Nerd's Eye View blog

Sage Scholars Tuition Rewards – A “Loyalty Points” System For Providing Wealth Management Services?

April 14, 2014 07:01 am 6 Comments CATEGORY: Practice Management

As financial planning and wealth management become increasingly popular, advisors are increasingly experiencing a "crisis of differentiation" where it's difficult to distinguish themselves from the competition. This has not only slowed the organic growth rates of many advisory firms as it gets harder to generate referrals, but made client retention all the more crucial to maintain the revenue of an advisory firm.

A new offering for financial advisors called SAGE Scholars offers a unique new way for advisors to offer a "client perk" that can help to support retention and potentially generate referrals: Tuition Rewards, which are "rewards points" clients can accrue based on the assets under management (or potentially, the retainer fees) being paid to the advisor, as a rate of 5%/year of the AUM. Which means a client with $1,000,000 of assets with an advisor can potentially accrue a whopping 50,000 points per year, which can be used as a dollar-for-dollar discount for tuition amongst a list of 323 eligible colleges and universities (up to 1 year's worth of free tuition) for any family member (including children, grandchildren, nieces, nephews, etc.).

Ultimately, the reality is that many students can already potentially earn merit-based aid and discounts from many schools, but there is little certainty about whether the discounts will really be there when the time comes. From the advisor's perspective, then, offering Tuition Rewards as a form of "loyalty points" for clients can have a high perceived value for clients who wish to stay with the advisor, and be something that potentially generates "buzz" amongst clients to drive additional referrals as well. In an environment where it's difficult to find unique "client perks" that are relevant to clients in the first place, the SAGE Scholars program represents an intriguing new opportunity!

Weekend Reading for Financial Planners (Apr 12-13)

April 11, 2014 03:07 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a strong response from CFP Board chair Ray Ferrara to last week's rather harsh editorial from Financial Advisor magazine's Evan Simonoff, focusing on all the ways that CFP Board has been growing successful in recent years, and suggesting that many of the criticisms being levied at the organization are more about what the organization once was, rather than what it actually is today.

From there, we have several practice management articles, including a good overview of what advisors should know and pay attention to regarding this week's widespread "Heartbleed" internet security bug, a look at how the SEC is turning up its attention on the growing space of hybrid- and dual-registered advisors, a review of the new software company Oranj which provides website and client "app" tools for advisors, some guidance about key areas that firms should focus on if they're planning to grow "inorganically" (e.g., via mergers and acquisitions), and a good discussion of the other key factors to consider when selling your practice besides just the valuation multiple (many of which can impact the sale even more!).

We also have a trio of more technical planning articles this week, from a good list of 24 Social Security "quirks" and planning tricks (or traps!), to a nice discussion from the New York Times about the current landscape of college financial aid and the increasing distinction between how public and private colleges determine "need" and available aid, to an overview of the current legal landscape when planning for "digital assets" and prospective legislation called the Fiduciary Access to Digital Assets Act (FADAA) that may pass later this year.

We wrap up with three interesting articles: the first looks at how, in the end, having a good website is the key to succeeding in getting clients online, and that trying to get active with social media isn't going to yield much of a result if it's not paired together with a website that can actually convert visitors to true prospects and eventually to clients; the second provides a great reminder that, as long as we're irrational human beings, there is a limit to what a "robo-advisor" or any automated solution can really accomplish, though advisors may still be underestimating how well such tools can execute what they are designed to do; and the last is a big announcement this week from "robo-advisor" Betterment that it is 'breaking ranks' with the other robo-advisors and launching Betterment Institutional, an offering to partner with and provide a version of its platform directly to RIAs, a big step that begins to blur the line between where a robo-advisor will end and a human advisor will begin.

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!

Evaluating Exposure To The Alternative Minimum Tax And Strategies To Reduce The AMT Bite

April 9, 2014 07:01 am 7 Comments CATEGORY: Taxes

While the American Taxpayer Relief Act of 2012 (ATRA) finally ended more than a decade of "temporary" Alternative Minimum Tax (AMT) patches and fixes that kept expiring and had to be renewed, the ultimate resolution of ATRA was not permanent repeal of the AMT. Instead, ATRA provided permanent "relief" by merely locking in the latest AMT exemptions from 2011, and adjusting the exemption - and everything else under the AMT system - for inflation going forward.

As a result, high-income individuals continue to be potentially exposed to the AMT, depending on exactly what their income levels may be, and the AMT adjustments and preference items that have to be added back to income for AMT purposes. Fortunately, though, a client's AMT exposure can actually be quickly evaluated by looking at a chart that maps income after deductions, and the amount of deductions that are lost for AMT purposes, to figure out what combinations of income and lost deductions will result in an AMT liability.

Notably, though, being exposed to the AMT is not always a "bad" outcome. In fact, because the top AMT tax rate is "only" 28%, in some cases high income individuals will actually want to accelerate more income into an AMT year. In an AMT environment, the primary planning opportunity is actually to manage income around the AMT "bump zone" - that span of income where the AMT exemption is phased out, temporarily boosting AMT rates (and capital gains rates!) by an extra 7%. For those below the AMT bump zone, the goal is to spread out income to stay below the zone. But for those above the AMT bump zone, it turns out the best strategy to reduce the long-term bite of the AMT may actually be to pay even more in taxes!

XY Planning Network and the Future of Getting Paid For Financial Planning

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

For most of its history, "getting paid" for financial planning has really been about giving away financial planning at little or no cost and making it up from the income generated by implementing the recommendations of the financial plan, first through the sale of insurance and investment products, and more recently by providing ongoing investment management services. While this has allowed for the growth of many successful financial planning firms, it also opens the door to the risk that the plan will lead to the sale of inappropriate products, and limits access for financial planning to those who have assets to manage or need to buy insurance or investment products in the first place.

To address this challenge, this month marks the launch of XY Planning Network, a new Turnkey Financial Planning Platform (TFPP) designed to help younger Gen X and Gen Y advisors who want to deliver financial planning to their Gen X and Gen Y peers, with a monthly retainer fee model that allows them to actually get paid for the advice itself and supports an ongoing financial planning relationship, without the sale of products or requiring AUM. Notably, this provides a path not only for younger consumers to finally have access to a financial planner, but also an important new career path for younger advisors who want to grow and develop a business serving their Gen X and Gen Y peers.

In fact, ultimately the launch of XY Planning Network may just be the next step in a long line of turnkey financial planning platforms that emerge, as advisors increasingly shift away from product- or asset-centric business models, towards ones that seek to get paid for financial planning itself. That doesn't necessarily mean that broker-dealers and custodians, or the associated product-based or AUM-based business models, are going to go away anytime soon. Nonetheless, the slow but inexorable transition towards actually getting paid for financial planning itself means the business models for financial advisors are changing, and so too are their needs for a very different kind of support service and infrastructure to help them be successful.

Weekend Reading for Financial Planners (Apr 5-6)

April 4, 2014 01:33 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a notable but nasty editorial from Financial Advisor editor Evan Simonoff, who suggests that the CFP Board has been irresponsible in setting its compensation for CEO Kevin Keller (at $888,000 in 2012, up 90% from 2008) and has been giving lavish travel perks to board members while trying to support the global growth of financial planning (with the potential for more details to come to light with the ongoing discovery process in the CFP Board's lawsuit with Jeff and Kim Camarda). Also in the news this week was a big announcement that Morningstar is acquiring ByAllAccounts for $28M, with rumors that this may lead to an account aggregation offering inside Morningstar Office (and possibly some interesting new analytics from Morningstar based on the data it can glean from its new account aggregation service).

From there, we have several practice management articles, including a good discussion from Financial Advisor magazine on the rise of the "robo-advisor", a plea from RIABiz editor Brooke Southall that it's time to stop calling them "robo-advisors" and adopt a better term instead, the latest from the FAInsight practice management research on the growing squeeze for quality lead (and even associate/support) advisors, and some advice about the "benefits" of firing a toxic client (what you lose in revenue from a client you can more than make it in a better firm culture and reduced staff turnover!).

We also have a trio of investment management articles this week, from a good discussion on the rise of "smart beta" strategies and fundamental indexing, to a WSJ "response" after the release of Michael Lewis' new book "Flash Boys" about High-Frequency Trading (HFT) from AQR founder Cliff Asness suggesting that on the whole HFT is driving down trading costs more than causing any trading harm (and that those complaining most about HFTs may be other HFTs and the legacy Wall Street firms they're undercutting), and an interesting discussion from Bob Veres about whether advisors need to do a better job analyzing the bonds that they hold and managing the "shape" of their bonds relative to the yield curve.

We wrap up with three interesting articles: the first looks at the launch of a new "Vanguard Personal Advisor Services" (VPAS) offering that provides wealth management plus financial planning with a $100,000 minimum and a mere 0.3% AUM fee (a new "quasi-robo-advisor"!?); the second is about how visual tools and interactive financial planning software may literally change the way our brains think through financial planning decisions; and the last looks at the research on aging and the brain, finding that perhaps the decline in our ability to make good financial decisions in later years isn't just about the potential onset of dementia but that our brains more selectively process information overall in our laters (which helps in many other ways, but not regarding our financial decisions!).

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!

How Delaying Social Security Can Trump Long-Term Portfolio Returns Or Lifetime Annuity

April 2, 2014 07:01 am 59 Comments CATEGORY: Retirement Planning

While much has been written about the inherent benefits of delaying Social Security benefits to age 70, a fundamental challenge in the real world is that the decision cannot be viewed in the abstract. The decision to delay Social Security isn't just about the value of delaying, but also about the money that must be spent from the portfolio to sustain spending in the meantime, and/or the decision to allocate money towards delaying Social Security and not towards other fixed income investments or a commercially available lifetime immediate annuity.

Yet a deeper look reveals that when viewed from an investment perspective, the decision to delay Social Security actually represents an astonishingly valuable "investment" return, based on the internal rate of return of the cash flows that it provides over time. While it is certainly unlike other more "traditional" investments, in that its return is based not on interest rates or market performance but on the longevity of one's life, for those who do live a long time the decision to delay Social Security can produce real (inflation-adjusted) returns of 4%, 5%, or even 6% for those who live into their 90s and beyond.

Calculated in this manner, the reality is that for those whose greatest retirement "risk" is living far past life expectancy, the decision to delay Social Security can actually be a highly beneficial investment, with a real return that dominates TIPS, is radically superior to commercially available annuities, and even generates a real return comparable to equities but without any market risk! Of course, there is still an aspect of "mortality risk" inherent in the decision to delay, but for those who are most concerned about living a long time and funding a long retirement, the decision to delay Social Security - even if it means partially spending down the portfolio in the meantime - can actually be the best means to securing a successful retirement, by converting the uncertainty of market returns into the certainty of higher Social Security payments!

News Highlight: SEC Issues New Guidance On Social Media And Testimonial Rule 206(4)-1

April 1, 2014 07:01 am 5 Comments CATEGORY: Industry News

As social media platforms continue to grow - and as is common, technological change outpaces regulators - the SEC has struggled (many suggest "lagged" might be more appropriate!) in its guidance regarding the advisor use of social media. While the core of the SEC's rules still ultimately boil down to: "Don't say anything on social media that would get you in trouble if you said it in any other public forum as well" the ambiguity regarding how these rules intersect with certain social media platforms has left many advisors (and their chief compliance officers!) confused and worried.

In a just-released update to its social media guidance, the SEC has provided some new rules and clarifications, especially regarding the potential use of third party "advisor review" sites, and also whether it's a testimonial violation to have (or participate in) a "community" or "fan" page, to have a public display of people you're connected to on social media channels (and whether it's an implied endorsement that you may be friends/followed by some of your clients), and whether it's permissible to direct clients to the advisor's social media pages to receive updates in the first place.

In general, the "new" rules are not surprising, follow a logical path to determining whether certain social media actions could constitute testimonials (e.g., the mere fact that clients happen to be connected/following/friending you is not deemed a testimonial), and unfortunately still do not address certain vagaries (e.g., are LinkedIn "endorsements" a violation of the testimonial rule or not?). Notably, though, the SEC's guidance was especially thorough regarding third-party "advisor review" sites and how such platforms can be administered safely without running afoul of the testimonial rules... in the process, potentially giving a green light to platforms ranging from Yelp to more advisor-specific review sites in the future!

The New Challenge In Training The Next Generation Of Financial Planners

March 31, 2014 07:01 am 6 Comments CATEGORY: Planning Profession

In the early days of financial planning, most "advisors" were ultimately insurance or investment salespeople, who evolved their skillsets and their practices over time to become financial planners. Accordingly, the education of financial planners was focused in adult education certificate programs, "learning" financial planning was about how to transition clients - and potentially the business model itself - from being focused on products, to advice instead.

As financial planning education began to shift to colleges and universities in the 1980s and 1990s, culminating in an explosion of degree-based financial planning programs in the early 2000s, this process of how a financial planner is trained as such began to change. While the first generation of financial planners were ultimately salespeople who became financial planners later, this next generation of financial planners will actually be the first seeking to enter the workplace and be trained as such from the start.

In turn, this transition is presenting new challenges for firms aiming to train and develop financial planners. While the historical process was to train experienced salespeople with existing clients to become financial planners, the new model looks more like the traditional one for professionals, starting with formal education, then transitioning to an "apprenticeship"-style period of gaining experience and honing skills, and only then - for the subset who wish to do so - going out to start a practice, and cultivate a skillset as a "salesperson" doing business development.

In other words, we used to train salespeople to be financial planners, and now the challenge is how to train financial planners to be effective salespeople! Ultimately, this will require new models of developing financial planners, as the required investment to train them are more significant than ever, in terms of both time and resources, forcing firms to figure out along the way how best to make the process of creating new financial planners successful for both the new advisor, and the firm as well!

Weekend Reading for Financial Planners (Mar 29-30)

March 28, 2014 03:43 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the latest news about the case between the CFP Board and the Camardas, with the latter filing a new motion in court to compel the CFP Board to move forward in the discovery process as the Camardas claim the CFP Board has failed to provide information in a timely manner. Separately, there's also an article that provides an interesting profile of the recent activities of Nick Schorsch, the non-traded REIT magnate who in the span of one year has exploded onto the advisor scene, aggregating together almost half a dozen different broker-dealers to quickly form what is now one of the largest B-D networks in the country.

From there, we have a trio of technical financial planning articles this week, including a look at the White House's recent suggestion that it may be time to curtail the File and Suspend Social Security strategy for wealthy couples (though doing so will require an act of Congress, so nothing changes are imminent), the rising use of Health Savings Accounts (HSAs) as a form of "Medical IRA" for more affluent clients, and an important cautionary note regarding no-lapse guaranteed universal life policies where some clients are finding that their guarantees are being forfeited not by paying premiums too late but by actually paying them too early instead!

We also have several practice management articles this week, including a provocative article from Mark Tibergien suggesting that perhaps it's time for the advisory world to spend less time talking about succession planning and more time focused on people development and cultivating the next generation of advisors instead, a look from Angie Herbers at the importance of creating an internal leadership team to begin cultivating your next generation of advisors and firm leaders, a review of a recent aRIA white paper on how to enhance the value of your advisory firm, and a good discussion of the 40-40-20 rule in evaluating and benchmarking the profitability of your advisory firm (and identifying what to change to 'fix' low profit margins).

We wrap up with three interesting articles on the theme of the rise of the robo-advisor: the first looks is from Bob Veres, and looks at how robo-advisors are commoditizing investment management and may ultimately lead to a bifurcation of advisory fees (a low AUM fee paired with a separate planning retainer); the second is from Angie Herbers, and cautions advisors not to become too enamored with the scalability of investment management and forget the importance of doing financial planning for clients to attract and retain them; and the last is from HighTower CEO Elliot Weissbluth suggesting that in the end the "robo-advisors" will not obliterate human advisors but will eliminate all the "posers" (those "advisors" who don't really add value with their financial advice and are just trying to sell investment products instead) which will actually make room for the "real" advisors to be even more successful!

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!

New Once-Per-Year IRA Rollover Rule Emerges from Bobrow v Commissioner Tax Court Case

March 26, 2014 07:01 am 31 Comments CATEGORY: Taxes

The Internal Revenue Code allows individuals who receive a distribution from an IRA to avoid tax consequences by rolling the funds over to an IRA within 60 days. However, to avoid abuse of the rule, the tax code prescribes that taxpayers can only complete an IRA rollover once in a 12-month period, which the IRS in the past has interpreted to apply to IRAs on an account-by-account basis. In turn, the "separate accounts" treatment of the IRA rollover rule potentially allows taxpayers to chain together multiple IRA rollovers, in an attempt circumvent the 1-year rule and gain "temporary" use of IRA funds for an extended period of time.

However, a recent Tax Court case, Bobrow v Commissioner, has shut down the separate IRAs rollover strategy altogether. In a case that started out as a taxpayer who botched a version of the sequential separate accounts rollover strategy, and drew the IRS' ire in the process, ended out with a finding of guilt for not only of botching the rollovers but having the Tax Court (re-)interpret IRC Section 408(d)(3)(B) as well. In the decision, the Tax Court applied the 1-year IRA rollover rule to apply in the aggregate across all IRAs, invalidating the separate IRA rollover treatment not only for Bobrow but all taxpayers as well!

In the aftermath of the Bobrow case, the IRS has now issued IRS Announcement 2014-15, stating that it will acquiesce to the Tax Court decision, update its Proposed Regulations and Publication 590, and issue new Proposed Regulations soon that will definitively apply the 1-year IRA rollover rule on an IRA-aggregated basis going forward. However, to allow time for transition - including taxpayers in the midst of rollovers left in the lurch, and IRA custodians who must update their own processes and procedures - the IRS has declared that the "existing" rules will be allowed through the end of the year. However, the new rules allowing only one IRA rollover in a 1-year period will be effective starting January 1, 2015 (potentially dating back to IRA rollovers that occur in 2014), so advisors and their clients should plan accordingly!