Nerd's Eye View blog

4 Tips To Better Structure Your Financial Advisory Firm For Gen X Clients

January 7, 2014 07:01 am 1 Comment CATEGORY: Client Trust & Communication

While the bulk of financial services has been focused on the baby boomer generation - as the saying goes, they're "where the money is" - an increasing acknowledgement is growing that at some point, financial planners have to expand their horizons to the Generations X and Y that follow. Not just because eventually, Gen X and Gen Y will inherit the remaining wealth of the baby boomers, but also because - in the case of Gen X at least - they're beginning to reach their peak earnings years, and build some serious wealth of their own.

In this guest post, Ted Jenkin of oXYGen Financial, an advisory firm that is squarely focused already on serving Gen X and Gen Y - and is doing so successfully - shares some of his own tips about how to serve Gen X effectively. From reframing away from retirement planning to "exit planning", to recognizing the importance of coaching outside of purely financial matters, to trying to bundle services not just for pricing but for efficiency from the client's perspective, Ted provides insight on how working with Gen X is different than generations past.

So whether you're looking to work more with Gen X clients, or perhaps figure out why you've had limited success trying to work with them already, hopefully this article will be helpful to you in considering how you might need to shift your services to serve Gen X clients more effectively. Alternatively, if you're just thinking about working with Gen X at some point in the future, this article should provide a roadmap of some of the services you'll need to consider - and expertise you must develop - along the way.

Top 3 Issues Financial Planners Will Face in 2014: Fiduciary Regulation, Demographics Pressures, And Robots Vs Cyborgs (Vs Humans)

January 6, 2014 07:01 am 4 Comments CATEGORY: Planning Profession

As we begin 2014, a number of issues loom that may have broad impact for advisors in the coming year. Perhaps most significant is the fact that we may finally see some activity on the regulatory front; the next fiduciary proposal from the Department of Labor is targeted for August of 2014, and while the SEC may be taking a back seat on the fiduciary issue and waiting for the DOL to act, the regulator has committed itself to step up oversight (i.e., examinations) of investment advisers, and may even take up the recent SEC Advisory Panel's recommendation to begin levying "User Fees" on RIAs to help fund increased oversight. On the other hand, the CFP Board may also face its own turmoil this way in its ability to oversee CFP certificants, as the challenging Camarda case plays out.

In the meantime, the slow-motion trainwreck that is the advisory industry's demographics problem will continue to play out; the latest Moss Adams study showed that employee advisors are now outnumbering owner advisors, yet the number of advisors available to hire who have capacity for new clients continues to dwindle. While the anticipated mass exodus of retiring advisors has been more like a trickle so far - for a number of reasons - the veteran advisors who remain still cannot solve the capacity of growing firms that need to hire younger advisors to take the lead. In the coming year, the problem is going to become a lot more noticeable.

The third key trend for 2014 will be the continued rise of the "robo-advisor" but with a more nuanced look; while the robo-advisors seem to have exploded onto the scene in 2013, the reality is that by numbers, most of them are still quite tiny (especially relative to the venture capital they raised), and none appear to actually be economically viable and even running at a breakeven pace yet (much less making the return-on-equity profits their funders expect). In the coming year, we'll begin to see which robo-advisors will outpace the others and pull ahead, and many will aim to refine their models; some may even decide that it's more constructive to be a partner with advisors than a competitor, given the reality that most robo-advisors are actually more in competition with online brokerage tools like Schwab and E-Trade than human advisors. At the same time, it may be the heavily technology-enabled advisors - the "cyborg advisors" - who really begin to shine, blending the best of technology and human skills that pulls ahead of both the robo-advisors and the humans.

And in the meantime, the potential for a bear market will continue to loom in the coming year. Whether 2014 turns out to be the next stock bear market - or a rapid unfolding of the long-anticipated bond bear market - remains to be seen. But if 2014 is the next big one, expect the decline to ripple across the industry, as advisors who have rapidly grown their AUM businesses receive a stark reminder of the importance of profit margins to protect against the inevitable revenue declines that come from time to time, as many advisory firms are now so large that they cannot simply grow their way through a bear market with new clients!

Weekend Reading for Financial Planners (Jan 4-5)

January 3, 2014 01:23 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's reading kicks off with the latest announcement from FINRA, that they are putting a heightened scrutiny on IRA rollovers, just as the Department of Labor is anticipated later this year to issue its own fiduciary rule on IRA rollovers, and raising the question of whether FINRA is trying to accommodate and prepare for the DOL rule or reassert its own jurisdiction on the issue. There's also an interesting article covering a recent survey from Spectrem Group that suggests prospective clients may have their own views about what "wealth management" means that differs from how advisors view the issue.

From there, we have a couple of practice management articles this week, including a look at how advisors may generate the most clients from client referrals but the best clients come overwhelmingly from Centers of Influence; a story of how one young advisor climbed the ladder from intern to CEO of an independent RIA and what it takes to climb the ladder; and a look at some of the differences in what Gen X/Y clients expect from their advisors versus baby boomer clients (hint: the Gen X/Y clients laughed out loud at the thought of having a 90-minute meeting).

From there, we have several more technical financial planning articles this week as well: a challenging article that questions whether commodities futures funds are really living up to their promise of high ("stock-like") returns with low correlations; a discussion of whether we may already be in another housing bubble, this time driven not by consumers but by private and institutional investors, as affordability hits new all-time lows; a look at whether client fears that their children won't be able to get into any college may be completely overblown; and a discussion of how the file-and-suspend Social Security claiming strategy, typically used for married couples, may actually be an effective approach for singles as well as a form of "delayed benefits insurance."

We wrap up with three interesting articles: the first is a discussion from an advisor who blogs about the benefits that he/she finds, beyond just the opportunity to develop business, from helping to clarify thinking to a mechanism for accountability; the second is an interesting discussion for technology innovation commentator Vivek Wadwha about how the United States may be poised for a new renaissance driven by real integration of the digital world into all industries that could spur a new wave of economic growth; and the last is an interesting discussion of how financial plans might be made more engaging for clients by inviting them to find images of their goals that they identify with, and then using those images to help them better visualize, connect with, and stay accountable to pursuing their goals. Enjoy the reading!

Mailbag: Home Office Vs Outside Office Space And Credibility As A Startup Financial Planner

January 2, 2014 07:01 am 8 Comments CATEGORY: MailBag

Many readers of this blog contact me directly with questions and comments. While often the responses are very specific to a particular circumstance, occasionally the subject matter is general enough that it might be of interest to others as well. Accordingly, I will occasionally post a new "MailBag" article, presenting the question or comment (on a strictly anonymous basis!) and my response, in the hopes that the discussion may be useful food for thought.

In this week's MailBag, we look at a question about whether it's important and necessary to have a physical office space when you're starting your financial planning practice, or if it's just a waste of money. Can any advisor really establish trust and credibility with clients with only a digital presence, or is that limited to just younger advisors serving younger clientele?

Understanding The Two 5-Year Rules For Roth IRA Contributions And Conversions

January 1, 2014 07:01 am 93 Comments CATEGORY: Taxes

While Roth IRAs are very popular as a retirement savings vehicle due to their tax-free growth treatment, they also have several unique rules associated with them to ensure that their favorable tax status is not abused. In particular, there are two different 5-year rules associated with Roth accounts to prevent them from being taken advantage of; the first 5-year rule applies to Roth contributions and determines whether earnings will be tax-free, while the second 5-year rule applies to Roth conversions and determines whether conversion principal will be penalty-free.

Each of the 5-year rules are measured from the beginning of the tax year for which they apply, which means in reality tax-free earnings or penalty-free conversion principal may be accessible in less than 5 years in certain circumstances. And because the Roth rules aggregate all accounts together for the purposes of determining the tax treatment of various distributions, it's necessary to track the various 5-year rules and the amounts they're associated with, regardless of whether they are held separately or mingled together into a single account.

Ultimately, being able to effectively navigate the various Roth 5-year rules creates several planning opportunities as well. For some, taking advantage of the Roth conversion 5-year rule is a way for those well under age 59 1/2 to tap their IRA funds "early" without an early withdrawal penalty. For others, the reality is that the Roth conversion 5-year rule is a moot point anyway, because they already meet another exception to the early withdrawal penalty (e.g., already being over age 59 1/2). However, in all cases, the 5-year rule for contributions must be met before any Roth earnings can actually be tapped tax-free; fortunately, though, because any first-time contribution or conversion can start the clock, clients who are concerned about the 5-year rule can make a contribution to a Roth (or to a traditional IRA and then convert it) to start the time window now, and ensure they'll never need to worry about it in the future!

Top 13 Nerd’s Eye View Blog Posts Of 2013

December 30, 2013 07:01 am 0 Comments CATEGORY: Nerd's Eye View

As we come to the end of 2013, I'm thankful to all of you, the readers who continue to visit Nerd's Eye View more and more often and share this content with your friends and colleagues (which is greatly appreciated!). The continued growth of this blog led to its re-designed launch at the end of this summer, and you'll continue to see enhancements coming in 2014 (if there's something you think we're still missing, please let us know in the comments!).

As busy as the year can be between life and work, though, I realize that many of you don't have the time to keep up with everything that's written here, and the ever-present challenge of blogging is that articles, once published, quickly vanish into the archives, never to be seen again outside of an occasional Google search from time to time. Accordingly, I've compiled for you this list of the 13 most popular articles I wrote this year on Nerd's Eye View (along with our most popular guest post!). So whether you're new to the blog, or simply haven't had the time to keep up with everything, I hope that some of these will (still) be useful or of interest to you!

Thanks for a great 2013, and looking forward to an even better 2014!

Weekend Reading for Financial Planners (Dec 28-29)

December 27, 2013 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 the latest news on the fiduciary front, that the Department of Labor may have delayed its latest rule reproposal to next August because incoming Labor Secretary Tom Perez is trying to rally support in Congress for the rule and preemptively address Democrat concerns about whether middle-income families may be cut off from financial advice as a result of higher regulatory costs. Also in the news was the striking announcement that Vanguard has collected a whopping 98% of all net inflows to U.S. equity funds this year, and rumblings continue about the recent Schwab announcement that they will offer a money-back guarantee for the last quarter's AUM fees for any advisory clients who are unhappy and whether this will set a new accountability precedent for advisors.

From there, we have a number of practice management articles, including some suggestions on how to handle the situation when an advisor/employee leaves, when it's time to think about hiring a professional manager for an advisory firm, the emerging rise of regionally-dominant "super ensemble" RIAs that have $5M+ of revenues and often $1B+ of AUM, and the 2013 "Best In Technology" awards from advisor tech guru Bill Winterberg.

We also have a pair of technical financial planning articles this week: the first looks at some of the traps and pitfalls of properly valuing life insurance policies that are being transferred to ILITs (given that the gift valuation rules are 50+ years old and life insurance has evolved greatly since then!); and the second is a discussion of the prospective benefits and caveats of a Department of Labor proposal that would require all defined contribution account statements to show an estimate of lifetime income that would be available at retirement given the current value and ongoing savings.

We wrap up with three interesting articles: the first is a look at some of the latest research on how we make choices, the fact that more choices can actually make it harder for clients to move forward, and the role that planners can play to help clients make better choices; the second examines the typical marketing of financial planners, noting that most appeal to a prospective client's analytical side, despite a growing base of research that makes it clear that people are more compelled to buy a product or service that appeals to their emotions instead; and the last is an interview with Ric Edelman about his firm, which now boasts a whopping $12B of AUM and 22,000 clients, focused entirely on the mass affluent, with plans to grow significantly more in the coming years... notwithstanding the fact that most large firms still insist that the mass affluent cannot be served profitably! Enjoy the reading!

Owning Deferred Annuities In Trusts And Preserving Tax-Deferral Treatment

December 25, 2013 07:01 am 28 Comments CATEGORY: Annuities

Annuities have long enjoyed preferential treatment under the tax code - so extensive, that they merit an entire portion of the tax code, IRC Section 72, all to themselves. The favorable rules are generally intended to support the use of annuities as a vehicle for retirement savings and/or retirement income... and as such, the rules generally only apply in situations where annuities are owned directly by individual, living, breathing human beings who may in fact someday retire (known in the tax code as "natural persons").

Accordingly, whether annuities owned by trusts still enjoy tax-deferred growth depends upon the exact details of the trust. The rules do allow that when a trust owns an annuity "as an agent for a natural person" the contract can still keep its tax-deferral treatment, such as when it's owned by a revocable living trust; even if merely all the beneficiaries of the trust are natural persons, such as with a bypass trust for the benefit of a surviving spouse and children, favorable treatment is still available. However, if other beneficiaries are involved - even and including charities - a trust-owned annuity may lose its preferential treatment.

An even more complex point of intersection between annuities and trusts is when annuity contracts are transferred to/from a trust. The problem is a key section of the tax code designed to prevent the unrealized gains of annuities from being shifted to another individual through gifting; as a result, if an individual transfers an annuity "without full and adequate consideration" its gains are immediately recognized. By this rule will not apply to transfers to a revocable living trust, or most types of transfers out of a trust, in the case of some common estate planning techniques - like gifting an annuity to an Intentionally Defective Grantor Trust (IDGT) - the situation remains unclear, and clients and their advisors must be cautious not to accidentally create an unfavorable taxable event!

The Real Reason Most Financial Planning Firms Have No Career Track

December 23, 2013 07:01 am 3 Comments CATEGORY: Practice Management

In recent years, it has been increasingly popular to lament the lack of career tracks at most financial planning firms, especially as financial planning struggles in the aggregate to attract enough new advisors to fill the shoes of those likely to retire in the coming decade.

Yet for all the furor about the need for career tracks, relatively few firms have established them so far, and the ones that have tend to be the largest of the advisory firms. Yet indirectly, that perhaps is the point - it takes a certain size and scale to be able to craft a career track in the first place, and most firms are simply not large enough to do so.

Of course, that doesn't mean there are no opportunities in financial planning. For the subset of firms that are enjoying some healthy growth - where 15% compound growth rates double the firm every 5 years - there are an ever-growing array of opportunities available.

Nonetheless, what this suggests is that as long as most advisory firms are small, trying to create fully fleshed out career tracks may be unrealistic anyway. Instead, the real focus should be on firms that are growing, which may increasingly become an imperative for those practices that want to attract and retain the top talent, and the new question for new planners should shift away from "what is the career track at this firm" to instead focus on "what are this firm's plans for growth" instead.

Weekend Reading for Financial Planners (Dec 21-22)

December 20, 2013 03:01 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's reading kicks off with some of the latest industry news, including a new filing from the CFP Board in its lawsuit with the Camardas asking the court to either throw out the lawsuit or at least narrow the scope of the Camardas' information requests as being a "fishing expedition" (if the court declines the motion, depositions of key CFP Board staff members will begin in the coming weeks); there's also an interesting announcement from Schwab that they will begin rebating the last quarter's worth of fees for any unhappy advisory clients (will other financial advisors feel compelled to match the offer for their own clientele?), and an interesting study from TIAA-CREF suggesting that Gen Y may actually be even more receptive to financial advice and willing to change their behavior than baby boomers.

From there, we have a number of "trends and predictions" articles that are so common towards the end of the year, including a white paper about "transformations" that broker-dealers must make to survive and be competitive as the differences between B/Ds and RIAs continue to blur with the movement towards AUM business models, a look at some of the big regulatory changes coming in 2014 (beyond just fiduciary and harmonization, look for increased focus on protecting clients from identity theft and business continuity plans for advisory firms), some of the biggest tech trends coming for advisors (big focus on the cloud and software integrations), and a broader look at four 4 trends that will impact advisors for many years to come (from demographics to technology and more).

We also have a few more technical articles this week, including a discussion from actuary Joe Tomlinson on some of the latest research debates on the best asset location strategies, an interesting (and high quality) analysis of some of the flaws in the Shiller P/E10 ratio and how to fix them, and a broad look at how estate planning is changing in a world of 'permanent' exemptions that have removed most clients from the reach of Federal estate taxes (shifting the focus to income tax planning, step-up in basis opportunities, and asset protection).

We wrap up with three interesting articles: the first discusses the recent acquisition of David Loeper's Wealthcare Capital and their Financeware financial planning software by a private equity firm, which is notable not just because they are investing into growing the company, but because they may also try to re-assert Loeper's patents related to financial planning (which some have gone so far as to call a risk to all financial advisors); the second is an article looking at the challenges that average Americans have with trying to save, and how it may be less a matter of their attention span or focus and more than the sheer urgency of spending interruptions prevents them from ever focusing on the less-urgent-but-still-important financial goals; and the last is an interview with indexing legend John Bogle, who suggests that the ETF industry has taken indexing "too far" and that he wouldn't advocate investing in almost 97% of today's ETFs! Enjoy the reading!