Nerd's Eye View blog

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!

Why Cancelling An Existing Whole Life Or Universal Life Policy May Be A Bad Idea

April 17, 2013 11:05 am 26 Comments CATEGORY: Insurance

The fundamental purpose of insurance is to protect against and manage risks that can't otherwise be borne by an individual, from homeowner's insurance to protect against the risk of a disaster to the home, to permanent life insurance to protect against the financial impact of an untimely death. While term insurance can and does fulfill the latter function for most, in many cases clients currently maintain an existing permanent insurance policy, in anticipation of an insurance need that will last for the rest of his/her life. Often that need really does continue for life, but sometimes it does not.

In situations where permanent insurance is no longer needed - whether because the individual accumulated enough wealth than the death benefit protection is simply no longer necessary, or perhaps because the insurance was intended to provide liquidity for estate tax exposure that is simply no longer relevant at the newly permanent and portable inflation-adjusting $5.25M estate tax exemption - the default decision is often to cancel the coverage. After all, what's the point of paying for life insurance that's no longer needed, when it can be surrendered for cash value instead?

The caveat, however, is that in today's low yield environment, many permanent life insurance policies indirectly provide another potential value: a remarkably favorable internal rate of return if simply held until death. Given this potentially appealing "bond alternative" many clients should not only keep an existing permanent policy - despite no need for the death benefit - but even consider making ongoing premiums, paying down loan balances, or even increasing contributions to maintain the policy in force for life! Of course, if the client really needs the cash value or cannot afford premiums, this strategy is not viable, but the policy can still be sold as a life settlement instead to harvest most of the underlying value.

The bottom line, though, is that given the internal rate of return on life insurance held until death, for those who don't need the policy - but don't need the cash value, either - the best decision for unnecessary life insurance might not be to surrender it, but actually keep it anyway!

Joining The Advisory Board Of BrightScope

April 16, 2013 11:01 am 14 Comments CATEGORY: Nerd's Eye View

Determining whether an advisor is any good is a remarkably difficult task for consumers; in fact, just determining whether an advisor has ever committed a regulatory violation could require contact to as many as 102 different agencies - from 50 state insurance departments and 50 state securities regulators, to FINRA and the SEC. While all the information is technically part of the public record, and to that extent is "transparent," the difficulty to view it in any consolidated manner - much less as an easy resource - renders its value remarkably limited as a consumer protection.

One company trying to tackle this problem is BrightScope, which is drawing all the publicly available information together into a central resource that consumers can use to check out their advisors and determine if there's a clean regulatory record. Recently, BrightScope announced it is also aiming to draw on fee details disclosed by RIAs in their Form ADVs to make this information readily to consumers, and is looking to add more pertinent information as well, to ultimately provide a one-stop resource for consumers to find out key information about an advisor's experience, education, costs, and regulatory record.

While shining such a bold light of transparency on the activities of advisors will no doubt draw some criticism, I believe that this kind of transparency is crucial for consumers to develop better trust with financial advisors, and ultimately can help ensure that consumers always know the truth about who they're working with as "Brightscoping" your advisor becomes a routine form of due diligence check for consumers. At the same time, the reality is that the nature of our industry is complex, and oversimplification of these realities will not help consumers either.

Accordingly, I'm excited to announce that I will be joining the Advisory Board of BrightScope in a consulting capacity, to try to help support their efforts in finding the right balance between fair information about advisors and the transparency that consumers need and deserve.

Proposed $3 Million IRA Cap, Estate Planning Crackdowns, And Other Proposals Of President’s Budget

April 15, 2013 11:02 am 2 Comments CATEGORY: Retirement Planning

Last week, President Obama released his proposed government budget for the coming 2014 fiscal year. Of course, the reality is that the budget itself is just proposed and has not yet been approved, and many of the suggestions contained in the budget may be reformed before being set forth in actual legislation (or fall by the wayside entirely, or be written into legislation that ultimately doesn't pass). Nonetheless, proposals in the President's budget often signal areas that the Administration may be targeting for reform, and/or line items that could end out as a bargaining chip in future legislation.

In the 2014 budget, the Administration reiterates several reforms that have been suggested in the past, including an array of high-net-worth estate planning crackdowns, and even a reversion back to the 2009 estate tax exemption and rates. However, the proposal also includes several notable new provisions, including a potential tax credit for establishing automatic enrollment retirement plans, a shift to chained CPI that could impact everything from Social Security benefits to income tax brackets to the return on TIPS, a series of estate planning crackdowns on GRATs, IDGTs, and dynasty trusts, and in what has already been picked up by the media as a controversial provision, a potential "cap" of $3.4 million on retirement accounts beyond which no further contributions would be allowed.

In addition, surprising new proposals outside of gift and estate planning were included, including favorable relief allowing inherited IRA rollovers and an extension to the tax-free treatment of mortgage debt cancelling in a short sale, and the elimination of Required Minimum Distributions for those with less than $75,000 in retirement accounts. On the other hand, the proposals also include an increase to Medicare Part B and Part D premiums, especially for higher income individuals, a potential cap on itemized deductions at a 28% tax rate (even if the individual has a higher tax bracket), and a new requirement that all stocks in the future must use average cost (eliminating the ability to make lot-level gain and loss harvesting decisions).

The reality at this point is that information and details on many of these provisions are still limited; nonetheless, we highlight all of the most important proposals that would impact financial planners and their clients, and consider their feasibility and the potential planning implications.

Weekend Reading for Financial Planners (Apr 13-14)

April 12, 2013 05:05 pm 3 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's issue starts off with discussion of two noteworthy news events this week, including an announcement by BrightScope that later this year it will begin to include details of advisors' fees based on their Form ADV filings to help consumers evaluate cost, and a release of new Cerulli research that finds tactical asset allocation is about to become the majority strategy for advisors.

From there, we look at a few articles on notable industry trends, including a recap of the top industry trends from Chip Roame at the event spring Tiburon CEO Summit, a discussion of the latest iteration of the Merrill Lynch training program (now salaried for 43 months, with CFP certification required!), and an overview of up-and-coming RIA custodian TradePMR that may be about to take integrated and mobile investment adviser technology to a whole new level.

In addition, there are a couple of research and technical articles this week, including a good discussion of the research on what does (and doesn't) work in trying to choose a good active investment manager, a Journal of Financial Planning article that effectively summarizes the long list of disparities between the theory and practice of portfolio construction, some tips on how to handle college financial aid offers, and a look at the recent White House announcement to delay parts of the Small Business Health Options Program for small business health insurance exchanges in 2014 and how this may accelerate the trend of separating health insurance from employment.

We wrap up with three very interesting articles: the first looks at the research on where money does and doesn't impact motivation and (job) satisfaction; the second explores from behavioral finance research that suggests telling clients they need to change behavior to avoid the "retirement crisis" the nation faces may actually be a harmful approach; and the last is a creative look about how we can all manage and build our personal assets, regardless of whether we're a business owner or an employee, in financial services or otherwise! Enjoy the reading!

Strategies For Existing Variable Annuities With GLWB Or GMIB Riders

April 10, 2013 11:03 am 17 Comments CATEGORY: Annuities

While some advisors recommend annuities more often than others, virtually any advisor may have to deal with situations where clients have existing annuities. And because of the significant "living" and death benefit riders offered over the past decade, the reality is that the decision about what to do with an existing variable annuity is not as clear cut as it was in the past; in fact, failing to do proper due diligence before recommending a client cancel a variable annuity can land an advisor in more hot water than just selling one in the first place!

Unfortunately, the due diligence process is complicated by the fact that almost no two variable annuity riders work the same, with a broad range of GLWB and GMIB riders from one company to the next, each with their own unique features and benefits. As a result, there's more pressure than ever on advisors to read through the details of each and every contract, to try to make a good assessment of the situation and what the client should do next. On the plus side, though, a growing number of third-party providers are available to assist - including a notable new offering aptly titled "Annuity Review" - giving advisors the opportunity to gain outside expertise to help go through the details of contracts with which they may not be familiar.