Nerd's Eye View blog

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!

News Highlight: CFP Board Reduces Length Of CFP Exam From 10 Hours To A 6-Hour Single-Day Test

January 14, 2014 07:01 am 28 Comments CATEGORY: Planning Profession

Last week, the CFP Board issued a press release announcing that it was transitioning from a paper-based test to a computer-based testing process, in an effort to improve the ease and efficiency of the test-taking experience for CFP certification candidates. The move to computer-based testing will allow the CFP Board to issue preliminary results immediately, offer official results in just 1-2 weeks (down from 5 weeks with the paper-based exam), and dramatically expand the breadth of available testing locations.

Yet in a surprising and dramatic change that was explained as little more than a side "benefit" to the computer-based exam process, the CFP Board also announced that the length of the CFP exam going forward would be chopped by a whopping 40%, from 285 exam questions down to only 170, while the duration of the exam itself is reduced from a 10-hour day-and-a-half exam into a 6-hour single-day exam.

While the CFP Board maintains that this is not a change in how hard the CFP exam really is - i.e., the difficulty of the exam isn't meant to be increased nor decreased by the change, because the (fewer) questions themselves will still be targeted for similar difficulty - the question arises nonetheless why the CFP Board would implement such a change, if the goal wasn't to at least create the perception that the exam will be easier and therefore more appealing to take? Which in turn raises the question - did the CFP Board just lower the standards of the CFP exam and try to make it easier to grow the ranks of CFP certificants?

Why Most Financial Planners Will Soon Be Forced To Lower Their Minimums

January 13, 2014 07:01 am 16 Comments CATEGORY: Practice Management

The growth of financial planning has been an incredible success story of the past 40 years, as the broader financial services industry slowly but steadily continues its shift away from the pure sale of products and towards the direction of personalized financial advice. Over the 25 years since the first CFP certificant was minted in 1973, nearly 10% of financial advisors obtained the designation, and the pace has accelerated as the CFP certification has continued to grow while the total number of advisors has been stagnant, now reaching what may be the “tipping point” of nearly 25% of all financial advisors.

Yet at the same time, the growth of CFP certificants – especially in the past decade – has not only outstripped the growth of all financial advisors; it has also dramatically outpaced the growth in the number of affluent households that financial planners typically serve. The end result: we are rapidly approaching the point where there are so many CFP certificants that there aren’t enough available half-million, millionaire, or wealthier clients available for them to serve.

As a result, financial planning may soon undergo a shift towards serving a wider base of clientele. The change will be driven not merely out of a desire to become a recognized profession that serves a wider base of the public, but instead out of sheer business necessity as financial planning firms of the future find they must lower their minimums and seek out a new “blue ocean” of prospective clients rather than continue to fight in a highly competitive space where just being a comprehensive financial planner is no longer the differentiator it once was!

Weekend Reading for Financial Planners (Jan 11-12)

January 10, 2014 01:01 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's reading kicks off with a big announcement from the CFP Board that it will be converting the CFP exam to be computer-based and in the process permanently reducing the length of the exam from 10 hours down to only 6 (and cutting the number of questions by 40% to match it). There's also a striking article reporting on the volume of Roth conversions that occurred in 2010 - the first year it was possible to convert without income limits - as the IRS found conversions increased nearly 1,000% over the 2009 numbers, and were especially concentrated amongst high-income investors (though ironically, they may have benefitted the least from the decision to convert!).

From there, we have a couple of practice management articles this week, including a roundtable interview in the Journal of Financial Planning about technology trends for advisors and the rise of the "robo-advisor", a review of the new financial planning software WealthTrace, and an announcement by financial planning software inStream that it is abandoning its free model and converting to an ongoing subscription model (and rolling out a lot of interesting features as well).

We also have a number of investment-related articles, from a discussion of William Bernstein's new book "Deep Risk" about the unique kinds of long-term risks that can permanently impair client portfolios, to a great summary by Reformed Broker Josh Brown about the current state of affairs in markets (we're somewhat overvalued, but with the animal spirits stirring, there's no reason why the party has to stop anytime soon), to a prediction that the "surprise" event of the year could be a default by Puerto Rico that sends ripples (or shockwaves?) through the municipal bond market as risk is repriced. There's also an article looking at how many elderly variable annuity holders are now having the surprising problem that they can't keep holding their annuity in deferred status and instead must convert it to a stream of income... unfortunately forfeiting what may be a substantial death benefit in the process.

We wrap up with three interesting articles: the first discusses how advisory firms can overcome the "success paradox" where the key things that helped the firm grow to where it is may be the exact factors blocking it from growing further (and the primary issue: usually the bottleneck around leadership at the top); some suggestions from industry commentator Bob Veres about what the top issues are likely to be for advisors in 2014; and a striking internal research study from "robo-advisor" Betterment, that has begun to calculate the behavior gap on its aggregate tens of thousands of customers and found that, through its systems, the average behavior gap is a mere 0.31%/year, barely 1/5th of the behavior gap reported for the typical investor in similar research studies (and raising the question of whether "client behavior gap" is something all advisors and robo-advisors might be expected to start tracking and reporting on in the future?). Enjoy the reading!

Investing Around Human Capital – Is Your Client’s Career A Stock Or A Bond?

January 8, 2014 07:01 am 10 Comments CATEGORY: Human Capital

Effective investment management requires proper diversification of assets to manage risk and maximize the likelihood of funding client goals. However, the traditional approach for doing so focuses on a client’s investment portfolio alone, or perhaps their personal residence as well, but often ignores their greatest asset: their ability to continue earning income through the fruits of their labor, also known as their “human capital.”

Just as with financial capital, the value of human capital may rise and fall over time. However, the reality is that human capital for some clients is far more volatile than others. Careers like working for the government, or being a tenured professor, produce human capital that exhibits “bond-like” risk and return characteristics, while more corporate and/or entrepreneurial positions are more stock-like (including the fact that they may be outright correlated to the economic cycle and stock market returns).

Accordingly, effective diversification of the client’s entire household balance sheet may entail using financial capital to counterbalance against the risks of human capital; in other words, those with stock-like careers should own more bonds, while those with bond-like careers can afford to own more stocks. Similarly, decisions about savings should recognize that sometimes, investing in human capital can actually produce a greater Return On Investment than saving (even better than buying stocks in a Roth IRA for the long run!). So the next time you’re working through financial planning decisions with your client, remember to consider whether their career and human capital behave more like a stock, or a bond!