Nerd's Eye View blog

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!

Weekend Reading for Financial Planners (Sep 28-29)

September 27, 2013 01:26 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 on the ongoing CFP Board woes, as the organization has now reinstated its "fee-only" search function on its website after resetting the compensation disclosure for all fee-only advisors last week, but in the process has raised the question of whether it was fair to effectively grant "amnesty" to a number of advisors at broker-dealers after publicly sanctioning former chair Alan Goldfarb for a similar offense last year. Also included is the latest analysis from Cerulli, suggesting that the number of advisors will continue to fall in the coming years, attritioning by nearly 10% by 2017 due primarily to the fact that the industry is simply not attracting enough next generation advisors to replace those who are retiring.

From there, we have several financial planning technical articles this week, including a discussion of the ABLE Act that may create 529-style tax-free investment accounts for those who have disabilities (possibly replacing the need for Special Needs Trusts at some point in the future?), a look at the current environment for long-term care insurance, a discussion of some of the challenges of making claims on long-term disability insurance policies (especially for high-income clients), and an overview of the newly launching "SHOP" health insurance exchanges for small businesses and why virtually every small business should participate (especially those that currently don't offer health insurance at all). There are also two retirement planning articles: the first looks at how Deferred Income Annuities (DIAs) might be even better than immediate annuities as a part of a retiree's portfolio, and the second examines how holding one year of cash reserves to mitigate transaction costs can slightly improve retirement income sustainability (though a large cash reserve bucket actually reduces retirement success).

There is also a trio of practice management articles: the first looks at how too often, the best thing an advisor can do in their business is nothing, though too often there is a temptation and desire to "do something" even if it's a bad idea; the second takes a fascinating look at the challenges of succession planning not from the perspective of the founder looking to exit but the successor who has taken over; and the third looks at how to focus an advisory practice on a client's "Return On Life" (ROL) and in the process provides one of the best descriptions out there of the 5 core value propositions that financial planners bring to the table for their clients.

We wrap up with a nice article on personal productivity that makes the simple point that in the end you should focus on what you can control, which means spending less time setting long-term goals and tracking your accomplishments and more time focusing on the efforts you must take to follow your path to success; not only does focusing on the effort instead of the results better focus your attention on what you can control, but ultimately it can help to sustain motivation in the midst of a difficult environment for the business. Enjoy the reading!

Should Equity Exposure Decrease In Retirement, Or Is A Rising Equity Glidepath Actually Better?

September 25, 2013 07:09 am 30 Comments CATEGORY: Retirement Planning

For the past 20 years, due both to the growing research on safe withdrawal rates, the adoption of Monte Carlo analysis, and just a difficult period of market returns, there has been an increasing awareness of the importance and impact that market volatility can have on a retiree's portfolio. Often dubbed the phenomenon of "sequence risk", retirees are cautioned that they must either spend conservatively, buy guarantees, or otherwise manage their investments to help mitigate the danger of a sharp downturn in the early years.

One popular way to manage the concern of sequence risk is through so-called "bucket strategies" that break parts of the portfolio into pools of money to handle specific goals or time horizons. For instance, a pool of cash might cover spending for the next 3 years, an account full of bonds could handle the next 5-7 years, and equities would only be needed for spending more than a decade away, "ensuring" that no withdrawals will need to occur from the portfolio if there is an early market decline.

Yet the reality is that strict implementation of a bucket strategy is more than just an exercise in mental accounting; it can actually distort the portfolio's asset allocation, leading to an increasing amount of equity exposure over time as fixed income assets are spent down while equities continue to grow. Yet recent research shows that despite the contrary nature of the strategy - allowing equity exposure to increase during retirement when conventional wisdom suggests it should decline as clients age - it turns out that a "rising equity glidepath" actually does improve retirement outcomes! If market returns are bad in the early years, a rising equity glidepath ensures that clients will dollar cost average into markets at cheaper and cheaper valuations; and if markets are good... well, clients won't have a lot to worry about in retirement anyway (except perhaps how much excess money will be left over at the end of their life).

Of course, the challenge to utilizing a rising equity glidepath strategy with clients is that many would obviously be concerned about having more equity exposure during their later retirement years. Yet the research shows that rising glidepaths can be so effective, they may actually lead to lower average equity exposure throughout retirement, even while obtaining more favorable outcomes. And ironically, it turns out that for those who do want to implement a rising equity glidepath, the best approach might actually be to explain it to clients as a bucket strategy in the first place!

Helping Financial Planning Clients With Their Digital Estate Planning

September 24, 2013 06:14 am 7 Comments CATEGORY: Estate Planning

Helping clients through their estate planning is a core part of the financial planning process - and of course, the reality is that the orderly resolution of an individual's affairs after they pass away is an issue that long predates financial planning itself. Though the rules have changed significantly over the years and decades, the courts have long played a role in ensuring that property is distributed properly, albeit with some cases a bit more orderly than others.

Yet in today's world, a unique new type of property is being introduced for the first time: digital assets. In this guest post, financial planner William Bissett shares an example of a potentially problematic client scenario, where it's necessary to help a client through not only the traditional estate planning process for their "traditional" assets, but also to recognize that the matter has grown significantly more complex as clients must also resolve everything from online billpay to recovering photos from social media accounts.

Going forward, helping clients plan for their digital assets may become increasingly important as more and more of our lives are move (or at least are captured) online. Though the laws themselves are still a bit murky on how to handle such situations - and perhaps, because of that fact - it is crucial to at least help ensure that clients have an inventory of their various digital accounts and digital assets, to help surviving spouses and heirs to get through the process as smoothly as possible.

The Goldfarb Tip Of The Camarda Iceberg – CFP Board’s Ongoing Fee-Only Compensation Disclosure Debacle

September 23, 2013 06:45 am 12 Comments CATEGORY: Planning Profession

In recent months, the CFP Board has been getting a lot of attention regarding its compensation disclosure rules and its definition of what constitutes "fee only" for financial planners. What started with the public resignation of then-Board-chair Alan Goldfarb - later publicly admonished for his improper disclosure of "commission and fee" compensation - has led to a notice to members, an "educational" webinar, and a series of increasingly problematic news stories, from the schism between CFP Board and NAPFA's definition of fee-only, to negative comments from former DEC members, and most recently a "breaking" news story that the CFP Board's website was allowing hundreds of wirehouse advisors to declare themselves "fee only" in direct contravention to the CFP Board's rules. As a result of this latest article, last Friday the CFP Board converted all of its more-than-8,000 "fee-only" advisors to a compensation disclosure of "None Provided", forcing them to affirmatively re-declare themselves to be "fee only" in compliance with the current rules.

Yet the also-recent announcement that Florida CFP certificants Jeffrey and Kimberly Camarda were suing the CFP Board regarding their own alleged compensation disclosure improprieties make it clear that in truth, the CFP Board's recent struggles are not so recent after all. In point of fact, it appears that the CFP Board has been dealing with this issue since early 2011, and only now, 2.5 years later, has it finally culminated to the breaking point where everything is coming to light. Along the way, it appears that the CFP Board has tried to act with integrity, in a manner consistent with its original Camarda ruling... except, unfortunately, given how problematic the original precedent actually was, sticking to the ruling is just compounding the problems further and further.

Advisors in good faith have acted on the reasonable assumption that they cannot be "entitled to" compensation that no client has ever actually paid, such that it doesn't necessarily matter who the advisor works for... what matters is what the client actually pays (and only then, if a commission is paid, should we be trying to evaluate to what person or entity the compensation was paid and the related parties involved). If the ultimate intention of the CFP Board is to truly change the compensation disclosure rules to what they are now - after recognizing it's a deviation from what the rules have been! - such alterations need to occur through a public comment process that allows the stakeholders to have a constructive role in the discussion. At this point, it seems time for the CFP Board to take a step back, acknowledge that - intentional or not - its current interpretation of the rules is in fact a material change from how the stakeholder community may have intended them when the rules were last changed in 2008, as evidenced by the sheer number of advisors who have been "out of compliance" simply by trying to disclose what their clients actually pay.

Weekend Reading for Financial Planners (Sep 21-22) – Practice Management & Advisor Tech Edition!

September 20, 2013 11:55 am 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's reading kicks off with an interesting article about a new research study on the online algorithm-based advice startups, suggesting that ultimately the role for many of them may turn out to be more like a "second opinion" platform than a primary advisor.

From there, we have a couple of practice management articles, including one about how to hire and train your client services team (hint: don't use your junior financial planners!), and the importance of going through an annual process to update your firm's strategy and why it matters.

We also have a number of advisor technology-related articles this week, including reviews of financial planning software Omyen, the latest cloud-based version of Junxure CRM, and online form and document signature platforms Laser App and DocuSign. There are also articles on how to create a digital/virtual business card that clients can access by text message, some ideas on how to integrate video into your marketing (and what, exactly, you should talk about in your videos!), and a review of some tools advisors can use to speed up their writing and note-taking (from voice-recognition software to mobile dictation services).

We wrap up with three interesting final articles: the first is from Philip Palaveev, suggesting that perhaps the difficulty of larger advisory firms financing successors is less about the actual affordability and financing of the practice and more about training future owners to be ready and willing to take the entrepreneurial risks involved; the second is from financial planner Ronald Sier about the importance of niches, and the idea that perhaps the best niches are not about what you do or who you work with, but the kinds of feelings you try to evoke in your clients; and the last is from practice management consultant Abby Salameh, who notes that while the productivity benefits of various technology-enabled communication (from social media to email to text messages) is great, that advisors still need to be certain to just pick up the "old-fashioned" telephone and call their clients from time to time as well! Enjoy the reading!

Is A Reverse Mortgage Better Than Keeping A Traditional Amortizing Mortgage In Retirement?

September 18, 2013 07:05 am 17 Comments CATEGORY: Debt & Liabilities

While the current low-yield environment has presented significant challenges to retirees trying to generate retirement income, the upside is that low yields have also driven down borrowing costs to record lows. As a result, retirees are increasingly deciding that perhaps keeping a mortgage and not paying it off is a good idea after all; with the average long-term return on stocks being significantly higher than today's 30-year mortgage rates, an inexpensive mortgage becomes a strategy to leverage the household balance sheet and boost the amount and sustainability of retirement income.

Yet the decision to keep a mortgage in retirement is not without risk. There's a danger than equities won't perform as expected, and fail to generate a return in excess of the borrowing cost over a relevant time period. And even if the returns do ultimately add up, the ongoing payment obligations for a traditional mortgage create a "sequence of returns" risk for the retiree, where withdrawals to handle the mortgage payments could so deplete the portfolio during an extended period of bad returns that there may not be enough money left over for when the good returns finally arrive.

From this perspective, retirees should perhaps consider the reverse mortgage instead. While such loans have been relatively unpopular - due in part to their high costs, and because they're often viewed as a borrowing option of last resort - the reality is that the lack of any cash flow obligations for a reverse mortgage actually allows it to eliminate the sequence risk from the mortgage-in-retirement strategy. In fact, over a long period of time, using a reverse mortgage in retirement can result in materially greater wealth when equities do perform as desired, as the reverse mortgage maintains a greater amount of household leverage, even while reducing the exposure to the impact of an unfavorable sequence of returns.

In the end, there are still a few caveats to the strategy - most notably, that reverse mortgages still tend to have higher upfront and ongoing borrowing costs (though the gap is narrowing), and that lending limits may constrain the usefulness of the strategy for affluent clients (who are often most interested in increasing household leverage as a retirement strategy). Nonetheless, the fact remains that for those who truly do wish to engage in the mortgage-in-retirement strategy, the reverse mortgage may be the most effective way to execute it.