Nerd's Eye View blog

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.

Weekend Reading for Financial Planners (May 4-5)

May 3, 2013 05:01 pm 3 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's issue starts off with a review of the latest Mark Hurley research suggesting that the overwhelming majority of advisory firms still have no economic value and are struggling for profitability. There's also a good review from Bob Veres of the rising range of online startup firms that are threatening advisors in various ways, a look at the recent SEC announcement that many RIA firms are failing to follow the Rule 206(4)-2 Custody Rules for client assets (in many cases, because the firms don't even realize what they're doing triggers the custody rule!), and a summary of recent research finding advisor use of social media - and consumer use of social media looking for advisors - continues to rise, with LinkedIn as the most active platform.

From there, we look at a few recent articles that have been critical of the SEC's request for information to do a cost-benefit analysis regarding a uniform fiduciary standard, finding that the way the SEC is asking the questions may already be shaping the outcome in a manner that either undermines the intended purpose of the rule, or in the view of the Institute for the Fiduciary Standard outright narrows the potential scope of fiduciary to the point where it no longer provides effective consumer protection. There's also an interesting alternative proposal from Don Trone that a better way to bring principles-based fiduciary to broker-dealers is to craft a series of "fiduciary safe harbor" guidelines that would allow broker-dealers to comfortably apply a fiduciary standard and know how to oversee it, without creating a maze of burdensome rules.

In addition, there's an article from Steve Utkus of the Vanguard Center for Retirement Research that criticizes the recent and controversial PBS Frontline special "The Retirement Gamble" (despite the special's favorable positioning of Vanguard and low-cost indexing), and a look from John Mauldin about how the progression to a "cashless society" (where we all do business using credit cards, debit cards, and smartphones) may be further away than we think, due to the rise in cash-based economic activity due to the incentives created by regulation, taxation, and social programs.

We wrap up with three very interesting articles: the first is a review of the recent "Technology Tools for Today's High-Margin Practice" book by Bruckenstein and Drucker; the second looks at a behavioral bias called "motivated reasoning" - where we are more analytical and critical of things that would challenge our existing views and beliefs - that can be a challenge for both clients and advisors themselves; and the last looks at how the shift to 401(k) and other defined contribution trends is analogous to a broader societal shift towards a greater demand on self-motivation and self-reliance, which allows some to flourish but is creating significant challenges for many others, as a world with more choices and fewer limits also has fewer guarantees and safety nets... and perhaps more opportunities for advisors to help people navigate effectively. Enjoy the reading!

Is Capital Loss Harvesting Overvalued?

May 1, 2013 11:01 am 27 Comments CATEGORY: Taxes

Capital loss harvesting has long been a staple of investment tax strategy - so much that the Internal Revenue Code has special "wash sale" rules to ensure that the technique is not overly abused. Fortunately, though, the wash sale rules can be navigated effectively, allowing taxpayers some means to take advantage of available tax losses.

However, while tax loss harvesting remains a viable strategy, it is often greatly overvalued, as the true benefit is not the tax savings from harvesting a loss but merely the benefit of deferring those gains. In the meantime, the strategy has a non-trivial exposure to several risks, including the potential for the alternative investment held during the 30-day wash rule period underperforming the original investment, the possibility of negative tax arbitrage if the investment rebounds in the near term, and the danger that harvesting losses too effectively over time will drive the client's future capital gains into a higher tax bracket! In addition, the fact remains that capital loss harvesting produces no benefits for clients who are eligible for 0% capital gains tax rates, and in fact potentially harms them; in such scenarios, clients should actually be harvesting gains, not losses!

Ultimately, this doesn't mean that harvesting capital losses is a bad strategy, but it is a strategy where the risks must be carefully considered, as they can easily outweigh the relatively modest benefits!
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Why Aren’t Checklists A Financial Planning Standard?

April 29, 2013 11:03 am 155 Comments CATEGORY: Practice Management

As financial planning for clients grows more and more complex, it becomes increasingly difficult for planners to recognize every planning issue, opportunity, and concern from memory alone. As a result, there is an rising risk that planners commit malpractice and make a mistake - albeit by accident - in the struggle of trying to apply everything they have learned to an incredibly wide range of client situations.

However, the reality is that this challenge is not unique to financial planning. Many professions face a similar struggle, where the sheer amount of knowledge required, and the incredible number of client/customer/patient situations make it almost impossible to remember everything that's necessary at the exact time it's needed, mean a rising risk of mistakes, negligence, and ineptitude.

So what's the solution to address this challenge? As it turns out, there's a remarkably simple one: checklists. While it may seem absurd that such a basic device could enhance client outcomes - in fact, as professionals we often bristle at the thought that a checklist could tell us something we don't already know - it turns out that checklists may be an excellent means to deal with the simple fact that we are all fallible humans.

Unfortunately, though, few checklists currently exist in the world of financial planning, especially outside of the operational aspects of an advisory firm. Nonetheless, it is perhaps time to give checklists the recognition they deserve, as a potentially critical step to ensure that we apply the proper due diligence to each and every complex financial planning situation, and that nothing accidentally slips through the cracks.

Weekend Reading for Financial Planners (Apr 27-28)

April 26, 2013 03:15 pm 3 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's issue starts off with some breaking news about the announcement by Senator Baucus that he will not run for re-election in 2014 - which may set the stage for compromise on bipartisan tax legislation - and a look at the latest in the recent debates about the flaws in the Reinhart and Rogoff research on high-debt countries, which are now suggesting that the criticism may have overstated the issue and that the fundamental concerns of growth in high-debt countries remain.

From there, we look at a few articles on working with younger "next generation" planners, including a discussion of the FPA's rising focus on young planners, some guidance from Deena Katz on how to better bridge the baby boomer vs Gen X/Y gap (which she suggests requires some improvements from both sides of the chasm), some tips on how to recruit and hiring Generation Y advisors and get them to stay, and some advice from Angie Herbers on when to consider not just hiring young "professional" staff (meaning young financial planners) but also "non-professional" staff (meaning your high quality operations and administrative staff) who can also have a critical impact on the success of your business.

In addition, there are two articles regarding social media, including one that looks at a series of recent research studies showing the rising adoption of social media by both advisors and their prospective and current clients, and another that examines the rising conflict between regulatory efforts to oversee social media in financial services and states enacting laws to protect personal social media accounts from employers. There's also an article by Mark Tibergien cautioning advisors not to just be "Fiduciaries In Name Only" (or "FINO" for short!), but to ensure that the entire practice is really being run in a proper manner.

We wrap up with three very interesting articles: the first is from retirement researcher Moshe Milevsky about whether we should consider bringing back an old annuity-like pooled investment approach called a tontine; the second looks at how to generate better referrals by getting your clients not to tell their friends about you and your benefits but a story about the kinds of problems you help people solve; and the last provides a good reminder that while all the technical knowledge we apply for our clients is valuable, from tax strategies to investment management, that for some clients our key value proposition may not be that we do it "better" than the client but simply that we do it "for" them and eliminate their time, hassle, and stress, so they can better enjoy their lives. Enjoy the reading!

Proposal Threatens To Ban Specific Share Identification Method For Lot Level Accounting Tax Strategies

April 24, 2013 11:04 am 6 Comments CATEGORY: Investments

The specific share identification method allows investors to choose which investment is sold, which can be especially helpful when there are multiple lots purchased over time that each have a different cost basis, as advisors and their clients have the opportunity to identify exactly which shares to sell to get the best tax result. In the past, this strategy was implemented to maximize tax loss harvesting to minimize an individual's tax liability over time, although notably in today's world some advisors and clients are actually using it to ensure that long-term capital gains are harvested for those in the bottom tax brackets! Either way, though, specific share identification provided the planning opportunity, and in fact a popular feature of portfolio accounting and rebalancing software has been the ability to track and manage lot level accounting to optimize these decisions.

The rules for specific share identification were tightened up slightly in recent years, as 2008 legislation has been phasing in year by year that requires brokers and custodians to track the cost basis of newly purchased investments - so-called "covered securities" - and to report the results of sales to the IRS on a new Form 1099-B that provides information on not just the sales proceeds and sale date (as in the past), but also the cost basis, acquisition date, amount of the gain or loss, and character of the gain or loss (i.e., long-term or short-term). In addition, the new tracking rules effectively enforce the requirement that if advisors and their clients are going to use the specific share identification method, or otherwise want to set a favorable default method of accounting, it must be chosen by the time the sale occurs and the trade settles; otherwise, the lot selection is "locked in" and cannot be changed later.

In a new potential blow to the planning strategy, though, the latest 2014 Budget Proposal from President Obama would eliminate lot level accounting and the specific share identification method altogether, requiring instead that covered securities all be reported using the average cost method once they are held long enough to be eligible for long-term capital gains. Although some of the details remain unclear - most notably, whether the rules would apply only for stocks, or for mutual funds and ETFs as well - the bottom line is that the opportunity to make tax-savvy decisions about individual investment lots being sold may soon cease to be a value proposition for advisors and the technology that supports them!

Are Your Time Saving Techniques Really Just Delegating Work Back To Your Clients?

April 22, 2013 11:02 am 1 Comment CATEGORY: Practice Management

Once upon a time, virtually all financial planners were actually life insurance agents or mutual fund and investment brokers, who were compensated by selling products and perhaps gave a little financial advice on the side. Over the past several decades, financial planning has been pushing towards becoming a recognized profession, and its practitioners recognized professionals. At the same time, the business itself has become more complex, challenging, and time-intensive, a natural by-product of shifting from the sale of products to the delivery of advice. The net result of all these trends are a greater pressure than ever for financial planners to maintain high productivity levels.

In response, financial planners have sought out ways to make themselves and their firms more efficient - such as requiring clients to come meet at the advisor's office, or to dictate that clients must gather all their data up front and bring it already-fully-assembled to the planner - to manage the costs in terms of both their time and staff, in order to run a successful financial planning business. The reality, however, is that such strategies don't actually eliminate the work to make the planner more efficient - it simply delegates the work to the clients, and makes it their problem instead!

While such an approach may be necessary for some business models, it's less than ideal for many - especially firms that pride themselves on the quality of service they provide their high net worth clients! So what's the alternative? Instead of just delegating work to clients, reimagine how to turn these challenge points into true value-adds for the client, or better yet use some of the emerging technology in today's digital age to eliminate the problem entirely!

Weekend Reading for Financial Planners (Apr 20-21)

April 19, 2013 05:09 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's issue starts off with some breaking news about new legislation from Representative Maxine Waters that would authorize the SEC to collect user fees to increase oversight of RIAs (although it's not clear the legislation will gain momentum, it's viewed by many as a favorable alternative to FINRA oversight of RIAs). There's also a call from the Consumer Financial Protection Bureau for a fresh crackdown on "senior designations" and a good in-depth look at the potential fiduciary rule coming out of the Department of Labor in the next few months.

From there, we look at a few articles on notable industry trends, including a review of recent Aite Group research suggesting that there may be more unhappy advisors in RIAs than working in wirehouses, a look at how CFP certificants are geographically distributed around the country, and a review of InStream Solutions financial planning software and its numerous innovations in how advisors can use its software to enhance their outcomes with clients.

In addition, there are a couple of research and technical articles this week, including a good summary of this week's Reinhart and Rogoff research controversy and exactly what the purported flaws were in the original study, a discussion of whether dividend investing is really just a value tilt in disguise (and that dividends might actually be a detractor from performance after adjusting for value!), and a look at a recent research brief from the Center for Retirement Research which finds that "nudges" like automatic enrollment programs may actually be a more effective government policy to encourage retirement savings than just providing a subsidy in the form of tax deductions.

We wrap up with two practice management articles - one with a list of good tips for using LinkedIn, and the other about how to introduce new technology tools to your clients - and close out with an article suggesting that advisors may be talking to clients with more jargon than they realize (and what to do about it), and another looking at financial planning trends in the future and suggesting that while expert knowledge is important, the best financial planners will be differentiated by their ability to use "left-brain" abilities to connect with clients emotionally to really leverage their right-brain knowledge. Enjoy the reading!