Nerd's Eye View blog

3 Ways Freedom Of Information On The Internet Is Changing Financial Planning

August 13, 2013 11:06 am 3 Comments CATEGORY: Practice Management

As the volume of information grows freely on the internet, the dynamics of working as a professional are beginning to change. While in the past, the defining characteristic of a professional was that he/she knew more about their subject matter than the client did, that is less and less the case in today's environment. Instead, it's increasingly possible that when the client walks in the door, they already have nearly the same information as the professional, whether that's in the case of a car dealership, a doctor, or a financial planner.

In this guest post, Dutch financial planner Ronald Sier shares his thoughts about the implications that this freedom of information is changing financial planning. From Ronald's perspective, the good news is that financial planners will not be made unnecessary or irrelevant in this information-laden future, because ultimately we as human beings are still social creatures that want and need to connect with others. We just don't hold ourselves accountable to technology the way we do a real, human financial planner.

That being said, however, the reality is that as information becomes more of a commodity, several aspects of financial planning do need to change, from how we relate to our clients, to the client experience of our service, to how we deliver financial planning to our clients. The key is to view technology not as a competitor to financial planning, but a way to augment it to serve more clients and serve them more effectively. And through it all, planners will need to learn to more effectively engage the "right-brain" functions of storytelling and emotion to help clients cut through the information overload to implement their financial planning goals. As Ronald states, "we are no more transferers of information. We are transferers of emotions."

Using Mind Mapping To Get Paid For Financial Planning Shadow Work

August 12, 2013 11:01 am 7 Comments CATEGORY: Client Trust & Communication

As financial planners seek out differentiation in an increasingly crowded environment, a new trend is emerging towards the use of more interactive software tools to provide a more engaging client experience. While many of these new approaches revolve around the use of financial planning software live with clients - replete with quick data entry support and sliders for clients to manipulate the goals and see immediate impact - the reality is that even the old-fashioned data gathering meeting represents an opportunity to use technology to better engage new clients, and the tool of choice appears to be the mind map.

Although mind mapping has been used in other business contexts - from keeping personal thoughts organized to creative team brainstorming meetings - the tool may be especially appealing for financial planning, as it not only visually captures a lot of client information that is otherwise hard to see all at once, but it does so in a manner that provides a tangible deliverable to what others is some of the most intangible "shadow work" that we do for clients. Whether as a way to justify fee increases, or simply to increase the firm's value proposition, adopting mind mapping becomes an appealing way to create perceived value for work that is ultimately useful for clients but also time-intensive and often unrecognized.

The rising interest in the use of mind mapping in financial planning has even led to the emergence of a training program being offered specifically to advisors on how to use the tool with clients, build a business model around it, and provides some templates to help get started. Of course, ultimately any mind mapping templates will still become very specific to the planning firm and its clientele - in no small part because the template becomes a de facto checklist process for the client discovery meeting - so some firms may simply wish to dive in themselves and get started! But regardless of the adoption route that is chosen, mind mapping appears to be an increasingly appealing tool for cutting edge firms to create a unique value and experience for clients.

Weekend Reading for Financial Planners (August 10-11)

August 9, 2013 05:05 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's reading kicks off with a big announcement by the CFP Board this week of some "clarifications" to its compensation disclosure rules, including the removal of the "salary" compensation category and an affirmation that advisors cannot be classified as fee-only if they or their firm merely could receive a commission, even if no client has ever paid one. Other industry news and commentary this week includes a look from Ron Rhoades about whether the Garrett Planning Network is a model of how most fiduciary advisors may be compensated in the future, the latest response from the 401(k) industry regarding Yale professor Ian Ayers' threat to expose high-cost employer 401(k) plans to the public, and a discussion of some big changes coming to the DFA investment process.

From there, we have a number of practice management articles, including some tips about how to be more quotable as an advisor when talking to the media, a look at how client advisory boards can be executed effectively, some best practices in vetting and screening potential financial planning candidates for your latest job opening, and how to delegate effectively (not just advice that you should delegate, but what you need to do to actually get it done!). We also have a pair of technical articles, including one providing an in-depth review of the File-and-Suspend and Restricted Application claiming strategies for Social Security benefits (and when they work best), and another that discusses planning opportunities for same-sex couples after the Supreme Court decision on the Defense of Marriage Act.

We wrap up with three interesting final articles: the first is from Jason Zweig of the Wall Street Journal about how financial services products that are less liquid or have exit penalties may actually be a positive "precommitment" strategy to help clients stay the course, an insider's "confession" of the problems in the institutional investing world (with striking parallels to the behaviors of many affluent clients), and a "farewell" message from Investment News technology reporter Davis Janowski who is leaving the publication after six years but shares some interesting perspective on the world of technology for advisors as he moves on. Also included this week is a glimpse at technology consultant Bill Winterberg's new video edition of his weekly "Bits and Bytes" covering the latest news and developments in advisor technology. Enjoy the reading!

Long Term Savings, Relying On Returns, And Retirement Date Risk

August 7, 2013 11:05 am 20 Comments CATEGORY: Retirement Planning

Starting savings efforts young, and taking advantage of the wonder of compounding interest, is a long-standing staple of financial planning advice. The longer the time horizon, the less that needs to be saved to achieve a retirement goal. Yet the caveat of such an approach is that while it's crucial to start saving initially, after the first decade or two the ongoing contributions have less and less impact, as the results are increasingly dominated - for better or for worse - by the portfolio returns.

In fact, by the time the retirement date approaches, the outcome becomes so dependent upon returns, that a poor final decade of performance can drastically derail the entire retirement plan. Saving steadily to grow a portfolio over the span of 40 years begins to look more like saving half the goal in the first 30 years, and quickly doubling the account balance and retiring. Of course, when viewed from this perspective, it suddenly becomes clear that the save-a-little-for-a-long-time approach to retirement is far riskier than most realize.

Ultimately, that doesn't mean people shouldn't start saving early for retirement. But it does recognize that a retirement plan that is heavily reliant on returns can have highly adverse outcomes, where the risk is not just the potential that wealth is significantly less than originally projected, but that retirement will have to be delayed significantly further than originally planned. In fact, perhaps it's time to talk less about risk as standard deviations and the volatility of wealth, and more about retirement date risk and the volatility of when the client will be able to retire, instead?

Are Financial Planners Experiencing A Crisis Of Differentiation?

August 5, 2013 11:01 am 3 Comments CATEGORY: Practice Management

As financial planning continues to grow, consumers increasingly have more and more access to qualified advisors. At the same time, the growth in the number of financial planners is leading to a troubling counter-trend - the more financial planners there are, the less differentiating it is to simply be a financial planner. As a result, while in the past financial planners might have competed primarily with stockbrokers, insurance agents, and do-it-yourselfers, now they're increasingly competing with... each other. And the trend is only exacerbated by the fact that large firms are increasingly steering their advisors in the same direction as well.

The outcome of this trend is a rising new pressure on advisors to focus and find a niche to establish true differentiation from the competition. Realistically, no one advisor can be the best at everything for everyone, but it is possible to be the best for a particular group of clientele, with a genuinely unique value proposition unlike what any other advisor provides. And the efficacy of this approach will only increase as search engines become better and better at helping to match people in need of help with the providers who can offer them the best solutions.

While most planners fear that establishing a niche will make the "pie" of potential clients smaller, the reality is that most advisors already take only a very, very tiny slice of their current pie, and for many the size of that slice is shrinking. By establishing a focus to the business, it creates a scenario where the size of the pie may be smaller, but the advisor has the potential to capture the entire pie! Or viewed another way, 100% of something is a whole lot better than 0% (or 0.00001%) of everything. Ultimately, the point is not to turn away prospective clients who don't fit your niche; it's to have a niche that's so well establish that the only people who contact you are those who seek you out for your niche... and that there are so many, there isn't time to serve anyone else, anyway!

Weekend Reading for Financial Planners (August 3-4)

August 2, 2013 05:02 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's reading kicks off with an interesting profile of online financial planning startup LearnVest, which just recently secured a fresh $16.5M round of venture capital funding to continue growing and scaling its business, along with announcing a prospective partnership with American Express and suggesting more partnerships with some large employers are in the works. Also in the news this week is a look at the recent 401(k) industry bombshell as Yale professor Ian Ayres sent controversial notices to 6,000 firms, threatening some of them that he will expose and highlight their above-average 401(k) plan costs (implying that the company could be breaching its fiduciary duties to plan participants).

From there, we have a number of practice management articles, including a look at Mark Hurley's recent white paper and its perspective on why most advisor M&A deals fall through, a profile of a financial planning firm that uses mind mapping tools live in client meetings as part of its "wow" experience, a review of the online tool "Mention" (an alternative to Google Alerts) to monitor your online reputation, and some perspective on how to get more value out of your advisory firm website (and even better understand what you should realistically be trying to accomplish with it in the first place).

We also have several technical articles, including one on how to route college tuition payments through a 529 plan to save on state income taxes (with a few caveats), another on the complications that arise when trying to allocate assets from an estate between the bypass and marital trusts after death (especially when there has been a material change in value between the date of death and the date property is distributed to trusts), and a third looking at floating rate bank loans and whether they're appropriate for client portfolios given the looming risk of a rising interest rate environment and the impact it could have on traditional bonds.

We wrap up with three interesting final articles: the first is from Texas Tech professor Michael Finke, looking at what factors are most predictive of which clients will "freak out" in the face of market declines (and some ideas of what to do about it); the second is a discussion from financial planner Dave Grant about what was most effective for him as he made a transition to going out on his own as a solo advisor; and the last is a discussion from Foundation Room Finance about how to find the balance as a new advisor between developing your technical skills and going out to build a client base, with some perspective on what it takes to build and refine a business model by applying the principles of Eric Ries' "The Lean Startup", that is equally relevant for both new and experience advisors and their firms. Enjoy the reading!

MailBag: Are 831(b) Captive Insurance Companies A Legitimate Financial Planning Strategy?

August 1, 2013 11:04 am 9 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 are 831(b) Captive Insurance Companies (CICs), whether they are a legitimate planning strategy or just an insurance scam, and what to watch out for and consider.

IRS Opens Door In PLR 201330016 For 1035 Exchange By Beneficiary Of Fixed And Variable Inherited Annuities

July 31, 2013 11:06 am 8 Comments CATEGORY: Annuities

A classic challenge of beneficiaries of inherited (non-qualified) annuities is that they have been "stuck" with whatever contract was originally owned by the decedent, often locking the beneficiary into a series of investment choices (or lack thereof) that limited the ability of the contract to be invested accordingly to his/her needs and goals, especially when a fixed annuity was inherited by a young beneficiary who wanted to invest for long-term growth. The only alternative: beneficiaries who wanted to reinvest the proceeds were forced to liquidate the contract, paying any/all gains at that time (at ordinary income rates), and then reinvesting whatever was left over.

In a new private letter ruling from the IRS, though, the rules are now changing. PLR 201330016 granted the beneficiary of a series of several fixed and variable non-qualified inherited annuities to complete a 1035 exchange of those contracts into a new variable annuity to gain access to more appealing investment returns. In the IRS' viewpoint, the beneficiary-as-inheritor had sufficient ownership and control of the inherited annuity to allow the exchange, and permitted the exchange to occur, as long as the technical requirements for the 1035 exchange were honored, and the beneficiary committed to taking post-death distributions from the new annuity at least as rapidly as were occurring under the old contract.

While this is ultimately "just" a private letter ruling, and not technically binding, it seems likely the IRS will continue to follow the ruling as long as it is not abused. Accordingly, though insurance companies will need to decide whether they individually will comply, and prepare the appropriate forms and paperwork to ensure that the technical requirements stipulated in PLR 201330016 are honored, the reality is that this new ruling may have finally opened the door for beneficiaries of inherited non-qualified annuities to gain a new level of flexibility to make decisions about what to do with inherited annuity contracts, and exchange accordingly as desired.

The Advisor Of The Future Is Not Human Nor Robot, But Cyborg

July 29, 2013 11:02 am 15 Comments CATEGORY: Practice Management

As the world moves increasingly into the digital age, technology-driven solutions continue to threaten the traditional way things are done, and the world of investment management is no exception, as numerous "robo-advisors" have cropped up in recent years with an aim to threaten and disrupt financial advisors. Yet the reality, at least so far, is that virtually all of the offerings are narrowly constrained to just portfolio solutions - where the world of mathematics and algorithms work well - with little capability of addressing the rest of an individual's financial picture.

But perhaps the biggest caveat of robo-advisor-driven solutions is that for many consumers, the real issue is not a cost-efficient portfolio solution, but managing the self-inflicted "behavior gap" where many investors, as a result of their own greed and fear, achieve inferior results. And it's not clear that robo-advisors will have any solution to these behaviorally-driven problems; just as a website that says "eat less and exercise more" doesn't solve the country's obesity problem (because it's a behavioral problem, not an information problem), it's not clear that robo-advisors and their portfolio construction recommendations will fare much better by providing information solutions for what are ultimately investors' behavioral challenges. Furthermore, at this point it's only the human advisors that address the entire set of comprehensive financial planning goals for clients.

Nonetheless, the reality is that a purely human solution isn't always better, either; many of the things advisors do can in fact be implemented far more efficiently with technology, and overall it's important to acknowledge that there are some things that humans do better but some things that really are done better by computers. Which means in the end, the real winner may not be the robo-advisors, nor the human advisors, but the technology-augmented humans - the cyborg advisors - who blend human and technology together into an optimal financial advice solution for consumers.

Weekend Reading for Financial Planners (July 27-28) – Blogosphere Edition!

July 26, 2013 05:04 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's collection of articles are drawn entirely from the blogs of financial advisors and the companies and consultants who serve them, and starts off with an interesting profile of a financial planner from India who is building a practice comprised almost entirely of virtual, online clients who can purchase increasing expensive and sophisticated tiers of service and advice, effectively allowing the planner to both build to the highest priced financial planning offering over time and have the opportunity to get paid while cultivating those relationships!

From there, we have a number of additional articles about building business online and through social media, including one article that emphasizes the importance of having a good online website (which is now even more important than having a good high-end glossy brochure), some guidance on what Search Engine Optimization (SEO) means for financial advisors and tips to improve it for your website, and a discussion of building networks on LinkedIn and whether it's a good idea to accept any/every LinkedIn invitation that comes your way.

We also have several practice management articles, including one on the perils of having a book of aging clients (though the tipping point is not merely when clients retire, but instead when they start reaching their late 60s and early 70s), another on marketing and how to differentiate yourself by providing case studies of how you work with your target clients, and a third on why networking is so unsuccessful for most advisors (hint: don't just search for prospective clients, search for prospective advocates who can open the door to many more clients down the road). There are also a few more technical articles, including one about how to address life insurance for your diabetic clients, and another with a good checklist of key areas to consider for any same-sex married couple clients since the Supreme Court DOMA decision.

We wrap up with three final articles: the first is from "Investment Committee Doctor" Tom Brakke about how our efforts to better convey information graphically and visually could lead us to make new behavior mistakes in our investment decision-making process; the second looks at what financial advisors can learn from the TV show Mad Men about specialization of roles within a firm and separating business development and relationship management from financial planning creativity and expertise; and the last looks at a recent survey that finds what matters most to clients is not your fees, your advice, your service, your knowledge, or your experience, but your interpersonal skills, the ability to use the right side of your brain to tell stories and create connections, and the importance of starting out by talking not about what you do, but why you do it in a way that clients can make an emotional connection. Enjoy the reading!