In the financial planning world, it's not uncommon to "fire" clients that are especially difficult to work with, not merely because the clients are unprofitable, but simply because they are so unpleasant for you and your staff even if they ARE profitable. In fact, many practice management consultants would suggest it's a best practice to systematically fire some of your most unpleasant clients, as it helps to create a more positive workplace for you and/or your employees. Yet the reality is that often clients who are difficult to work with are also those in greatest need - and in virtually all other helping professions, it's a requirement of the profession to help everyone in need, not just those who are the most pleasant to work with. Of course, the reality is that right now, there aren't enough financial planners to serve everyone out there, but nonetheless it raises the question: is firing the most difficult clients in a financial planning practice a best practice, or a sign of an immature profession?
Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with a review of the recent legislative shift on investment adviser oversight, suggesting that RIA lobbying was the successful driver that staved off the Baucus bill, and an article from the Journal of Financial Planning examining how the fiduciary standard should be properly applied by financial planners. From there, we look at two articles that challenge the traditional planning world, one suggesting that the next stage of financial planning may shift away from AUM to standalone planning fees (and highlighting a firm that is pushing this trend), and another focusing on some of the ways that financial planning in practice diverges from the theory. We also look at a few practice management articles, one about how young planners are being integrated into firms, another about how firms are getting creative in the benefits they provide to build employee morale and connections, and a third about how older clients and older staff members can diminish the value of a financial planning practice. This week's summary also includes a few technical articles, including one suggesting that HSAs may become less popular starting in 2014 with the new Obamacare-mandated insurance plans, how advisors may start getting questions from clients soon about crowdfunding investment opportunities, and how using a reverse mortgage as a part of a "cash reserve" strategy can boost retirement income sustainability. We wrap up with two recent controversial articles - one from Bill Gross suggesting that "the cult of equities" is dying and exploring the ramifications of a low-return environment, and the other from the Harvard Business Review suggesting that you should never hire an employee who makes grammar mistakes. Enjoy the reading!
Under the Defense of Marriage Act (DOMA), the Federal tax law only affords treatment to married couples when the marriage is between a man and a woman, and denies marital treatment for same-sex couples, regardless of whether the couple is recognized as married under state law. However, in the recent Windsor v. United States court case, a New York District Court declared the applicable Section 3 of DOMA to be unconstitutional, and ruled that a same-sex couple should be eligible for the marital deduction for Federal estate taxes, resulting in a $363,000 estate tax refund. The case will likely end up in the Supreme Court, and in fact appears to be on the fast track to get there soon. If DOMA is ultimately declared unconstitutional, it will result in a dramatic shift in planning for same-sex couples, opening the door for marital treatment for estate tax marital deduction, intra-couple gifts, and numerous income tax deductions, credits, and other benefits afforded to married couples. At this point, DOMA is still the law of the land, but same-sex couples may wish to begin filing protective refund claims in case DOMA is ultimately struck down in the coming year.Read More...
The assets-under-management model for financial planning firms has become increasingly popular in recent years. However, its rising popularity has also brought a great deal of criticism, especially regarding the volatility of revenues as markets cycle up and down. As a result, some firms have begun to shift to a retainer-style model in an attempt to smooth out fees, rather than pricing on a strictly AUM basis.
Unfortunately, though, an annual retainer model where clients have to write a check for services makes the fee significantly more "salient" and can actually force firms to either cut prices or work harder to generate the same income, and may result in worse client attrition during down markets as fee-sensitive clients choose not to renew during difficult times.
As a result, some firms that shift to annual retainers are even shifting away from retainers and back to AUM pricing after a few years of business pain! Of course, the reality is that the AUM model can't serve all clients, and retainers may be necessary in some segments of the marketplace; nonetheless, in situations where there is a choice, the AUM model may have far more longevity than some expect.
Identifying centers of influence has been useful and effective for businesses and advertisers as long as people of influence have wielded power in their communities. Historically, though, the challenge has been that it's not always clear who is influential, especially in relatively narrow niches. However, as the use of social media continues to grow and evolve, quantifying influence, at least through social media channels, is becoming possible for the first time - and companies are jumping quickly to fill the void.
The current leader in this space is a company called Klout, which seeks to make itself the standard of measuring (online) influence. While thus far the company is relatively new and its impact is limited, it is growing fast. In fact, in some industries, an individual's Klout score is already impacting their ability to get a job, or their opportunity to receive discounts and perks from advertisers. While the time hasn't arrived yet, Klout may soon become relevant in the world of financial planning as well, for everything from increasing the visibility of an influential planner, to identifying centers of influence to contact in a target niche market. Which raises the question: do you have Klout?
As financial planning firms continue their search for scalability and efficiency, more and more firms are choosing to outsource various aspects of their business, retaining only the core areas where they provide the most value. As a result, Turnkey Asset Management Programs (TAMPs) have exploded in recent years, as more and more planning firms outsource their investment process to focus on their financial planning services.
However, a new option is beginning to emerge - the Turnkey Financial Planning Program (TFPP), designed to be a holistic one-stop shop for starting a financial planning practice. And as signaled by LPL's recent announcement to acquire Veritat, one of the early TFPP platforms, building an effective TFPP can be a valuable business proposition itself, in addition to being an appealing offering for the growing financial planning firm.
In fact, arguably the TFPP is a glimpse at the broker-dealer of the future - a core offering for financial planning firms, once the other parts that are unnecessary for a financial planning practice are stripped out - and may also represent a way for RIAs to grow as well. So forget the TAMP - it's time for the TFPP.
Monte Carlo analysis has become an increasingly popular arrow in the financial planner's quiver, as an improvement over the oversimplified traditional straight-line projection. Unfortunately, though, use of Monte Carlo analysis has begun to focus excessively on a singular probability of success, that itself can be almost as misleading as straight-line projections when not viewed in proper context. However, this is not a flaw of the Monte Carlo approach itself, but instead of the tools being used by financial planners. Instead, what's ultimately needed is software that shows not just the probability of success, but also the magnitude and consequences of failure, and a sensitivity analysis that helps clients understand the impact of the trade-off decisions they have available. What can ultimately result is a "next generation" of Monte Carlo analysis, that provides a more useful, relevant, and actionable framework to help clients make effective financial planning decisions.Read More...
Choosing a financial advisor is difficult, and as a result it's helpful to provide the public with guidance about how to select one. Unfortunately, though, in recent years recommendations to the public from many organizations have increasingly focused on whether the advisor is a fiduciary, without any acknowledgement of whether the advisor has the training, education, and experience to provide effective financial advice. Consequently, the public increasingly runs the risk of being poorly served by a well-intentioned advisor whose advice is totally incompetent. Ultimately, protecting the public will require setting forth a standard that meets fiduciary and competency requirements. And as it standards right now, the clearest choice for a professional minimum standard appears to be the CFP certification. While the CFP marks - as with any standard - don't unequivocally mean someone will get the best and most optimal advice because the advisor has the CFP, that's not the point; in the end, the purpose of such a standard is not to define a best practice, but instead the minimum acceptable standard to ensure the fundamental protection of the public.Read More...
As the so-called "fiscal cliff" looms, and the debate continues about whether to solve the country's fiscal woes with tax increases and/or spending cuts, a third option to help the situation is also emerging: do a better job collecting the taxes already due under the laws as they're written now. In the latest such shift, the word is out that the IRS is becoming less and less lenient regarding IRA mistakes, given the significant potential penalties involved - for instance, failing to take a required minimum distribution results in a penalty that is a whopping 50% of the RMD itself, and the penalty for an improper IRA contribution is 6%, per year, potentially accumulating for years on end. And there is potential that the IRS' efforts could extend further, leading to a crackdown on perceived abusive IRA strategies. As a result, clients should be more cautious than ever to comply properly with all IRA rules, including the timely distribution of RMDs, and proper compliance with all IRA contribution and rollover limits, and be wary of aggressive IRA strategies. From the planner's perspective, it's more important than ever to not only help clients comply properly with the rules, but to be cautious about giving accurate IRA advice, or run the risk that if the client ends out with IRS penalties, that the advisor - or his/her E&O insurance - may end out sharing in the high penalty cost to fix the mistake.Read More...