Nerd's Eye View blog

When Will There Finally Be A Good Personal Financial Manager (PFM) Software Solution For Advisors?

November 18, 2013 06:01 am 38 Comments CATEGORY: Technology & Advisor FinTech

In the world of technology, some of the most cutting edge computers, tools, and software are bought and used by Wall Street. Yet the reach of technology to financial advisors has been severely limited; at best, most solution categories have only a handful of players, often built around homegrown tools creative by/for one advisor and marketed to others, or much larger platforms that have to be extensively adapted and customized to actually be relevant for financial advisors. To the extent that any venture capital dollars are invested into financial services solutions, it seems they tend to be offered directly to consumers, rather than as a tool for advisors.

One of the key areas where this shortcoming is most notable is the world of “Personal Financial Management” (PFM) software, where market dominator Mint.com serves consumers directly, but has not been adapted or expanded for use with advisors, and the alternatives actually available for advisors are meager at best, often focusing solely on aggregating investment and retirement assets but falling far short of a comprehensive financial planning solution.

Nonetheless, the market potential for a PFM serving advisors is huge; while most direct-to-consumer solutions struggle to generate enough revenue to be financially successful while trying to get consumers to pay directly, or to induce consumers to buy other financial services products the tool recommends, advisors might happily pay an ongoing fee for an effective solution targeted directly for them. After all, imagine if you as an advisor could have your clients enter simple financial account information into a computer and have an immediate snapshot of the client’s assets, liabilities, and cash flows in the very first meeting (and every plan renewal thereafter). The tremendous efficiency and productivity enhancement – not to mention a better client experience – could be a breakthrough for expanding the reach of financial planning!

Which raises the question – when will a financial technology startup finally take up the incredibly low-hanging business fruit, rise to the challenge, and build the advisor PFM tool we could all so desperately use?! And why isn't the allure of a company that could generate tens of millions of steadily recurring revenue from advisors enough to draw venture capital interest!?

Weekend Reading for Financial Planners (Nov 16-17)

November 15, 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 some big news from the CFP Board, which announced this week that it will not be pursuing its controversial proposal to offer CFP CE credit, and instead will be offering up a series of initiatives over the next 3-5 years aimed at lifting the overall quality of CFP CE across all programs; in addition, the CFP Board also announced that it will be extending its "Let's Make A Plan" public awareness campaign by another two years, citing better-than-expected results from its public awareness metrics.

From there, we have several regulatory-related articles this week (following on the heels of Tuesday's guest blog post regarding FINRA's significant fiduciary shift with its recent "Report on Conflicts of Interest"), including a new consumer educational program from Wall Street trade organization SIFMA entitled "Our Partnership With You" that advocates consumers should receive best-interests personal investment advice (though the word "fiduciary" was not used), an announcement by FINRA that it is making its BrokerCheck and IARD systems more accessible and consumer-friendly for those who want to check up on their advisors, and a summary of the current state of various fiduciary activity (from the SEC, DOL, and FINRA) presented at this week's Schwab IMPACT conference (along with another article that provides overall highlights from the event).

There are also a few technical articles, including a good summary of this week's proposals to "fix" the Obamacare problems by extending the time period that insurance companies can renew "old" insurance plans without cancelling them (and some of the problems with trying to do so), the potential coming offering of new "R-Bonds" from the US Treasury as a new kind of IRA alternative, a discussion of some of the practical caveats and limitations to the 4% "rule", and an interesting look at just how long it may take for a total return bond fund to recover from various interest rate increases (hint: a while, but not as long as clients might fear, and still with far less volatility than equities).

We wrap up with three interesting articles: the first looks at how bland and sometimes unprofessional the typical "Out of Office" email is, or at best how it's purely "AUTOREPLY" style is at odds with what are otherwise high-touch high-relationship advisory firms (and some suggestions about how to improve accordingly); the second is from Steve Lockshin about trends that are likely to impact the advisory world in the coming years (excerpted from his recently published book "Get Wise To Your Advisor"); and the last provides a good reminder about how important it is to have a clear mission for your firm, noting not only do customers/clients increasingly prefer mission-driven companies, but that employees who worked at firms with clear mission and follow-through were twice as likely to want to stay with their current employer and three times more likely to have high job satisfaction! Enjoy the reading!

The Idiocy Of The IPO Price Pop

November 13, 2013 06:07 am 9 Comments CATEGORY: Investments

With the rise of social media companies in recent years, there's been a rise of social media company IPOs, creating a frenzy almost on par with some tech company IPOs of the late 1990s, especially for big, high-profile companies like Facebook and more recently, Twitter.

Yet along the way, it seems that we've lost perspective of what constitutes a "successful" IPO in the first place; while Twitter has been hailed as a success, with its whopping 73% pop in its IPO, while Facebook was viewed rather negatively, as the company struggled to even hold its IPO price in the open markets, the reality is that from the perspective of the companies themselves, arguably Facebook was the success and Twitter marks Wall Street at its worst. After all, think about it from the perspective of the company - if you were selling a portion of your business to raise capital, you want to see your portion of the sale occur at the best price possible, not at an lower price that limits the benefit for the company and maximizes the short-term profit for those lucky enough to get their hands on an "underpriced" IPO!

While the reality is that some price "pop" on the day of an IPO is healthy, inasmuch as it alleviates fears of IPO buyers and makes them more comfortable to take on the risky unknown that is IPO pre-commitment of share purchases. Nonetheless, the fact remains that expecting a pop as big as the one Twitter saw may be more notable for the amount of money Twitter left on the table - money that the company won't be able to use towards justifying the market capitalization that has now been established. And from the individual investor's perspective, arguably buying IPO shares on the open market when they start trading - the practical reality for most retail investors who don't have access to direct IPO shares - represents the worst of both worlds, simultaneously paying the maximum price for the shares, and investing in a company that doesn't even get the full benefit of its own IPO value. So perhaps its time to stop celebrating the idiocy of the big IPO price pop, something that benefits neither the retail investor, nor the company they're buying!

Is The Fiduciary Battle Shifting With FINRA’s “Report On Conflicts Of Interest”?

November 12, 2013 06:01 am 5 Comments CATEGORY: Planning Profession

The past several years have been a bit of a rollercoaster for potential changes to the regulatory landscape for advisors. In the aftermath of the financial crisis, there was discussion of imposing a fiduciary duty on financial advisors as a part of the Dodd-Frank legislation, though it was ultimately scaled back to just a study on the issue under Section 913. Given that the study confirmed there was widespread confusion on the issue of standards for advisors, the Dodd-Frank legislation also authorized the SEC to promulgate new rules to lift the standard for advisors to one "no less stringent" than the Investment Advisers Act, though at this point it remains to be seen whether such a "uniform fiduciary standard" will ultimately be issued, the terms of its standards, and what organization will be responsible for it, especially given the Registered Investment Adviser industry's opposition to FINRA as a potential regulator.

In this context, the recent release of FINRA's "Report on Conflicts of Interest" is all the more striking, as discussed in today's guest post by regulatory lobbyist and expert Duane Thompson. In its report, FINRA takes a surprisingly candid look at the conflicts of interest rife within the brokerage industry, suggesting many times that brokers may need to adjust their compliance processes and procedures to fit a standard more consistent with the best interests of the customers.

What's notable about this FINRA report is not merely the details of the conflict of interest discussion itself - for which Thompson provides an excellent summary - but the fact that in writing it, we may be witnessing an historic shift in FINRA's positioning on the issue. After all, if the reality is that a fiduciary standard is inevitable, FINRA risks being made irrelevant altogether if it can't demonstrate that it is capable of regulating financial advisors in a future fiduciary world. Accordingly, while the Report on Conflicts of Interest never actually uses the word "fiduciary" even once, it seems clear that FINRA is beginning to take steps to lift the standards for brokers, likely in no small part to help demonstrate that it is capable of regulating a clients'-interests-first fiduciary standard for advice, as FINRA tries once again to position itself as a future regulator of all financial advisors, albeit under what would be a higher uniform standard than what exists today.

Why Your Financial Planning Pricing Should Be Clearly Stated On Your Website

November 11, 2013 07:01 am 9 Comments CATEGORY: Marketing

As consumers increasingly use the internet to research potential products and services, a financial planning firm's website is often the prospective client's first impression. Yet unfortunately, the reality is that most financial planning firms fail to answer the three basic questions any consumer has when visiting the website for a potential professional to hire: 1) What services do you provide? (i.e., what is your value); 2) Do you work with people like me? (i.e., what are your minimums and am I in your firm's target niche?); and most important, 3) How much will this cost?

The last issue in particular is often a sticking point for financial planners, who fear that if costs and fees can't be discussed in person, the client may misunderstand or not properly evaluate the value the firm provides. Yet the reality is that avoiding the issue on your website doesn't help; instead, it simply drives away prospective clients and referrers who move on to the next website/professional who does clearly disclose cost! Transparency is a fundamental factor in building trust... which means being opaque about the cost of your services is not exactly the best way to start a trusting relationship!

The solution, instead, is to clearly communicate the pricing of your financial planning fees on your website; and if you're concerned that clients will not evaluate the costs properly, then provide them "proper" comparisons on the spot! Transparency is crucial to establishing trust, but it doesn't have to exist in a vacuum!

Weekend Reading for Financial Planners (Nov 9-10)

November 8, 2013 02:02 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's reading kicks off with three articles highly critical of the CFP Board. The first is a warning from FPA Board President Michael Branham that the CFP Board's consideration of becoming a CE provider and competing against the 1,200 CE education providers it regulates is an untenable conflict of interest that could cause "irreparable damage" to the credibility of the CFP marks. The second article is a discussion of the latest CFP Board debacle when it granted amnesty to hundreds of wirehouse brokers who had violated CFP Board rules in their compensation disclosure on the CFP Board's own website, even while it publicly and privately disciplined other advisors - including former CFP Board Chair Alan Goldfarb - for similar offenses. The third article is from a CFP certificant who works with clients strictly on a fee-only basis, but because of an unrelated ownership interest is not permitted under CFP Board rules to state that he is "fee only" - and declares that if necessary, he will drop his CFP certification rather than cause client confusion by stating he is "commission and fee" when in reality no clients will ever pay any commissions.

From there, we have several practice management articles this week, including one that provides an overview of the 10 types of online investment startups that may impact financial advisors (some favorable, some complementary, and some competitive), a second that provides some coverage of this week's T3 Enterprise conference for advisor technology, and a third that provides an interesting process about how to craft a client value proposition statement (without all the data, numbers, and target client demographics typical of so many client value propositions).

There are also a few technical articles, including one looking at potential tax law changes that may be coming as a part of the December 13th Congressional budget negotiations (high on the list for planners: potential changes to the favorable payroll tax treatment of S corporation dividends), a second explaining the recent judicial challenge to the premium assistance tax credits that could have a significant "surprise" impact on the Affordable Care Act, and the third providing some excellent advice from 529 guru Joe Hurley about how to properly handle grandparent-owned 529 plans while preserving favorable financial aid treatment for the grandchild/student.

We wrap up with three interesting articles: the first provides a fascinating analogy that compares low- versus high-cost investing to joining gyms that have donut-eating requirements; the second points out that just as planners recognize that financial planning should be about the clients and their goals and not the numbers, financial planners themselves should focus less on numbers-centric business coaches and more on holistic-goal-centric life coaches; and the last provides a humorous look at the so-called "robo advisors" by putting forth a list of 10 questions that consumers can ask to vet their robo-advisor (a riff on the all-too-common "10 questions to ask to vet your financial advisor" articles). Enjoy the reading!

The Impact Of Taxes On The Safe Withdrawal Rate

November 6, 2013 07:07 am 8 Comments CATEGORY: Retirement Planning

While the first safe withdrawal rate research originated nearly 20 years ago, it was simply based on an analysis of the sustainable cash flows that could be drawn from a portfolio over a 30-year time horizon based on various historical scenarios, ignoring the impact of fees and taxes. Of course, in the real world clients must bear the cost and impact of both, which reduce not only the amount of growth that the portfolio enjoys over time, but also the level of sustainable cash flows.

In reality, though, extensive research has been done over the past two decades to model the impact of taxes (and fees) on safe withdrawal rates. The impact is not as severe as some might fear - it's not as though the safe withdrawal rate must be chopped by 25% for a client in the 25% tax bracket - due to the fact that taxes have a natural self-mitigating effect, as they are only due when the portfolio has appreciated (which is when it has the most money available to pay those taxes). Of course, if the account actually is a pre-tax IRA, though, the net spending really does have to be reduced for the entire marginal tax rate!

Although the application of these adjustments can become complex when combining taxable accounts, pre-tax retirement accounts, and tax-free Roth IRAs, the fact remains that a proper application of the safe withdrawal rate research should reduce a client's recommended spending to account for the future drag of taxes, along with investment expenses and advisory fees. On the other hand, the good news is that other factors can help to boost the safe withdrawal rate as well, including a client's greater diversification (i.e., more diversified than the original research assumptions), spending flexibility, and varying time horizon. Ultimately, all of these adjustments can be incorporated to arrive at an appropriate safe withdrawal rate recommendation for a client.

Helping Clients To Switch Behavior By Directing The Rider, Motivating The Elephant, And Shaping The Path

November 4, 2013 07:01 am 5 Comments CATEGORY: Client Trust & Communication

Even though in the end much of the success in a financial planning engagement ultimately comes down to behavior change - helping a client alter whatever he/she was doing towards something that will better allow them to achieve their goals - there is still remarkably little education and training for financial planners focused directly on behavior change. Instead, advisors must turn to resources from other industries and professions to find ideas and best practices about how to help their clients actually make the behavioral changes necessary to achieve their goals.

A recent new book, however, makes headway in this regard. "Switch" by Chip and Dan Heath, provides one of the most accessible books yet on understanding behavior change and the techniques that can help to bring it about. Using a fantastic series of metaphors, the Heath brothers liken the battle in our brains between the rational and emotional sides as an elephant and its rider - noting that at best, the rational rider can help to steer the direction that the two will go, but that ultimately it's the energy and drive of the elephant that will dictate most outcomes. Accordingly, the authors suggest that the best way to ultimately achieve behavior change is through a combination of efforts, to direct the rider, motivate the elephant, and shape the path that the pair must follow to help guide the outcome.

The book provides a remarkably good framework for financial planners, who arguably spend a great deal of time oriented towards directing the rational rider to long-term goals, but don't spend very much time at all focused on how to motivate the elephant or shape its environment. In fact, many planners are notorious for focusing entirely on the "rational" solutions without engaging "messy" client feelings (a classic "rider-centric" planning approach), and we often spend almost no time at all thinking about how clients can reshape their environment to help themselves succeed (for instance, by encouraging clients to find a social support group for their problematic spending behaviors, or suggesting that they think about relocating to a neighborhood or getting a different group of friends who will be less likely to encourage their bad spending behavior). While the book "Switch" doesn't necessarily provide a lot of new and original research (at least for anyone who's read the works of many of the primary researchers in this space from Daniel Kahneman to James Prochaska), it provides what is easily one of the most accessible treatments of the topic that can help planners to think fresh about how they might incorporate more behavioral change techniques into their own practices!

Weekend Reading for Financial Planners (Nov 2-3)

November 1, 2013 01:31 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 IRS announcement of 2014 inflation adjustments, which will move everything from the top 39.6% tax bracket to the AMT to a new Federal estate tax exemption (up to $5.34M next year), though many key areas will have no change, including IRA contribution limits (still $5,500) and the annual gift tax exclusion amount (still $14,000/year). There was also a second big tax announcement this week - the Treasury is relaxing the "Use It Or Lose It" rules for flex spending accounts (FSA), and instead will now allow up to $500 to be carried over to the following year.

From there, we have several articles related to the new health care exchanges and the shifting landscape for health insurance decisions, including one about how to counsel clients if they're just finding out their individual health coverage is being cancelled (hint: doesn't mean they can't get coverage, just that they have to get new coverage that meets the new requirements), a second providing a workaround for many financial planning clients and advisors who are struggling with the technical glitches on Healthcare.gov (if you don't need a Premium Assistance Tax Credit, just go through a health insurance agent!), and the last looking more broadly at how many financial planners are starting to develop an expertise in health insurance and Medicare as a specialization (especialy for retirees trying to navigate health care through their 50s and 60s).

We also have an array of technical and practice management articles this week, including: new foreign tax reporting requirements for clients who live (or retire) abroad under FBAR and FATCA; a reminder of the importance of having a privacy policy for your advisory firm (and the easy model templates available to craft one safely); a warning from the SEC that it is going to focus in 2014 on examinations of RIAs that have been around at least three years but have never been examined in the past; a list of reasons why it might be a good job to quit your advisory firm as an employee (along with an important reminder to try to work through problems first, and only view quitting as a last resort!); and a look at the industry trends around wirehouses (while there's been much discussion about the breakaway broker trend, it still amounts to little more than a trickle based on the amount of wirehouse advisors and assets).

We wrap up with three interesting articles to give you something to think about: the first is one of the more comprehensive overviews I've seen on all the academic research (good and bad) about the fiduciary standard and how such a standard might impact access to advice for the middle class; the second is a discussion from a former NestWise advisor (the LPL subsidiary that was aiming to bring financial advice to the middle class before it was abruptly shuttered a few months ago) about what was and was not working well as a practicing advisor on the platform; and the last is an interview with financial planning professor and researcher John Grable, who advocates for more "applied" research from academics that advisors can really put into practice with their clients. Enjoy the reading!

Using Social Proof To Help Clients Make Better Financial Planning Decisions

October 30, 2013 07:04 am 1 Comment CATEGORY: Client Trust & Communication

In uncertain situations, we often look for social cues about what to do based on what everyone else is doing. This kind of "social proof" can be highly effective in helping us to navigate what to do in the absence of proper information. In fact, sometimes the effects of social proof can be remarkably powerful, causing the herd to do something dramatic "because everyone else is doing it too," even if no one in the crowd actually knows why they're doing it!

Unfortunately, though, the principles of social proof are often used unintentionally, and in fact can be unwittingly applied to encourage negative behavior. From teenagers making irresponsible decisions because their friends are doing it, to baby boomers not saving for retirement due in part to a perception that no one else is doing it either, it's important to consider the social proof ramifications of any message that is communicated. Otherwise, there's a risk that explaining the commonality of a bad behavior will actually communicate to people that the behavior is socially condoned and that it's ok to do it!

On the plus side, though, financial planners are often in a good position to invoke the positive effects of social proof on behalf of their clients. If the "normal" behavior is bad, we can establish positive role models of what the normal behavior of a "good" outcome would be instead. On the other hand, applying social proof with clients also requires us to let go of the idea that absolutely every client scenario is completely unique, and instead try to identify ways that a client's situation are similar to others, to provide a positive social proof context. But the bottom line is that since our brains are hard-wired to create these kinds of comparisons, just ignoring the phenomenon is not an option!