Nerd's Eye View blog

Will Monthly Retainers Be The Next Big Business Model In Financial Planning?

October 28, 2013 07:05 am 14 Comments CATEGORY: Practice Management

The business of financial planning is in a state of flux, both within the US and around the world. The broad financial services industry has gone increasingly in the direction of a relationship-based assets-under-management approach, a combination of the potential to serve clients with ongoing financial planning, the allure of recurring revenues, and technology's brutal commoditization of many previously-profitable transactional business models - a potentially prescient shift, as the potential for fiduciary regulation in the US could further flatten much of the transactional commission-based model as is occurring with the regulatory reforms of other countries around the world.

Yet at the same time, financial planning faces a new challenge - the increasing focus on the AUM model has left it a profitable way to serve the asset-centric baby boomer generation, but is an ineffective model to reach the even-larger Generation Y that simply does not have the assets to support the model (along with a large segment of Gen X that, similarly, simply does not have the liquid net worth to work with advisors on an AUM basis). The end result is that as financial planning goes increasingly fee- and fiduciary-centric, it is struggling to find a way to serve "the rest" of the market beyond affluent baby boomers.

While the hourly financial planning model has shown some promise, its ability to gain traction has been limited, arguably due in part to the fact that it is a very transactional model for what is ultimately a relationship business, and because the pricing model makes the costs so salient for consumers that many balk at the immediate cost-benefit trade-off. Yet an alternative, through a combination of business refinements and the efficiencies of technology is beginning to emerge: a monthly retainer model, structured like a "financial planning subscription" that may finally open up financial planning to the middle class with a sustainable, profitable business model.

Weekend Reading for Financial Planners (Oct 26-27)

October 25, 2013 12:04 pm 4 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's reading kicks off with three interesting industry articles: the first looks at some recent strong statements from the FPA at its recent FPA Experience conference against the CFP Board, even while the organization renews its commitment to CFP professionals; the second is an interview with Sheryl Garrett of the Garrett Planning Network and how the network and its advisor members continue to evolve; and the third is a prospective look at how the financial services industry is changing in the coming two decades, heavily influenced by its currently low position on the trust/reputation scale after a decade of financial services scandals and debacles.

From there, we have several practice management articles this week, including: the benefits some advisors are finding in expanding their practices to lower net worth clientele; advice from practice management consultant Angie Herbers about how female advisors need to get comfortable being more "selfish" and acting on their own behalf; and how running a financial planning business is like poker, in that if you're sitting at a difficult table, you can always get up and change tables (and change your business model/target clientele).

There are also a few technical articles, including one about how risk tolerance measures could be improved, another looking at some examples of the size of premium assistance tax credit subsidies for those buying health insurance on the exchanges (which, because the rules are based on income only, can apply for clients even with a very high net worth), and a look at how advisors are increasingly using HELOCs again as home equity levels rise and banks become more willing to lend.

We wrap up with three interesting articles: the first looks at how dramatically life expectancy has increased over the past 150 years, though despite significant medical advances it turns out the driving force of the improvement has been our ability to better manage (and avoid) the spread of disease; the second looks at how you can inspire more creativity and build a "culture of healthy debate" in your advisory practice to encourage growth; and the last is a "manifesto" from blogger and personal finance writer Ramit Sethi, who makes the case that people would be better served by focusing less on traditional financial advice around budgets and trimming little expenses, and more on the "Big Wins" that can really meaningfully impact their finances and more importantly, establish healthy financial behaviors. Enjoy the reading!

Should Advisors Use Series I Bonds To Hedge Inflation And Rising Rates In Client Portfolios?

October 23, 2013 07:01 am 10 Comments CATEGORY: Investments

Government bonds that pay a rate of return that adjusts with inflation to ensure investors receive a fixed, real return have been around since the late 1990s. The most popular form are Treasury Inflation Protected Securities (TIPS), which can be purchased in brokerage accounts or directly from the Treasury, are actively traded in the secondary market, and are often pooled together into increasingly popular mutual funds and ETFs as investors worry about the risk of future inflation. Yet shortly after the arrival of TIPS, the U.S. Treasury also began to issue "Series I Bonds" directly to investors; these government savings bonds were an alternative to the historical Series E/EE and H/HH bonds, but like TIPS offered a rate of return that would float with inflation and ensure a specific fixed, real rate of return.

As real interest rates declined over the past decade, and the U.S. government experienced a sharp increase in debt issuance, TIPS have become increasingly popular as a way to hedge against the risk and fear of future inflation. Given the nature of their return, arguably I bonds can do so as well, but with one notable feature that makes them quite unique: the U.S. Treasury is always available to redeem Series I bonds at their full value, which eliminates any risk that their prices could decline if/when/as interest rates rise. In addition, unlike TIPS bonds, that have some very unfavorable tax treatment (which is why they're often held within IRAs), the I bond actually accrues and compounds its interest without paying it out, which allows the investor to both avoid reinvestment risk and enjoy automatic tax deferral as long as the savings bond is held!

Given these unique features and benefits of Series I bonds, arguably financial planners and their clients should be looking more closely at I bonds (or "Ibonds"!) as a potential way to hedge inflation and rising interest rates in client portfolios, or simply to use as an alternative to cash or ultra-short-term fixed income at a more appealing yield. Unfortunately, dollar amount limitations on the purchase of I bonds restricts the extent to which they can be used, and the requirement that I bonds be held in a TreasuryDirect account (and not a standard brokerage/investment account) further limits the practicality of their use. Nonetheless, for clients who are looking to manage their exposure to inflation and rising rates, or would simply like a better return on emergency funds or short-term funds they don't plan to use for a few years anyway, perhaps it's time to give Series I bonds a closer look.

Financial Planning For Gen X And Gen Y Clients: Focus On Human Capital First

October 21, 2013 07:03 am 2 Comments CATEGORY: Human Capital

For those who are retiring, their income needs for the remainder of their lives will be funded by their financial capital - the numerous assets that have been accumulated in various types of accounts, that can either generate income directly, or be systematically liquidated to free up necessary cash flows. For younger clients, though, the reality is that their "human capital" - the ability to generate earnings from their labor - is actually the greatest asset on their balance sheet, and financial capital simply represents human capital that was converted to income and saved rather than spent.

From this perspective, the reality is that for younger clients, financial planners can bring significant value to the table by helping clients to enhance and maximize not just their financial capital, but also their human capital. Sometimes, it may even be better to invest in the client's career than a tax-preferenced retirement account, and many clients unwittingly fail to diversify between their financial and human capital.

Accordingly, in the future firms that are aiming to serve younger clientele should consider adding "career asset management" services, and advising clients on their career decisions, and not focus too heavily on "just" the financial products clients need to purchase or the assets they have available to manage. In fact, such services may be especially conducive to an ongoing retainer-style financial planning engagement, and become a way for advisors to bring value to the large number of underserved Gen X and Gen Y clients. And of course, clients who are effective maximizing their human capital in the early years may even become the clients with the most financial assets in the future, too!

Weekend Reading for Financial Planners (Oct 19-20)

October 18, 2013 01:10 pm 3 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's reading kicks off with two interesting bits of regulatory news: the first discusses a recently released report from FINRA focusing on broker-dealer conflicts of interest, and advocating that brokerage firms need to do a better firm of focusing on their clients' interests and mitigating or avoiding their conflicts of interest (though the word "fiduciary" isn't actually used); and the second looks at a sharp rise in the number of arbitration settlements that brokers are getting expunged through FINRA, as a redemption process that was theoretically supposed to be used in just "limited, unusual circumstances" is now getting approved in almost 97% of requests over the past several years, in the process obscuring consumer access to important information about an advisor's regulatory record.

From there, we have a number of practice management articles this week, including: some tips on how to prepare clients for what may soon be an onslaught of direct hedge fund advertisements and marketing; how to defend your online reputation from negative publicity (hint: the best defense is a good offense); how some advisors are successfully differentiating themselves as "remote" advisors working virtually with clients; the problem with the "access to principals" paradox where advisors promise clients to have direct access to them, simultaneously promoting the growth of the firm but limited its growth potential and equity value; how to create a tagline for your advisory practice; tips to crafting a good career plan for your advisors (why do we create financial plans for all of our clients but no career plans for our staff!?); and a fascinating article looking at how to build a good partnership/ownership culture in an advisory firm.

We wrap up with three interesting articles: the first looks at a recent study that finds financial literacy may not actually be very effective at helping consumers with their financial problems, and that other techniques (like "just-in-time" education when needed, or even developing more simple rules of thumb) may actually be more advantageous; the second provides a great reminder of the importance of reducing our distractions to focus on our work (and that multitasking isn't really beneficial, despite what many think); and the last is an article from financial advisor blogger Josh Brown that tells the story of why and how he got started as a blogger, and how other advisors can do so, too. Enjoy the reading!

Is The LTC Cost Guarantee Of Today’s Hybrid Life/LTC or Annuity/LTC Insurance Policies Just A Mirage?

October 16, 2013 07:02 am 33 Comments CATEGORY: Insurance

As traditional long-term care (LTC) insurance becomes more and more expensive, and interest rates remain at ultra-low levels, planners and their clients have become increasingly interested in so-called "Hybrid LTC" policies that match together a life insurance or annuity policy with LTC coverage, especially with a more favorable set of tax rules that took effect in 2010. For many, though, the primary appeal of hybrid policies is the simple fact that, unlike their traditional LTC insurance brethren, the premiums really are guaranteed and cannot be increased in the future. Given some of the extraordinarily large premium increases that traditional LTC coverage has experienced in recent years - especially for some of the early policies issued in the 1990s and early 2000s - a cost guarantee is remarkably reassuring.

Yet the reality is that the guarantee of LTC premiums in a hybrid policy may be entirely offset by the fact that the insurance company controls the cash value, and is under no obligation to pay a going rate of return, especially if interest rates rise. In other words, it doesn't really matter that the insurance company can't increase the premiums on the policy by $4,000/year, when the company can simply under-pay on the interest rate by $4,000/year to accomplish the same result! And while the cash value of a hybrid LTC policy generally does remain liquid, taking a withdrawal to reinvest to get better, higher rates would entail surrendering the policy and forfeiting the LTC coverage! In fact, for some types of hybrid LTC policies, the arrangement contractually provides no rate of return to the client at all, and is essentially the equivalent of the client selling a call option on interest rates to the insurance company, where the more rates rise the greater the company wins at the expense of the client!

Given the unique structure of hybrid LTC policies, though, there are still several circumstances where they may be appropriate, despite the concerns about how they may perform in a rising rate environment. In some cases, simplified underwriting provides a way to get coverage for those who otherwise couldn't get any, and in other scenarios, the favorable tax treatment alone can make a hybrid policy compelling as a place to park an existing appreciated annuity. Nonetheless, the bottom line is that in today's environment, consumers must be careful not to engage into hybrid policies that amount to little more than offering the insurance company the unilateral right to profit if/when interest rates rise, when the reality is that simply following a "buy LTC insurance and invest the rest" philosophy would lead to a far better outcome in the long run.

6 Ways Money Really Can Buy Happiness For Your Financial Planning Clients

October 15, 2013 06:41 am 2 Comments CATEGORY: General Planning

A fundamental aspect of financial planning is to help clients achieve their goals... yet the unfortunate reality is that some clients have difficulty even identifying productive goals in the first place. And for some, even upon achieving their goals, they find the outcome unsatisfying, resulting in a new, greater goal of "more" in a never-ending cycle. To say the least, many clients find that setting and achieving their goals does not result in the happiness they anticipated.

In this guest post, Dutch financial planner Ronald Sier shares some insights about the latest research on money and happiness from Elizabeth Dunn and Michael Norton, Sonya Lyubomirsky, and more, who have found that in fact there really are some ways to buy happiness... or at least, ways that money can be spent that is more likely to result in happier outcomes, from spending on experiences (rather than stuff), spending on others (not yourself), spending money to "buy" time, or directly spending to many small pleasures rather than a few big ones.

While many financial planners question whether it's appropriate for an advisor to "tell their clients how to spend their own money" the research suggests that some financial planner wisdom could go a long way in helping clients to really derive a bit more happiness from their money. And of course, the guidance is equally relevant to advisors who may be looking for a little more happiness around their own money, too!

The Rise Of The Employee Advisor At Financial Planning Firms

October 14, 2013 07:01 am 2 Comments CATEGORY: Practice Management

Throughout most of its existence, the survival of a financial planner has been built around an "eat what you can kill" mentality; those who could find and bind clients were successful, and those who couldn't hunt for clients successfully didn't survive. Accordingly, most financial planning firms were relatively small businesses, essentially little more than a sole practitioner "hunter" with a handful of support staff.

However, as advisory firms have increasingly shifted over the past decade from a commission-based transactional model to an AUM-based recurring revenue relationship model, the separation of business development of new clients from the servicing of existing clients has created a new role: the employee advisor. And as the number, size, and scale of AUM-based firms has exploded, so too has the number of employee advisors - to the point that, accordingly to the latest industry study, they actually outnumber the owner/partner advisors!

The implications of this shift from hunter advisor to employee advisor is significant. On the one hand, the emergence of multiple tiers of employee advisors is creating the "missing career track" of financial planning, and providing a safe home for advisors who may be wonderful financial planners but terrible at business development. Ultimately, the existence of such career tracks may help to attract far more young talent into the industry. On the other hand, the dearth of young talent available today, coupled with the pace of advisory firm growth, suggests that the talent squeeze will get much worse before it gets better. From the firm's perspective, this may make it increasingly difficult for smaller firms to hire and retain the talent they need to grow and compete. From the perspective of younger advisors, on the other hand, the career opportunities in the coming decade may be nothing short of astounding.

Weekend Reading for Financial Planners (Oct 12-13)

October 11, 2013 01:01 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's reading kicks off with a scathing expose from Bloomberg Markets on managed futures funds, suggesting that many have been hiding underlying fees and expenses as high as 6% to 9% per year, resulting in high profitability for the firms that offer them but nothing for the investors who buy them, as overall 89% of the upside of the managed futures funds studied had been eaten up by costs over the past decade.

From there, we have several industry and practice management articles, including one about how wirehouses are evolving (the breakaway broker trend is still just a trickle, and the large firms are marshalling their resources to create a compelling wealth management offering), how many broker-dealers are refining their technology to support advisors (with a focus on mobile productivity, deep cross-software integrations, and more sophisticated trading and rebalancing platforms), and an interesting look at how different generations of prospective clients require different messaging and communication styles if advisors hope to reach them.

We also have several more technical articles this week, including a look at how probabilistic retirement planning may be great for analytical purposes but is difficult if not impossible for clients to truly understand, a study of whether "sequence of return" risk may be overstated (as even Year 2000 retirees are still faring reasonably well despite the past decade of low returns, and are doing even better if just small mid-course adjustments were made along the way), tax planning strategies for trusts to avoid the new higher top tax rates in 2013, how to plan around the new 3.8% Medicare surtax on net investment income, and a Journal of Financial Planning study on how to use an internal rate of return (IRR) analysis to properly evaluate the value of an existing life insurance policy and whether to keep funding it.

We wrap up with three interesting articles: the first looks at how pricing wars in the advisory space are compressing profit margins in "just" building regularly rebalanced passive strategic asset allocation, which will increasingly force advisors to really figure out how to get paid for their advice to succeed; the second explores how financial planning needs to expand its garden of knowledge by cultivating a coherent and comprehensive theoretical framework, establishing "Finology" as another course of study like psychology and sociology; and the last looks at some of the recent research explained in the book "Happy Money" by Elizabeth Dunn and Michael Norton about how, spent properly, money really can buy some happiness.

Enjoy the "light" reading!

How The Premium Assistance Tax Credit For Health Insurance Impacts The Marginal Tax Rate

October 9, 2013 07:03 am 14 Comments CATEGORY: Taxes

As 2014 approaches, the new health insurance exchanges will begin their open enrollment, and along with the new exchanges will come the premium assistance tax credit, intended to make health insurance purchased on an exchange more affordable for the "lower income" - which is actually broadly defined to include everyone up to 400% of the Federal Poverty Level. As income rises, the premium assistance tax credit is slowly phased out, until eventually it provides no benefit at all.

However, the reality is that because the premium assistance tax credit phases out as income rises, it indirectly serves as a surtax that triggers higher marginal tax rates for those who are phasing the credit out. And the marginal impact is actually quite significant; at relatively modest levels of gross income from $25,000 to $50,000 of income, the premium assistance tax credit effectively doubles the marginal tax rate (to more than 30%) for those who are purchasing health insurance from the individual exchange. For older households that are claiming Social Security early, but still obtaining health insurance from an exchange (as they're not eligible for Medicare yet), the effect can be even more severe, as marginal tax brackets, the phaseout of the premium assistance tax credit, and the phasein of Social Security taxability all overlap.

The end result doesn't mean that it's a good idea to avoid generating income - the marginal tax rates are significantly higher than just the individual's tax bracket, but nowhere near 100% tax rates. Nonetheless, the introduction of the premium assistance tax credit may mean a whole new level of in-depth year-to-year tax planning for those with relatively modest incomes, who can be subject to surprisingly high marginal tax rates under the new rules.