Nerd's Eye View blog

Weekend Reading for Financial Planners (June 1-2)

May 31, 2013 05:02 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's issue starts off with two industry studies: the first shows that an advisor's interpersonal skills and emotional intelligence dominate the traits of what makes the top advisors most successful (as opposed to quality information and advice, which is necessary but not sufficient for maximal success); and the second finds that as overall economic and wealth growth slows in the US, advisors will increasing be forced to compete with other advisors to win clients (or "steal" them), rather than just relying on the newly wealthy for new clientele.

There are several practice management and technology articles this week as well, including a good reminder about why it's so important to say "no" to the wrong prospects, the rising importance of getting involved with the Google+ social network as a way to grow your advisory business, some best practices tips on Twitter for advisors that are genuinely useful, a fascinating profile of what digital marketing for financial planning may look like in the future (and that a few advisors are already implementing today), and some data on how Millenials do and don't differ from older clientele and how advisors may (and may not) have to change to deal with their future clients.

We also have a pair of technical articles, including one looking at how the new health insurance rules will work for 2014 - open enrollment begins in October for millions of people! - and another on how the use of bypass and other estate planning trust strategies are changing as estate planning takes on a more income-tax-centric theme for the many clients who simply no longer face any kind of Federal estate tax liability.

Continuing the opening theme of emotional intelligence, we wrap up with three articles looking at the importance emotional intelligence, relationships, and the value we provide: the first is an interview with Doug Lennick, author of Moral Intelligence 2.0 and a consultant to advisors; the second is a meta analysis from the Harvard Business Review of all the research on emotional intelligence and what we can draw upon from it; and the last is a more general article about how just being in the information of dispensing expert information is no longer sufficient in today's world, and that everyone - including advisors - needs to get out of the business of trying to hoard increasingly commoditized information, and instead deliver real value through non-commodity service, customization, and making complex information relevant. Enjoy the reading!

Introducing the Play Or Pay Tax – Employer Shared Responsibility Payments For Health Coverage

May 29, 2013 11:04 am 7 Comments CATEGORY: Insurance

In 2014, employers will first become responsible for payments for “shared responsibility” for health care coverage, or what is increasingly being called the “Employer Shared Responsibility Tax” (ESRT), as a part of the PPACA legislation, under the new IRC Section 4980H. The ESRT is also known as the “play or pay” tax, as it effectively requires employers to either “play” by offering employee health care, or pay a tax for failing to do so. The ESRT will apply to so-called "large employers" with more than 50 full-time (equivalent) employees.

What's significant about the ESRT, though, is the fact that while it does represent a potential new tax to manage or avoid, the reality is that for many employers the penalty tax may be less expensive than sharing in the cost of employee health care... which means over time, employers may increasingly choose to just pay the penalty and let their employees get their own coverage. While in the past this wasn't feasible - simply because health insurance was often viewed as a "mandatory" employee benefit, especially for highly competitive job markets or positions - the reality is that employees (and non-employees) will be able to get guaranteed issue insurance for standard policy types and rates without any limitations on pre-existing conditions beginning in 2014. Which means, simply put, that employees will no longer need to rely on employers for health insurance, at the same time that employers may find its cheaper to just pay the penalty and stop offering coverage to employees.

In the meantime, though, the transition may be challenging for employers, which must make a decision by the end of the year whether to change their approach to health insurance in 2014, and make some significant decisions with big economic ramifications (not to mention simply ensuring they properly comply with the rules so they don't offer health insurance to employees AND pay a penalty!). Nonetheless, the onset of the ESRT may mark the beginning of the end of health insurance being tied to employment, where employers instead just pay employees a little more (or not), and let them make their own health insurance choices. And although this may be a difficult transition for employees as well, in the long run many individuals may actually enjoy the greater flexibility to change jobs, start businesses, or just retire early, in a world where employment is simply no longer a requirement to get access to health insurance.

Why Profit Margins Should Matter To Any Financial Planning Firm

May 27, 2013 11:06 am 0 Comments CATEGORY: Practice Management

The profitability of a financial planning firm is a sensitive issue for many advisors. For some, the income of the business is a primary focus, and the balance between the financial success of the firm and its owners, and the services it provides to clients, is carefully balanced. For others, however, there is far less focus on the profitability of the firm, and more on the depth of service delivered to clients (even at the cost of profitability), especially if total income is "comfortable" to support the advisor's lifestyle.

Yet the reality is that whether the goal is to maximize income or not, the profitability of an advisory firm matters, in far more ways than "just" the income paid out to the owner. The profit margins of a firm are also crucial to its value; in the case of a sale to a third-party, it may be the difference between selling or not finding a buyer at all, and even for an internal succession plan, a business that isn't profitable is simply unaffordable to the next generation at any price. And of course, if the owner's exit from the business is unexpected - for instance due to disability or death - the profitability of the firm has a direct impact on whether the surviving family members receive any value at all.

But beyond the financials of the advisory firm owner, family members, and successor owners, the profitability of an advisor firm matters for another reason as well: the stability of the practice helps it to retain its staff. After all, a firm that is only marginally profitable simply has no flexibility to deal with the vicissitudes of business; like living from paycheck to paycheck, it creates an environment where even a small disruption can have major ramifications, as many firms discovered when the 2008-2009 financial crisis forced them to fire staff and reduce services to clients at the exact time clients needed them the most.

And perhaps, ultimately, that's the real reason why running a firm with healthy profit margins matter: a firm that doesn't have a healthy profit margin as a cushion to deal with inevitable difficult times that can occur may be unable to sustain the quality of its services to clients... or at worst, may have to cease serving them entirely.
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Weekend Reading for Financial Planners (May 25-26)

May 24, 2013 04:38 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's issue starts off with a series of practice management articles, including a discussion of the emerging talent shortage for experienced advisors, how to choose a practice management coach to work with, and making a decision at the crossroads of business growth about whether to continue being an advisor or become a CEO of an advisory firm. There's also an article on the importance of watching the words that you use in your business, another about the positive impact that happiness can bring to your business and your success (the reality is that it's not success brings happiness, but that happiness brings success!), and a good reminder that even when you're building an online marketing effort there's a difference between platforms you can control and those you can't so be cautious that you don't turn yourself into a "digital sharecropper" with landlord risk.

From there, we look at a few technical planning articles, including a recent study finding that health insurance cost inflation may be slowing, a discussion of whether it makes sense to shift from current health care coverage to the coming new "Obamacare" health plans coming in the insurance exchanges this fall, a look from David Blanchett at how the factors of alpha, beta, cash flows, and delayed retirement impact retirement success, and the latest from Michael Finke on how there may be too much emphasis on the 4% rule and not enough on balancing out the longevity and "upside" risks that are also embedded into its assumptions.

We wrap up with three more introspective articles: the first looks at some recent research suggesting that seniors may not quite have the memory and cognitive decline once believed but that instead they're just better at prioritizing what to remember and what's irrelevant; the second examines our tendency to underinsure ourselves against high-impact low-probability events and that sometimes we need insurance to be "sold" to us to overcome our biases; and the last is an interesting piece about how forcing people to give a small "prosocial" bonus to others can actually be more effective for team-building and business success rather than just giving employees bonuses they can spend on themselves. Enjoy the reading!

The Rise Of The Spousal Lifetime Access Trust (SLAT)

May 22, 2013 11:06 am 2 Comments CATEGORY: Estate Planning

In late 2012, a new estate planning strategy emerged - the so-called "Spousal Lifetime Access Trust" (or SLAT for short). The basic concept of the SLAT was relatively straightforward: it would function like a bypass trust, but be funded during life instead of at death, with the intention of using it to take advantage of the then-current $5.12M estate tax exemption before it dropped back to $1M as was scheduled for 2013.

Ultimately, the estate tax fiscal cliff didn't happen, but the SLAT remains valid in 2013 and beyond for a new purpose: planning around state estate taxes, and the mismatch between the numerous states that have only a $1M state estate tax exemption and no gift tax, while the Federal gift and estate tax exemptions are at $5.25M. Given this "decoupling" of the state estate tax from its Federal gift tax - and the lack of any state gift tax backstop - couples have a unique opportunity to manage or avoid state estate taxes by creating "supercharged bypass trusts" in the form of SLATs funded during life.

The caveat to the strategy is the "reciprocal trust" doctrine, which can cause SLATs to become "uncrossed" and taxable in the original donor's estate. Fortunately, reciprocal trust treatment can be avoided. Unfortunately, though, the rules to avoid reciprocal trust treatment are based on the facts and circumstances of the situation, and consequently a focus for the IRS and estate planning attorneys in the coming years may be figuring out how best to avoid the reciprocal trust doctrine without actually ruining the client's financial and estate planning goals.

Nonetheless, though, the reality remains that the SLAT may be increasingly popular in the coming years, at least until states implement a gift tax, recouple to the Federal gift and estate tax system, or just repeal their state estate taxes entirely.

How To Be “No Longer Awkward” When Planning For Grieving Clients

May 20, 2013 11:02 am 1 Comment CATEGORY: General Planning

Working with grieving clients is a difficult challenge for many planners; most people simply do not have very much experience working with others who are grieving, and the uncertainty about what to say or do - or not say or do for fear of offending - leads many to avoid such potentially awkward situations altogether. Yet the reality is that experiencing loss, and grieving for it, is a fact of life, especially when we recognize that the kinds of "loss" triggering grief can encompass a wide range of circumstances, from the death of loved ones to a loss of role or routine to an outright material loss of money or even home.

Fortunately, though, a recent new book entitled "No Longer Awkward: Communicating with Clients Through the Toughest Times of Life" helps to provide guidance in navigating these difficult issues. Written by Amy Florian, who is herself an expert on grief, both academically (with 30 years of experience, she holds a Master's degree and is a Fellow in Thanatology) and sadly personally (as several decades ago a sudden car accident left her a 25-year-old widow with a 7-month-old son), the book provides guidance on exactly what to say (and not to say) in grief situations, and a wide range of templates and resources as well.

Simply put, "No Longer Awkward" may quickly become the definitive handbook for advisors on how to comfortably handle those uncommon-but-frequent-enough grief situations with clients.

Weekend Reading for Financial Planners (May 18-19)

May 17, 2013 04:07 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's issue starts off with an announcement by the CFP Board of a new initiative to increase the number of women entering financial planning (currently only 23% of CFP certificants), a discussion from FPA's lobbying group of the current advocacy priorities in Washington DC for 2013, and a surprising article about industry trends showing that using virtual advisors isn't just about young people as many of the new startups in this space are reporting a significant number of Baby Boomers using their technology-driven advisory services.

From there, we look at a few industry-related articles, including one discussing how often the reason why advisors merger and acquisition deals fall through is not problems with culture and philosophy but just good old-fashioned dollars-and-cents, and a review by Bob Veres of the latest Mark Hurley white paper and the insights it provides not just about the advisory firm landscape but also some good tips for buyers and sellers about how to get a deal done. In addition, there's a pair of more technical articles, the first explaining how to help clients choose an appropriate Medigap supplemental policy, and the other looking at what an unwinding of Quantitative Easing by the Fed would really look like (hint, it will be a lot more gradual than the market volatility will imply when it begins).

In addition, there are several practice management articles, including one about how to ensure any photos and images you use on your website at legal to avoid a Copyright infringement lawsuit, another with some tips about how to "wow" a client (everyone says it's good to wow clients with great service, but what does that really mean!), and a good discussion about the importance of paying attention to your office environment and decor because the impression it leaves can impact your client's perspective on the entire experience.

We wrap up with three more introspective articles: the first poses a series of 5 questions that advisors should ask themselves and be able to answer to better focus where their business is going to succeed in the future; the second reflects upon the importance of telling your own personal story to help build a client's faith and trust in you; and the last is a fascinating look at the book "Give and Take" which finds that some people are givers, some are takers, and most are matchers, but it's the dynamic between the three of them that ultimately determines who succeeds in business. Enjoy the reading!

MailBag: Tips And Best Practices For Financial Planners Building Media Visibility

May 16, 2013 11:06 am 2 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 how to get started and best practices for building media visibility, getting articles published, and getting quoted in the press.

Should Financial Planners Invest Using Bucket Strategies Or Just Report That Way?

May 15, 2013 11:07 am 10 Comments CATEGORY: Investments

Financial planners have always sought to adjust their strategies and communication techniques to the realities of client needs, although the increasing volume of behavioral finance research is now beginning to document exactly how we as human beings sometimes think in very irrational ways, which in turn provides insight about how to best adapt to deliver effective advice. One common challenge area regarding investments in particular is our tendency for mental accounting - where we break up and categorize assets based on various needs and purposes, even if the underlying investments are flexible or entirely fungible - which in turn has spurred the growth of so-called "bucket strategies" that seek to allocate portfolios based on various goals, needs, or time horizons.

Unfortunately, though, recent research has shown that stringent applications of bucket strategies can potentially result in less optimal retirement outcomes, not better ones, particularly due to the "cash drag" and portfolios that can dial down too conservatively too fast; in addition, the reality is that mathematically, most of the benefits of bucket strategies are captured simply from traditional rebalancing strategies, which already ensure that stocks are bought (not sold) when they're down and that cash and bonds are used for spending needs when appropriate.

Nonetheless, from the behavioral perspective, using bucket strategies remains appealing, if only to help clients stay the course during stressful times. But ultimately, perhaps the best solution is not just to weigh the trade-off between managing with buckets (even if the results are worse) versus helping clients psychologically (which is still better than having them bail out at the worst of times), but to accomplish both by improving performance reporting to overlay buckets and goals on top of the portfolio. In other words, maybe the key is not that we need to change how we invest for clients, but simply to more effectively frame how we report the results?

CFP Board Considers Going Into Competition With CE Sponsors It Regulates

May 13, 2013 11:03 am 8 Comments CATEGORY: Planning Profession

Last week, leaders from the CFP Board, including CEO Kevin Keller, board of directors chair Nancy Kistner, and chair-elect Ray Ferrara, traveled to the FPA Retreat conference and NAPFA's national spring conference. The purpose of the visit was not just to participate in the conference itself or check out the latest growth of the organizations; instead, it was to gauge support from these gatherings of the experienced planner community for a potential new initiative: the CFP Board is considering whether it should begin to offer CFP Continuing Education (CE) credit to its certificants, going into direct competition with the CE sponsors it is simultaneously responsible for overseeing, in an effort to raise the quality of CFP CE.

Not surprisingly, given the fiduciary focus of both FPA and NAPFA members and the efforts of the respective organizations on the Financial Planning Coalition - which is currently making the lobbying case for why a conflicted organization like FINRA should not be allowed to oversee registered investment advisers - planners from both groups were negative on the proposal, citing the blatant conflict of interest involved if the CFP Board were to compete with those it regulates.

While at this point, the reality is that this is just a preliminary discussion, and not even a substantively drafted proposal issued for comment, it nonetheless raises a more substantive question: is this really the best idea the CFP Board has regarding how to improve the quality of CFP CE, or does this proposal represent a strategic first step towards something more far reaching, like going into direct membership association competition with the FPA and NAPFA themselves? Will the CFP Board back away from the proposal given the nearly unanimous negative feedback thus far, or will it further tip its hand in pursuing a new strategic initiative?