Nerd's Eye View blog

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.

Financial Planning Is All About Setting Priorities

October 7, 2013 07:03 am 10 Comments CATEGORY: General Planning

If clients could simply accomplish everything they wanted, at once, with the resources they had, financial planning would be unnecessary. It would simply be a world of instant gratification, as needs were satisfied on demand. Of course, in the real world, we can't simply have anything/everything we want whenever we want. Resources are limited, and as a result financial planning is essentially about trade-offs. We must prioritize which goals are most important to achieve, and allocate resources to them, recognizing that this means money may not be left to satisfy other goals (or wants or desires). Thus, in practice we might say that the essence of financial planning is to help clients prioritize trade-offs, and decide what goals will be satisfied first (and which will be second, and which won't be done until third, etc.).

However, in financial planning we have a problematic tendency to just "dump" a long list of recommendations on clients, with either an implicit expectation that they will implement everything, or with a series of priorities that the advisor (not the client) establishes as "the expert" as being most important. Yet behavioral research suggests that this can be daunting, overwhelming, or sheerly unmotivating for clients. In an effort to be comprehensive, protect ourselves from liability, and demonstrate the thoroughness of our expertise, we may be getting clients stuck into an analysis-paralysis paradox of choices, or worse simply overwhelming them into inaction.

Ultimately, the key may not merely be to give clients a comprehensive list of recommendations, or to tell them what steps they should take next, but instead to help them make the choice of what's most important to them and then hold them accountable to follow through on it. Accordingly, the ideal "Action Items" list for clients shouldn't just delineate everything the planner recommends in order, but be offered to clients with a series of blanks where they can fill in what's most important to them, what they will commit to do, and when. The goal is not to get everything done immediately, but instead to begin a process of incrementally getting a little done between (or at) each meeting, until the entire financial plan is finally implemented (and of course, by then it will be time update, change, and adapt accordingly in a continuous planning process!)!
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Weekend Reading for Financial Planners (Oct 5-6)

October 4, 2013 01:59 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's reading kicks off with a fascinating discussion of a younger planner who specializes in working with retirees decided to launch a series of specialized blogs to grow his AUM... and in only his second year, is already on pace to bring in more than $40M of new assets to his advisory practice (and his clients are older retired clients, not "young" people!).

From there, we have several investment related articles this week, including a look at the growing actively-managed ETF space, the ongoing rise of alternative investments, the opportunity to use Master Limited Partnerships (MLPs) to invest in the infrastructure around the oil and gas boom, a detailed look from Morningstar at different types of MLP structures and their yields and tax treatment, whether advisors should steer clients away from bonds in the current environment, and whether it makes sense to keep a mortgage or not in today's low-mortgage-rate (but also low-yield) environment.

There is also a pair of practice management articles: the first looks at some of the key "hot button" issues cropping up in the space of mergers and acquisitions (and succession planning) for financial advisors; and the second gives a good overview of the SEC's "testimonial" rule for RIAs and how it relates back to social media.

We wrap up with three interesting articles to give you something to think about: the first is a creative look at different ways that we can characterize advisory businesses, from geographically-based businesses to commodity-based solutions to community-based offerings (and the benefits and disadvantages of each); the second provides a good reminder that while regular communication and "touch points" are key to client retention, too much communication can be bad thing too, especially if what you're sending out in your communication isn't truly meaningful and substantive and relevant for clients; and the last is a fascinating discussion of a recent presentation by Blogger and Twitter co-founder Ev Williams about what it really takes for an internet-based business to be successful, noting that ultimately what really has the most success is not trying to invent something entirely new, but simply looking at what humans already do and the ways we connect and simply making the experience easier and more convenient. Enjoy the reading!

Understanding The New Premium Assistance Tax Credit

October 2, 2013 07:06 am 131 Comments CATEGORY: Taxes

The premium assistance tax credit, established under IRC Section 36B as a part of the Affordable Care Act (also known as "Obamacare"), took effect in 2014, and is intended to help make health insurance more affordable by providing a tax credit to subsidize the cost of insurance for “lower” income individuals.

In practice, though, the introduction of the premium assistance tax credit creates a new series of rules that financial planners must be aware of, for a wide range of clients who may potentially be eligible for the credit, which can apply for individuals with income up to $47,080 and a family of four earning $97,000 (in 2015, and adjusted annually for inflation). And given the dollar amounts involved for the credit itself (which can be worth several thousand dollars to a family), the ramifications of effective health insurance tax credit planning can be significant.

While the new health care rules have been controversial, with the new health care exchanges opening for enrollment on October 1st (albeit with some technology glitches and speed bumps so far!), the time is now for advisors to begin to get familiar with the new rules and some of their tax planning implications. For some uninsured clients, this may represent their first opportunity ever to get access to health insurance without medical underwriting - and with a premium subsidy to help - creating a newfound flexibility for employment and retirement decisions. For others, it will be important to comply with the new rules simply to avoid the potential penalties under the so-called "individual mandate."
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What Is The Philosophy Of Your Financial Planning Firm?

September 30, 2013 07:02 am 5 Comments CATEGORY: Practice Management

In a world where financial planning is guided by a standardized process but a lot of leeway about precisely what financial planning recommendations are crafted and implemented, the reality is that two well-intentioned financial planners can come up with remarkably different solutions for clients depending on their views and perspective. Whether it's the active vs passive debate, or permanent insurance vs buy-term-and-invest-the-rest, some planners just tackle client problems in a materially different manner than others.

So how can clients find the planner that's right for them, and how can planners ensure they're a good match for their clients? Consider crafting a "financial planning philosophy" document, that explains what you believe when it comes to all things financial planning, so clients understand the perspective of the advisor they're potentially going to work with. The point here is not to craft a politically balanced and sensitivity positioned document, but to help make it clear what your financial planning "deal breakers" are - the things you just don't believe in and won't recommend to your clients, period.

The goal of going down this path is to find people to work with who believe in what you believe - a crucial fundamental first step in having a positive long-term relationship. In fact, using your financial planning philosophy as a screening tool can be effective not only in trying to connect with prospective clients, but also potential affiliated professionals you might work with or refer clients to, advisors you might hire into your practice or work with as a partner, or even to evaluate the prospective fit of a potential successor buyer or merger of your advisory firm. In the end, it all comes down to shared beliefs, and the easiest way to ensure that your viewpoints are aligned is to state clearly what your financial planning philosophy is in the first place!