Nerd's Eye View blog

MailBag: Introducing Financial Planning Services To Existing Brokerage Clients For The First Time

September 5, 2013 07:03 am 0 Comments CATEGORY: MailBag

Many readers of this blog contact me directly with questions and comments. While often the responses are very specific to a particular circumstance, occasionally the subject matter is general enough that it might be of interest to others as well. Accordingly, I will occasionally post a new "MailBag" article, presenting the question or comment (on a strictly anonymous basis!) and my response, in the hopes that the discussion may be useful food for thought.

In this week's MailBag, we look at a question about what an investment management firm that has only provided investment management services in the past should do when they try to start offering financial planning and clients refuse to provide all of their personal financial information.

What Does It Really Mean To Be A Fee-Only Financial Planner?

September 4, 2013 07:09 am 8 Comments CATEGORY: Planning Profession

In recent months, the CFP Board has faced some high-profile cases that have tested its definitions of what it means to be a "fee only" advisor. First there was the incident with Alan Goldfarb, and more recently (though dating back to an earlier incident) a lawsuit filed by Jeffrey and Kimberly Camarda. In both cases, the incidents revolved around situations where advisors were providing services on a "fee-only" basis to clients, but also separately held a financial interest in a broker-dealer and/or an insurance agency that at least "could" potentially generate commissions. Although the CFP Board's current compensation disclosure requirements have actually been in effect since 2008, the cases have highlighted the complex realities of how many financial advisors structure their businesses, and tested where the line should be drawn regarding what does and does not constitute "fee only" compensation.

While it's hard to fault the essence of what the CFP Board is trying to accomplish with its definitions - that advisors should only describe themselves as "fee only" if they truly, solely receive compensation from fees - a broad interpretation that compensation includes not only what is received but what the advisor or a related party are "entitled to receive" has arguably narrowed the interpretation of "fee only" beyond the point it was ever intended. In fact, the CFP Board's current rules appear so tight that they may actually invalidate as much as 5% of NAPFA's own membership.

At the core of the issue is the CFP Board's viewpoint that "commission" compensation should include not only what a client does pay, but what a client could pay to the advisor or a related party. As a result, a wide range of advisors whose clients truly have only ever paid a fee to anyone must declare themselves to be "commission and fee" for the sole reason that someday, somehow, a client could pay a commission to the advisor or a related party (due to a license the advisor holds, or other advisors under the same employment agreement), even if no client ever has, or is even intended to - a standard that's virtually impossible for any but a small subset of independent privately-owned RIAs to meet.

Instead, perhaps it's time for a simpler, more straightforward definition of fee-only compensation - that "fee only" be based not on what a client could pay, but what the client actually does pay. If the client really does pay a commission to an advisor or a related party, then the advisor should be required to describe themselves as "commission and fee" accordingly. But if the client really, truly does only pay fees to the advisor and pays no commissions at all to the advisor or any related party, the advisor is permitted to call themselves "fee only" instead. Or viewed more simply - unlike the CFP Board's current rules, advisors should always be able to rely on the fact that no client has ever actually paid a commission to the advisor or any related party as a defense to calling themselves "fee only," if that is in fact the case.

19 Ways to Make Your Financial Advisor Website More Credible And Trustworthy

September 3, 2013 07:02 am 10 Comments CATEGORY: Marketing

Having a website as a financial advisor is increasingly shifting from a "nice to have" to a necessary minimum just to establish that the advisor is a legitimate professional in the first place. If your business cannot be found online, then it's almost as though the advisor doesn't exist. Yet at the same time, just having a website isn't enough; it has to convey credibility and trustworthiness to prospective clients to really be an effective marketing tool for the business.

In this guest post, business consultant Maria Marsala shares her checklist of 19 ways that financial advisor websites can be made more credible and trustworthy. From the importance of having your own domain name - for both your business and your email address - to eliminating annoying flash and pop-ups, to making sure that prospective clients can learn the information they need, Maria's list helps to ensure your website is up to speed in today's environment.

Whether you're looking at creating your first advisory firm website, upgrading and replacing it to something new, or simply looking for a checklist that you can use to review your own site and perhaps make a few tweaks, I hope you find today's guest post to be helpful!

IRS Grants Same-Sex Married Couples Marital Treatment Regardless Of Current State Of Residence

September 2, 2013 07:04 am 6 Comments CATEGORY: Taxes

When the Supreme Court struck down Section 3 of the Defense of Marriage Act on June 26th in the case of United States v. Windsor, it forced the Federal government to recognize whether or not a couple was married based on the rules of the state. If the state declared that the marriage was valid, the Federal government had to honor it as well, though whether the the marriage would be recognized in the first place was still left up to the state.

While this was fairly straightforward to apply for many couples - if they got married in one of the 13 states (plus the District of Columbia) that allows for same-sex marriage they would be married for state and Federal purposes, and if they were in a state that didn't allow such marriages then being unable to get married at the state level would leave them unmarried at the Federal level, too. Yet unfortunately, this also introduced a significant complication in today's increasingly mobile world: if a couple got married in a state that allowed the marriage and then relocated to a state that didn't recognize the marriage, were the rules for marital status based on the state the couple currently resided in, or the state in which they celebrated their marriage in the first place?

Fortunately, an announcement last week by the U.S. Treasury, accompanied by Revenue Ruling 2013-17 from the IRS, declared that all legal same-sex marriages would be recognized for Federal tax purposes, regardless of what state the couple currently resides in. In other words, as long as the marriage was legal in the state in which the marriage itself occurred, the IRS will follow the laws of the "place of celebration" in determining legal marital status, for both income and estate tax purposes. As a result, planners need to review the current income and estate tax situation for such couples, from the potential for filing amended income, gift, and estate tax returns, to reviewing the treatment of employee benefits, to re-evaluating whether it's time to update estate planning documents and gifting strategies in light of the new availability of the marital deduction!

Weekend Reading for Financial Planners (Aug 31/Sep 1)

August 30, 2013 12:34 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's reading kicks off with a new lawsuit against the CFP Board, brought by an advisor who was sanctioned for improper use of the "fee only" term and is now trying to take the CFP Board to court to clear the record. There are also two notable articles about changes in the space for new advisor business models and online advice startups, as LPL pulls the plug on NestWise, but a number of new online investment platforms are gearing up to debut later this year and in early 2014.

From there, we have several articles about social media and technology, including a great profile of three advisors who are using social media successfully to drive new clients to their firms, a look at how large broker-dealer firms are starting to open up to using social media and challenge the RIA early adopters, and an intriguing focus group study that found despite Gen X and Gen Y use of technology that they still show a strong preference to have a real human being from their financial services firm that they can interact with and get personalized advice from.

There are also a few technical articles this week, including a discussion of the IRS announcement to allow same-sex married couples to file joint tax returns (regardless of whether their current state of residence recognizes the marriage), some proposed regulations from the IRS on how the small business health insurance premium tax credit will work beginning in 2014, and a look at the new "navigators" being funded under the Affordable Care Act to help people navigate the health insurance exchanges.

We wrap up with three interesting final articles: the first is from Bob Veres, who suggests that perhaps advisors need to do more to help clients avoid dwelling on the potential worst-case scenarios that leave a tremendous opportunity cost on the table; the second looks at how despite the popularity of the concept, the "wisdom of crowds" is not really as robust as it's made out to be, and in fact can be highly susceptible to herding when people know what others are thinking and doing (e.g., as is true in the case of markets!); and the last is from the blog of Rick Ferri, and explores the idea of a "stewardship" standard, the potential next step proposed by Don Trone beyond the fiduciary standard. Enjoy the reading!

MailBag: Can You Deduct Investment Advisory Fees Directly From An Annuity?

August 29, 2013 07:02 am 4 Comments CATEGORY: MailBag

In this week's MailBag, we look at a question about whether investment advisory fees can be paid directly from an annuity account, and the prospective tax issues involved in paying investment management fees associated with annuities.

Do Today’s Guaranteed Living Benefit Annuity Riders Really Offer Enough To Be Worthwhile?

August 28, 2013 07:04 am 13 Comments CATEGORY: Annuities

The fundamental promise of guaranteed living benefit riders on annuities is the potential to invest more aggressively for growth, while maintaining an income guarantee no matter what, in case things don't work out as expected. In other words, at the most basic level, using income guarantees is a "floor with upside" approach to investing for retirement income. The floor may not be the most appealing income level, but it's tolerable on the downside when there's a hope and real chance that things could turn out much better.

Yet in today's environment, the combination of lower prospective returns and higher annuity costs is presenting a troubling new alternative: that guaranteed income riders no longer representative a "floor with upside" but instead are a floor that will be almost impossible not to fall down to and hit. In other words, what was supposed to be a floor that would only be relied upon in a worst case scenario may instead turn out to be the best case scenario and an unavoidable outcome instead!

Unfortunately, though, if the reality is that the income guarantee of the annuity is no longer a worst case scenario but actually a best case one, then it no longer represents the fundamental trade-off that made it so attractive in the first place. Instead, if there really is little upside to the income guarantee, then it may be more appealing to skip the guaranteed living benefit rider altogether and instead just buy a single premium immediate annuity for a comparable guarantee and invest the rest, or just invest and spend conservatively using a safe withdrawal rate approach and simply ride out any intervening market volatility!

How Financial Advisors Should Manage LinkedIn Endorsements

August 27, 2013 07:05 am 11 Comments CATEGORY: Practice Management

As financial planners slowly incorporate social media into their marketing and business growth plans, LinkedIn has been one of the more popular and widely adopted platforms, given its bent towards professionals that provide a fertile ground for advisors looking to network. Yet even as LinkedIn (and other platforms) have grown in popularity, advisors must still be cautious to use social media in a compliant manner - which is no small tasks, given that many of the platforms routinely launch new features that can be difficult to evaluate in the context of decades-old rules and regulations that long predate the kind of technology to which they're now being applied.

In this guest post, marketing and social media consultant Amy McIlwain of Financial Social Media shares her thoughts about navigating one of the most common questions about regulations and LinkedIn: the endorsement. In a world where advisors are prohibited from having client testimonials and are highly regulated regarding how they advertise their investment performance and results, how are advisors supposed to handle LinkedIn endorsements in a compliant manner?

While many compliance officers have simply decided that the easiest solution is to ban endorsements altogether - which can now be easily done using the tools of the LinkedIn platform itself - McIlwain notes that ultimately the regulations really only prohibit the use of endorsements that are from clients or related to financial services and your ability to manage money (assuming your firm's own social media compliance policy isn't more restrictive). Accordingly, while some have simply eliminated endorsements from their profiles altogether, the alternative is to only hide endorsements related to specific people (e.g., clients) and/or specific skills (e.g., investment performance), both of which can now be done on the LinkedIn platform. According, McIlwain provides a walk-through of the exact steps that have to be taken to make the appropriate and compliant changes for LinkedIn endorsements, and shares some thoughts about how to communicate your actions - especially to those clients who may have provided an endorsement that you've subsequently be forced to hide - to ensure that every endorsement you receive still has a positive outcome!

The Growing Marketing Inequality In Financial Planning Firms

August 26, 2013 07:01 am 11 Comments CATEGORY: Marketing

Given that the core of financial planning is the delivery of personalized, customized financial advice, there have always been limited benefits of scale for financial advisory firms; no matter how good the technology, operations, and staff support, advisors only have so many hours available and so much mental "bandwidth" to serve clients, ultimately limiting the scalability of an advisory firm.

Yet while advice itself may not be conducive to scale, the marketing of financial advice certainly is. In fact, recent industry studies are beginning to show that larger firms seem to be driving more referrals than smaller ones, and many of the largest advisory firms are generating a huge volume of new clients by leveraging the value of relatively few dedicated full-time marketing staff.

Accordingly, this suggests the environment for smaller advisory firms may become increasingly challenged, as the larger firms grow larger while the smaller firms remain "stuck" small, unable to reinvest enough into marketing the practice to accelerate its own growth. While this may not be the end of small firms and solo practitioners, it will make such firms increasingly reliant on scalable marketing strategies (e.g., social media) or focused niche markets to carve out a space where they can remain differentiated and truly competitive.

Weekend Reading for Financial Planners (August 24-25)

August 23, 2013 12:01 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's reading kicks off with some turmoil between NAPFA and the CFP Board, which have split on the definition of "fee only" and created the awkward scenario where some "fee only" planners under NAPFA actually don't qualify as "fee only" CFP certificants.

From there, we have several practice management articles this week, including some ideas from Bob Veres about how to fix the industry's regulatory woes, some tasks to target for outsourcing in your firm, and a discussion of whether we need to reframe "succession planning" as "continuity planning" instead (to recognize that many advisors want a more continuous and ongoing role in the transition). We also have a few articles related to technology topics, including a look at how to make sure your client data is safe when you're using your laptop and mobile devices on (public) WiFi networks, and a nice summary of Susan Weiner's "Virtual Book Tour" with a long list of great articles on blogging for financial advisors (great tips whether you're thinking about getting started, or trying to get better).

There are also a few technical articles this week, including on from Ed Slott about the latest proposals for changes to retirement accounts under President Obama's budget (some beneficial for clients, some not so much), and another article about the rising specialty of helping clients through health care and health insurance issues in retirement.

We wrap up with three interesting final articles: the first is from the Research Puzzler blog, suggesting a fresh way to look at the active vs passive debate is to distinguish between "maximzers" and "satisficers" instead; the second about the concept of "negative selling" and reverse psychology, where sometimes clients are more engaged by telling them what they can't have than what they can; and an intriguing discussion by financial planning blogger Ronald Sier about the fact that in the end, most clients don't have financial goals, they have real world goals that have financial ramifications, and we as advisors need to adjust our conversations accordingly. Enjoy the reading!