Nerd's Eye View blog

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?

Weekend Reading for Financial Planners (May 11-12)

May 10, 2013 05:05 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's issue starts off with a surprising announcement that the CFP Board is considering a questionable proposal about whether to offer CE credit and go into direct competition with the CE sponsors it regulates (with advisors expressing strong concern about the conflict of interest that entails), along with two articles reporting on advisor trends in the industry, including a continued slide in the total number of advisors and wirehouses in particular, along with a contrasting view that the decline of wirehouses and the breakaway broker trend may actually be quite overstated.

From there, we look at a few behavioral-finance-related articles, including a controversial study suggesting that as many of 93% of financial advisors experienced symptoms of PTSD after the 2008 financial crisis and that the recent rise of tactical asset allocation may be a stress-driven response, a review of another recent study suggesting that the world of a fund manager is also a much more emotionally-driven experience than many might have thought, a discussion from the Journal of Financial Planning about the importance of focusing not just on a client's risk tolerance but also his/her risk perceptions (and the ways those perceptions can be distorted), and a review by Joel Bruckenstein of a new software package called Riskalyze that is aiming to provide a slightly newer way to assess client risk tolerance.

In addition, there are a few technology-related articles, including a reminder of the importance of considering not just software vendors and products and integrations in your technology decisions but also the staff that must implement it, some guidance from technology consultant Bill Winterberg about how to protect your firm and clients against so-called "phishing" attacks, a look at how some RIAs are successfully using social media to generate new clients, and a great article by Dan Moisand suggesting that the "rise of the machines" is not so much a threat against advisors as an opportunity for them to use technology for better efficiency.

We wrap up with an article reviewing recent research from Julie Littlechild, suggesting that just relying on client referrals by just making them satisfied and happy with your services isn't enough, given that surveys indicate 88% of clients are willing to provide a referral yet only 2% actually do provide one that successfully closes; instead, the real key is to create engaged clients who will refer you not because they're satisfied, but because you know how to solve the problems of one of their friends or family in need. Enjoy the reading!

Coverdell Education Savings Accounts Vs 529 Plans For College Savings

May 8, 2013 11:06 am 6 Comments CATEGORY: Taxes

Over the past decade, 529 college savings plans have been the dominant vehicle for those trying to save and invest for college. The combination of tax-free growth, high contribution limits, generally reasonable expenses, and more favorable financial aid treatment than outright gifting money to children through a UGMA/UTMA account, have all added to the appeal. While alternatives have been available - like Coverdell Education Savings Accounts - the appeal was limited, due both to the relatively small contribution limits, and the potential for some of the most favorable Coverdell rules to sunset at the end of 2012 with the fiscal cliff.

With the American Taxpayer Relief Act fiscal cliff legislation making Coverdell accounts permanent, though, it is perhaps time to give them a fresh look. Unfortunately, their contribution limits remain modest compared to both what can be contributed to 529 plans, and simply the cost of college itself, so Coverdell accounts may still only be part of the college savings picture for many clients in the foreseeable future - especially given that many states provide state tax deductions or credits for 529 plans but not Coverdell accounts. Nonetheless, Coverdell Education Savings Accounts represent one of the only opportunities to save tax-free for elementary and secondary school, and in some cases may even be lower cost than 529 plans due to their greater investment flexibility. As a result, it may be time to start considering them more proactively as a potential planning tool for certain client situations.

Managing The Paradox Of Choice In Your Financial Planning Practice

May 6, 2013 11:06 am 4 Comments CATEGORY: Client Trust & Communication

The proliferation of choice in recent years has given consumers more and more financial options, from choosing a 401(k) investment to selecting a long-term care insurance policy, or even identifying a financial planner to work with. While on the one hand the flexibility of choice is appealing, recent research suggests that in reality too many choices may make us so fearful of choosing poorly that it leads us to not choose at all; in other words, the more choices we have, the less likely we may be to select from any of them.

This so-called "Paradox of Choice" has significant implications for financial planners. On the one hand, it presents an opportunity to deliver value to clients by helping to narrow down and simplify the choices, or at least provide them helpful indicators about how to make a selection from amongst a wide array of complex options. On the other hand, it seems that some financial planners may be creating a Paradox of Choice for clients, sometimes by providing them with too many options about how to even work with the planner, instead of keeping the business model simple with a clear value proposition that clients can just take or leave.

The good news is that with some conscious focus, financial planners really do have an opportunity to create value for clients by helping them avoid "analysis paralysis" and drive forward to decisions and actions that improve their financial lives. But getting there may require us to collectively embrace the inherent irrationality we all have, and recognize that in many situations - including what we offer to our clients and how we help them - that offering more may lead to less, and focusing on less may lead to more.