Kitces.com - Advancing Knowledge in Financial Planning

Universal Life Insurance Funding Strategies: Optimizing Death Benefit vs Cash Surrender Value IRRs

June 13, 2018 07:01 am 0 Comments CATEGORY: Insurance

Before the development of universal life insurance, permanent life insurance was relatively straightforward. Policies had fixed premiums, fixed death benefits, and fixed interest rates generating consistent growth of cash surrender values over time. As a result, determining the internal rate of return (IRR) on policies was relatively easy. However, as “flexible premium” universal life products were developed in the early 1980s, policyowners gained flexibility to structure premium payments differently – introducing the possibility for individuals to place greater emphasis on either the IRR of death benefits or the IRR of cash surrender values based on their goals. However, because of the complexity of universal life insurance, many policyowners (and financial advisors) still remain unaware of this ability, and how to properly structure flexible universal life premiums to fully optimize either one of these objectives.

In this guest post, Rajiv Rebello of Colva Insurance Services examines various universal life insurance premium funding strategies, illustrating that in order to fully understand the dynamics influencing both death benefit and cash surrender value IRRs, it is crucial to understand exactly how the policies work, and in particular the interrelationships between cash value, death benefits, and cost-of-insurance (COI) charges, and the ways that changes in the Net Amount At Risk (NAR) compound over time.

Ultimately, the key point is to understand that strategies that maximize the long-term cash value of universal life insurance - which are all about minimizing the net amount at risk to reduce COI while managing the tax code requirements that there must always be at least "some" amount of death - and fundamentally different than the strategies to maximize the IRR of the death benefit of life insurance (which is driven by minimizing the amount of cash in the policy to maximize the net amount at risk and therefore the amount of money the insurance company must come to the table with in the event of death). Which means it is crucially important to pair the right funding strategy with the right policy structure in order to accomplish the long-term goals of a client with a particular flexible premium universal life insurance policy!

#FASuccess Ep 076: Why Financial Therapy Beats Financial Advice To Help Clients Change Their Behavior with Kristy Archuleta

June 12, 2018 07:01 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome, everyone! Welcome to the 76th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Kristy Archuleta. Kristy is an Associate Professor in the financial planning program at Kansas State University, with a focus on teaching advisors how to actually change their clients' behaviors for the better.

What's unique about Kristy, though, is that she's also a licensed marriage and family therapist, and comes to the world of financial planning and how to help clients improve their financial behaviors with the perspective of a trained psychologist.

In this episode, we talk in depth about Kristy's work at the intersection of financial planning and financial therapy, how a financial therapist would view common financial planning challenges from a different perspective with different solutions, the way that therapists approach helping clients to change their behavior by recognizing that clients are the best experts in their own lives, and why according to the best practices research of therapists themselves, what financial advisors typically do – give advice with a comprehensive list of recommendations to their clients about how to improve their financial lives – is actually not a good way to get them to change their financial behaviors for the better.

We also talk about Kristy's work in helping to co-found the Financial Therapy Association, the development of a new Certified Financial Therapist (or "CFT") program they're developing, why Kristy anticipates that financial therapy will eventually become a specialization path for financial planners... and where the line should still be drawn between the end of what advisors can do by providing financial therapy, and when it may still be necessary to involve a fully licensed mental health professional on the client's behalf.

And be certain to listen to the end, where Kristy talks about her own upcoming transition, from teaching financial planning and financial therapy at Kansas State University, to joining the financial planning program at the University of Georgia, to hopefully help them build more insights from financial therapy into their core financial planning curriculum as well.

So whether you are interested in learning more about the intersection between financial planning and financial therapy, how financial therapy can help clients improve their financial behaviors, or how financial therapists can become certified through programs such as the CFT, I hope you enjoy this episode of the Financial Advisor Success podcast!

Celebrating 10 Years Of Kitces.com And Hiring For The Future

June 11, 2018 07:01 am 0 Comments CATEGORY: Nerd's Eye View

Featured Image Celebrating 10 Years At Kitces.com

In 2008, Kitces.com was first launched as a platform to showcase my new paid newsletter service, The Kitces Report, and to advertise my services as a speaker for financial advisor conferences, with a “grand vision” that my newsletter would help to draw interest for more speaking engagements, and that speaking in front of more advisor audiences would help me grow the number of paid subscribers to the newsletter. And on the side… I launched a blog, to share a few of my thoughts on financial planning strategies and industry trends that didn’t quite merit a full issue of the newsletter.

A decade later, the growth of the Nerd’s Eye View blog has surpassed even my wildest dreams, moving from a side project to the center of my business, built on a foundational belief that if we can stay focused on advancing knowledge in financial planning and helping real financial advisors to be more successful in their businesses and with their clients, that growth and other opportunities would come. And indeed they have, as the latest Erdos & Morgan study on financial advisor usage of digital media found that the Nerd’s Eye View ranks #1 for influence, objectivity, credibility, and simply being actually useful to financial advisors.

Given this growth, we’re excited to announce the addition to two new positions with the Kitces.com team. The first is a new Associate Editor role, to help us manage the ever-growing volume of content, readers, and behind-the-scenes logistics that are necessary to execute our growing media platform. The second is a new Senior Researcher, to replace Dr. Derek Tharp as he takes on a new financial planning teaching position at the University of Southern Maine’s business school. The Senior Researcher will help us to build a growing base of original research we aim to conduct directly through the Kitces.com platform, to help gain a better understanding of what real financial advisors actually do – from how they deliver plans, to how they price their services, how they use technology, and how they market and grow their advice-centric firms.

In the end, the goal of this growth and expanding the Kitces.com team is not to alter the service that we provide to the financial advisory community; instead, it’s simply to help us get even better at what we already do. Because in the end, a successful growing business needs more good people to be more successful and have a bigger impact to the community it serves. Which is true for both running a financial advisory firm itself, and also a platform that serves them. We’re nowhere close to being done yet, and I can’t wait to see what we can build to help the advisor community in the next 10 years from here!

Weekend Reading for Financial Planners (June 9-10)

June 8, 2018 02:52 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with a look at why, nearly 3 months after its surprising decision to vacate the DoL fiduciary rule, the clerk's office of the 5th Circuit Court of Appeals still has not actually issued its official mandate to vacate the rule, raising the question of whether there may actually still be some other last-ditch effort afoot to save the rule... or if the clerk's office is simply backed up on paperwork, such that the final issuance will be coming soon.

Also in the news this week is a brief recap of the Financial Planning Association's Advocacy Day in Washington DC, where 85 FPA members spoke with Congressional lawmakers and their staff about raising the standard for financial advice (and advocating that "financial planner" should also be a protected term, along with financial advisor), and the launch of "Equita Financial Network" for women-led advisory firm owners who are seeking more infrastructure and support to launch and run their own independent advisory firms.

From there, we have a number of articles on the ongoing shifts in the broker-dealer industry, as May is the month that several industry publications issue their annual "top broker-dealer" lists and interview broker-dealer executives. Highlights include: the annual Financial Planning magazine survey, that highlights how the largest broker-dealers are adapting to the changing landscape as this year marks the first ever that fee-based revenue at the top-50 independent broker-dealers exceeds commission-based revenue; the annual ThinkAdvisor broker-dealer Presidents poll showing that in the near-term, most broker-dealers are struggling the most with technology and regulation, even as their advisors are struggling to attract new clients in an increasingly competitive environment; how the likely roll-back of the DoL fiduciary rule (and the non-fiduciary SEC advice rule) is giving a new wind to small broker-dealers, even as more and more large broker-dealers appear intent on rolling them up (which might not be a bad deal for those smaller broker-dealers in the end); how the burden of FINRA regulation is so cumbersome that not only are many advisors leaving broker-dealers to start their own RIAs, but now some hybrid broker-dealers are themselves considering whether to spin off their entire "legacy" broker-dealer and instead just focus on becoming mega-RIAs in the future; how Cambridge Investment Research embodies this trend by choosing to start eschewing broker-dealer terms like "OSJ" and "branch" as the majority of its advisors, and its revenue, now come from the fee-based side of the business; and how the increasing mobility of brokers is leading them to take a hard look at not just the costs of the broker-dealer that are subtracted from their payout grids, but all the additional ways that broker-dealers mark up their various investment solutions by 10bps - 25bps (or more in some cases).

We wrap up with three interesting articles, all around the theme of how the "politicization of everything" is making more and more of us have to deal with criticism and negative feedback, and the best way to handle it: the first is a Harvard Business Review examination of how various CEOs are handling the growing pressure of businesses to take public positions on controversial issues; the second looks at how, whether it's political criticism or simply personal criticism, there are better and worse ways for us to take in criticism to actually learn from it; and the third is a good reminder that, no matter what we do, someone will likely criticize it, so often the best approach is simply to try take it all in, figure out if there is a grain of truth that merits an adjustment, and then simply move on and focus on making whatever choice is right for you (may as well, if you're going to be criticized no matter what!).

Enjoy the "light" reading!

What Do You Say When You Witness Sexual Harassment At A Financial Advisor Conference?

June 7, 2018 11:44 am 1 Comment CATEGORY: Practice Management

The number of female CFP professionals has remained stubbornly pegged at 23% for nearly 15 years, despite an ever-growing effort of the industry to attract more women. Because unfortunately, even as the profession seeks to build awareness and draw more women into financial planning, the positive impact is limited by the amount of sexual harassment and demeaning and belittling comments still directed at women by “fellow” advisors at the typical advisory industry conference.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, I share recent and unfortunate case-in-point examples of inappropriate and belittling comments that are still being made towards female advisors at industry conferences today, and explore what needs to be said to curtail problematic behavior.

For instance, at the recent FPA NorCal conference, a conversation that I was having with a group of female colleagues – including fellow advisors and several industry-leading consultants – was interrupted by another advisor who proclaimed the semi-circle of women I was speaking with looked like a “harem”. As though it’s ever appropriate to compare professional female colleagues to concubines!?

Similarly, it’s still all too common for women at advisory industry conferences to receive comments like “Whose assistant are you?” or “What do you actually do at your advisory firm?” with the implication that it couldn’t possibly be working as a financial advisor… even for a woman who prominently displays her CFP certification and a firm that’s named after her!

Yet I’ll confess that even as someone who has witnessed these kinds of disparaging comments, and am incredibly frustrated by them as well… I still struggle to figure out what, exactly, to say in order to break the cycle. As unfortunately, calling out offenders and trying to publicly humiliate them for their offensive comments is more likely to just make them defensive and run from the situation, instead of gaining some empathetic perspective and actually acknowledging and recognizing how their comments may be so demeaning to their female colleagues.

The bottom line, though, is that as someone who has witnessed this behavior, and often said nothing - out of a sheer lack of knowing what to say - I regret not taking a more active role in trying to stop it and saying something when I see or hear inappropriate behavior at advisory industry conferences. And it’s something I intend to address more proactively going forward. But I hope you’ll share your comments at the end of this article with your own perspective, on how best to have this conversation in the first place? What do you say when you witness sexual harassment at a financial advisor conference?

Should A Financial Plan Really Be Boiled Down To An Index Card Of Advice?

June 6, 2018 07:01 am 3 Comments CATEGORY: Client Trust & Communication

The Three Roles Of The Physical Financial Plan

Historically, getting paid for financial planning – not just to implement the recommendations, but for "The Plan" itself – meant producing a voluminous physical financial plan for which the advisor would be paid. The Plan was the tangible, physical deliverable, full of in-depth analyses and culminating in the advisor’s recommendations, that substantiates the financial planning fee. The one major caveat: few clients ever actually open The Plan again after it is first presented, focusing only on the subsequent recommendations and action items… and raising the question of whether financial planning might be done far more efficiently by eschewing The Plan and just delivering a One Page Financial Plan (of core recommendations and action items) instead.

Yet the reality is that even if The Plan is never revisited by the client after the day it’s presented, that doesn’t mean it was useless to have created it in the first place. Because from the client’s perspective, The Plan is what helps to validate that the subsequent recommendations are right and to be trusted in the first place; in other words, the client may in the end focus on just the recommendations and not The Plan, but that doesn’t mean they would have trusted and acted on those recommendations in the absence of the supporting comprehensive financial plan analyses and output.

Similarly, the real challenge for many clients is not figuring out the appropriate recommendations for them to achieve the goals in their financial plan, but to identify what their goals should be – or can be, or are even possible – in the first place. Which means producing The Plan, and subsequent What-If scenarios for the plan, are an essential element of the planning process in the first place. And again something that cannot be eschewed by just focusing on the One Page Financial Plan of recommendations at the end.

Notably, this doesn’t necessarily mean that financial advisors should or need to continue producing comprehensive financial plans exactly as they have in the past. The more the advisor can establish their trust and credibility – whether through showing empathy to create rapport with the client, demonstrating good communication skills, or simply their years of experience – the less the client may rely on the advisor’s analytical plan output. And to the extent planning software can be used more interactively and collaboratively with the client, the less it’s necessary to print out the voluminous plan in the first place.

Nonetheless, the challenge remains that even if the goal of the financial advisor is not just to get paid for The Plan, but for the advisor’s own financial planning knowledge and wisdom… it’s still necessary to go through the financial planning process in crafting recommendations for clients, if only because that’s what it takes for the client to have the buy-in and trust necessary to actually follow through and implement them!