highly inefficient marketplace for advisors looking to transition from one wirehouse to another. Notwithstanding all this confusion, a new firm is looking to bring an end to the opacity of brokerage firm recruiting deals. Called "AdvisorHUB", for $9.99 advisors will be able to download a current report detailing the recruiting deal terms of dozens of broker-dealers, private banks, and wirehouses in today's marketplace via an Apple or Android app, based on the intelligence that the AdvisorHUB team is able to gather from its available connections and networks.

And an early glimpse at the data reveals a startling reality - it turns out that in a world where the 'typical' RIA deal is approximately 2X revenue, the typical wirehouse recruiting package is as much as 350% (3.5X) trailing revenue. In turn, this suggests that the reality the breakaway broker trend has been more of a trickle than a flood may have less to do with the captive confines of the broker-dealer world, and more to do with the simple reality that notwithstanding the lack of "equity", a broker can actually monetize their practice for as much or more than many RIAs. On the other hand, the reality is that the amounts that wirehouses are paying may well be unsustainable, especially if AdvisorHUB brings so much transparency to deal terms that every broker demands such treatment. Nonetheless, it seems that for the time being, having built a practice in a wirehouse - and staying there - may have been far more lucrative than the independent community ever realized, and that the decision to breakaway is far more nuanced than just the concept of "having equity [to someday sell] in the advisory practice."

News Highlight: Continued Lawmaker Concern On How Fiduciary Would Impact Middle Class

January 21, 2014 07:01 am 6 Comments CATEGORY: Industry News

As the debate around the fiduciary standard continues, lawmakers have once again expressed concern about whether the application of a fiduciary standard may raise the cost of advice for consumers, cutting off access to investment advice for the middle class.

Yet even as this anti-fiduciary argument persists, a closer look reveals just how ridiculous it is. The RIA marketplace is not less profitable than the brokerage world due to its fiduciary compliance costs; in fact, brokers are finding the fiduciary RIA world so much more appealing that the breakaway broker trend has persisted for years.

Instead, the real challenge is that the market for advice is so complex, consumers have trouble choosing at all, and as research has shown, such environments of "information asymmetry" can lead to a "market for lemons" where the quality declines as dishonest businesses drive the honest ones away. In turn, this suggests that in the end, applying a consistent fiduciary standard for those who offer advice may actually be the single best way to drive down the cost of advice for consumers!

How Technology Is Reshaping And Commoditizing The World Of Investment Advice

January 20, 2014 07:01 am 9 Comments CATEGORY: Investments

The ongoing march of technology and explosion of the internet over the past 20 years is slowly but steadily reshaping the world of investing advice. As more and more tools become accessible directly to consumers, many of the services once provided by financial advisors to analyze, review, and construct client portfolios can now be done at a dramatically lower cost, and without the advisor being involved at all.

In reality, this simply represents the next step in technology continuing to commoditize many of the core services that financial advisors provide their clients, from the days of implementing trades (i.e., actually being a "stockbroker") that's been demolished by online discount brokerage, to helping with the investment search-and-selection process (being replaced by online tools and analytics), to the construction of passive strategic diversified portfolios that can now be accomplished for 25 basis points or less by a number of "robo-advisor" solutions.

Ultimately, this doesn't mean that financial advisors will disappear altogether, as ultimately technology can augment the relationship but not replace it; nonetheless, it will force advisors to continue to evolve their client solutions to stay ahead of the technology commoditization curve, as clients will only pay "so much" for the relationship alone. Some advisors may choose to become more active and (attempt to) deliver a greater value-add with respect to the portfolio itself in the form of alpha, while others may choose to offer financial planning services as a value-add (as many have already begun), and still others may decide to abandon investment management as an offering altogether and focus solely on providing personal financial planning advice itself. Whatever the outcome, though, it seems those advisory firms who hang their hat today on providing little more than the construction of passive strategic diversified investment portfolio for a 1% AUM fee may be in serious trouble, as technology continues to commoditize their core business offering.

Weekend Reading for Financial Planners (Jan 18-19) – Practice Management & Tech Edition!

January 17, 2014 01:01 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" with a special focus on practice management and technology topics! This week's reading kicks off, though, with news from the CFP Board's ongoing saga in the Camarda lawsuit; the latest development is that the CFP Board declined to answer a large number of questions in a deposition with its staff counsel, in turn prompting the Camardas to ask a Federal judge to sanction the CFP Board for failure to comply with the deposition and the CFP Board maintaining that the questions from the Camarda attorneys are just a "fishing expedition" beyond the scope of their actual case.

From there, we also have an article on the recently announced SEC regulatory priorities for 2014, which includes a deeper look at "reverse churning" inactivity in fee-based AUM accounts, the activities of dual-registered advisors, how advisors handle IRA rollovers (dovetailing on the DOL's anticipated new fiduciary rules), and a big push for more investment adviser examinations. There's also a discussion of whether robo-advisors may finally start to become a threat to advisors - or not - as Wealthfront announced this week that it has crossed the $500M AUM mark, after being at little more than $100M a year ago.

We also have a number of additional practice management and technology articles this week, including: two interesting industry studies released this week, where the first shows that wealthy clientele are increasingly adopting a multi-advisor approach and not consolidating advice and assets with just one person, and the second study finding that while advisor client retention is consistently high, there is a noticeable dip in retention for advisors 2-4 years after a client relationship begins (suggesting a clear area for focus for advisors who want to boost retention); an article looking at how best to build relationships with centers of influence (based on a live panel where attorneys and accountants were asked to rate advisors' "pitches" to them); some very practical tips about how to dramatically increase how many meetings you're conducting and the amount of face time you're getting with your clients; and two technology articles by Bill Winterberg, the first looking at some helpful productivity apps, and the second a review of how to use the free Google Forms service to conduct based survey and client data gathering activity.

We wrap up with three interesting articles: the first is a remarkably good list of all the conventional practice management wisdom that is often repeatedly but rarely implemented in full, presented as a series of potential "mistakes" that advisors should avoid; the second is an article about the latest research on persuasion and how to (ethically) influence clients to act; and the last is a fascinating interview with popular personal finance blogger "Mr. Money Mustache" who retired at the age of 30 and now writes about how to retire early with a modest lifestyle, built around a message not of Scrooge-like frugality but a simple focus on enjoying the things that matter the most in life and letting go of the rest of our spending excesses (and some light chastisement towards financial planners that perhaps we focus too much on saving for old-age affluence and not enough on managing spending). Enjoy the reading!

The Untenable State Of State Estate Taxes – Recouple, Repeal, Or Enact Gift Taxes

January 15, 2014 07:01 am 6 Comments CATEGORY: Estate Planning

The past decade has been a tumultuous one for the world of state estate taxes. What had been a rather stable structure for decades, with the Federal credit for state estate taxes paid that allowed states to create a "sponge tax" to absorb the maximum Federal credit, was brought to an end with the Economic Growth and Tax Relief Reconciliation Act of 2001, and in the years that followed the system was phased out and replaced with a state estate tax deduction instead. As a result, states faced the possibility that their estate tax revenue would drop to zero, which is in fact what happened for all states by 2005 that did not "decouple" from the Federal system to create their own state estate tax, often with their own exemptions.

Yet the reality is that for the remainder of that decade, states had continued to rely upon the Federal $1,000,000 gift tax exemption threshold to effectively "backstop" their state estate tax systems; after all, without any gift tax system, the estate tax doesn't really work, as people simply gift the money away before they die to avoid paying the tax at death. In turn, a new wave of state estate tax "disruption" occurred at the end of 2010 when the fiscal cliff legislation "reunified" the Federal gift and estate tax systems, bringing up the Federal gift tax exemption from $1,000,000 to an inflation-indexed $5M+ level, removing in the process the Federal gift tax support structure for the states that still had a gift tax.

As a result, in today's environment the states remaining with a state estate tax find themselves in an untenable position; most have an estate tax but no gift tax, which just invites citizens to either give away the money before they pass away, or relocate and change their residency to another state to another the tax (which causes the state loses income, property, and other tax revenue as well!). To fix the problem, states are increasingly compelled to come up with a solution: either enact gift taxes themselves to backstop the system (and then hire auditors to oversee and enforce the system); repeal the estate tax; or "recouple" the state back to the Federal system, to once again rely on the Federal tax structure and the IRS to backstop the states. Ultimately, it remains to be seen which path the states will pursue, but the likelihood for legislation is increasing - some states are considering proposals already - which means the time window is quickly closing for anyone who actually wishes to take advantage of the state estate tax "loophole" that still exists today!