Nerd's Eye View blog

IRS Opens Door In PLR 201330016 For 1035 Exchange By Beneficiary Of Fixed And Variable Inherited Annuities

July 31, 2013 11:06 am 8 Comments CATEGORY: Annuities

A classic challenge of beneficiaries of inherited (non-qualified) annuities is that they have been "stuck" with whatever contract was originally owned by the decedent, often locking the beneficiary into a series of investment choices (or lack thereof) that limited the ability of the contract to be invested accordingly to his/her needs and goals, especially when a fixed annuity was inherited by a young beneficiary who wanted to invest for long-term growth. The only alternative: beneficiaries who wanted to reinvest the proceeds were forced to liquidate the contract, paying any/all gains at that time (at ordinary income rates), and then reinvesting whatever was left over.

In a new private letter ruling from the IRS, though, the rules are now changing. PLR 201330016 granted the beneficiary of a series of several fixed and variable non-qualified inherited annuities to complete a 1035 exchange of those contracts into a new variable annuity to gain access to more appealing investment returns. In the IRS' viewpoint, the beneficiary-as-inheritor had sufficient ownership and control of the inherited annuity to allow the exchange, and permitted the exchange to occur, as long as the technical requirements for the 1035 exchange were honored, and the beneficiary committed to taking post-death distributions from the new annuity at least as rapidly as were occurring under the old contract.

While this is ultimately "just" a private letter ruling, and not technically binding, it seems likely the IRS will continue to follow the ruling as long as it is not abused. Accordingly, though insurance companies will need to decide whether they individually will comply, and prepare the appropriate forms and paperwork to ensure that the technical requirements stipulated in PLR 201330016 are honored, the reality is that this new ruling may have finally opened the door for beneficiaries of inherited non-qualified annuities to gain a new level of flexibility to make decisions about what to do with inherited annuity contracts, and exchange accordingly as desired.

The Advisor Of The Future Is Not Human Nor Robot, But Cyborg

July 29, 2013 11:02 am 15 Comments CATEGORY: Practice Management

As the world moves increasingly into the digital age, technology-driven solutions continue to threaten the traditional way things are done, and the world of investment management is no exception, as numerous "robo-advisors" have cropped up in recent years with an aim to threaten and disrupt financial advisors. Yet the reality, at least so far, is that virtually all of the offerings are narrowly constrained to just portfolio solutions - where the world of mathematics and algorithms work well - with little capability of addressing the rest of an individual's financial picture.

But perhaps the biggest caveat of robo-advisor-driven solutions is that for many consumers, the real issue is not a cost-efficient portfolio solution, but managing the self-inflicted "behavior gap" where many investors, as a result of their own greed and fear, achieve inferior results. And it's not clear that robo-advisors will have any solution to these behaviorally-driven problems; just as a website that says "eat less and exercise more" doesn't solve the country's obesity problem (because it's a behavioral problem, not an information problem), it's not clear that robo-advisors and their portfolio construction recommendations will fare much better by providing information solutions for what are ultimately investors' behavioral challenges. Furthermore, at this point it's only the human advisors that address the entire set of comprehensive financial planning goals for clients.

Nonetheless, the reality is that a purely human solution isn't always better, either; many of the things advisors do can in fact be implemented far more efficiently with technology, and overall it's important to acknowledge that there are some things that humans do better but some things that really are done better by computers. Which means in the end, the real winner may not be the robo-advisors, nor the human advisors, but the technology-augmented humans - the cyborg advisors - who blend human and technology together into an optimal financial advice solution for consumers.

Weekend Reading for Financial Planners (July 27-28) – Blogosphere Edition!

July 26, 2013 05:04 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's collection of articles are drawn entirely from the blogs of financial advisors and the companies and consultants who serve them, and starts off with an interesting profile of a financial planner from India who is building a practice comprised almost entirely of virtual, online clients who can purchase increasing expensive and sophisticated tiers of service and advice, effectively allowing the planner to both build to the highest priced financial planning offering over time and have the opportunity to get paid while cultivating those relationships!

From there, we have a number of additional articles about building business online and through social media, including one article that emphasizes the importance of having a good online website (which is now even more important than having a good high-end glossy brochure), some guidance on what Search Engine Optimization (SEO) means for financial advisors and tips to improve it for your website, and a discussion of building networks on LinkedIn and whether it's a good idea to accept any/every LinkedIn invitation that comes your way.

We also have several practice management articles, including one on the perils of having a book of aging clients (though the tipping point is not merely when clients retire, but instead when they start reaching their late 60s and early 70s), another on marketing and how to differentiate yourself by providing case studies of how you work with your target clients, and a third on why networking is so unsuccessful for most advisors (hint: don't just search for prospective clients, search for prospective advocates who can open the door to many more clients down the road). There are also a few more technical articles, including one about how to address life insurance for your diabetic clients, and another with a good checklist of key areas to consider for any same-sex married couple clients since the Supreme Court DOMA decision.

We wrap up with three final articles: the first is from "Investment Committee Doctor" Tom Brakke about how our efforts to better convey information graphically and visually could lead us to make new behavior mistakes in our investment decision-making process; the second looks at what financial advisors can learn from the TV show Mad Men about specialization of roles within a firm and separating business development and relationship management from financial planning creativity and expertise; and the last looks at a recent survey that finds what matters most to clients is not your fees, your advice, your service, your knowledge, or your experience, but your interpersonal skills, the ability to use the right side of your brain to tell stories and create connections, and the importance of starting out by talking not about what you do, but why you do it in a way that clients can make an emotional connection. Enjoy the reading!

MailBag: Deducting Investment Management Fees Against Net Investment Income For The 3.8% Medicare Portfolio Surtax

July 25, 2013 11:03 am 0 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 whether/how to deduct investment expenses - including investment management fees - against net investment income for the purposes of calculating a client's exposure to the new 3.8% Medicare surtax.

Understanding The True Impact Of A Single Premium Immediate Annuity On Retirement Income Sustainability

July 24, 2013 11:01 am 14 Comments CATEGORY: Retirement Planning

In today's low-return environment, retirees have become increasingly stressed about the potential risk of outliving their retirement assets, which in turn has led to an increasing call for strategies that at least partially annuitize a portion of the portfolio. After all, a single premium immediate annuity (SPIA) provides a lifetime stream of income that by definition cannot be outlived, and the potential for long-lived retirees to earn mortality credits creates the potential to earn significantly more cumulative return than what bonds alone can pay. In fact, a great deal of research over the past decade has shown that partial annuitization of a portfolio can improve retirement income sustainability over portfolio-based strategies alone.

Yet in new research produced by yours truly, along with retirement researcher Wade Pfau, it appears that the prior research may not be entirely correct. While it's true that for extreme longevity scenarios, SPIAs provide an unparalleled return and enhance retirement outcomes, the strategy as commonly implemented is also an indirect form of a bucket strategy that disproportionately liquidates fixed-income assets in the early years and lets the rest of the (risky) portfolio run. By reducing withdrawals from risky assets in the early years, the exposure to potentially unfavorable return sequences is diminished, even as the total allocation to equities rises throughout retirement.

In fact, as the results show, the majority of the benefits commonly attributed to partial annuitization are actually just the indirect result of a bucket strategy that produces a rising equity glidepath. While SPIAs do still provide superior results for very long-lived retirees, it truly takes extreme longevity - i.e., married couples living beyond age 100 - before the contribution from mortality credits actually outweighs the benefits of just using a strategy that liquidates more fixed income in the early years and allows equity exposure to rise. Accordingly, the bottom line is that for retirees who truly want to hedge extreme longevity, the benefits of SPIAs remain unmatched, but for most retirees who will not live that long the reality is that SPIAs not only fail to provide benefits, but they can actually produce results inferior to just replicating the rising equity glidepath without annuitizing at all!

Financial Planning Success Means Being A Giver Without Being Taken Advantage Of

July 22, 2013 11:03 am 2 Comments CATEGORY: Personal/Career Development

Helping professions like financial planning often attract "Givers" - people who are naturally inclined to put others before themselves and help those people to succeed. Yet the challenging reality for many helping professions is that often the practitioners go so far out of their way to help others that they undermine their own careers and success in the process. When comparing Givers who tend to focus on others, and Takers who put themselves first, it's no surprise that those at the bottom of the success ladder are often a group of burned out and worn out Givers.

Yet recent research from Wharton Professor Adam Grant made a startling discovery; while the bottom of the success ladder is populated by Givers, the top of the ladder is also dominated by Givers! In other words, the traits that lead some people to be Givers who are taken advantage of lead others who are also Givers to propel themselves to success. Accordingly, in his research Grant digs further to identify what the key traits are that separate the successful Givers from the unsuccessful ones, and how anyone can set themselves on a more successful path.

Although the book is written as a guide for success in any business context, the lessons of Grant's research are certainly relevant for financial planners in particular, from how to help those experiencing burnout, to making slight changes in your Giver behavior to keep from "being a doormat," to how to shift the Takers in your business to act more like Givers for the benefit of the team. Ultimately, changing one's style of interacting with others is difficult - the implications of Grant's research are profound, but certainly not a cure-all. Nonetheless, what emerges is some interesting clarity about why some financial planners seem to build growing, successful businesses, while others stay mired in a practice that can't seem to get ahead.

Weekend Reading for Financial Planners (July 20-21) – Practice Management & Technology Edition!

July 19, 2013 05:01 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's issue is focused on articles about practice management, career development, and technology, and kicks off with a discussion from industry commentator Bob Veres about advisor fee models, particularly the AUM fee model, and how many are looking at changing and evolving beyond an AUM-centric business focus.

From there, we have a number of practice management articles, including a discussion of whether advisors are increasingly "stealing" clients from others in order to grow, how many succession planning deals are actually poorly structured and priced, and the importance of having a career track in your firm to attract and retain talent (and potential future successors!).

There are also a number of technology-related articles, including a review of new digital content marketing services Vestorly and AdvisorDeck, a review of financial planning software eMoney Advisor and how it can also serve as a personal financial management tool for clients, the importance of adopting rebalancing software, the viability of using cloud-based office productivity software like Microsoft Office 365 or Google Apps, and how to balance the benefits of marketing automation with the importance of personalized service.

We wrap up with three final articles: the first is from Angie Herbers and looks at how relinquishing some control to employees is crucial for staff (and ultimately the firm itself) to grow and develop; the second is a case study discussion of the XCelsior study group as an example of the importance and value of being involved with a study group; and the last looks at how clients in the future will have different needs and expectations of their advisor than the baby boomers of the past, and that becoming a "Gen-Savvy Financial Advisor" in order to succeed may require not just an evolution for advisors but an entire revolution from the way things are currently done. Enjoy the reading!

MailBag: Advice For A Career Changer Transitioning Into Financial Planning

July 18, 2013 11:04 am 5 Comments CATEGORY: Personal/Career Development

In this week's MailBag, we look at a question about how best to transition as a career changer into financial planning, the issues to consider, and some best first steps to take.

Why Inferential Statistics Is A Lousy Way To Evaluate Active Managers

July 17, 2013 11:03 am 15 Comments CATEGORY: Investments

Determining whether investment results are due to luck or skill is no small task for even skilled analysts evaluating an active investment manager; given the amount of randomness inherent in markets, it can be very difficult to determine which is which. Fortunately, the field of inferential statistics exists specifically to analyze such situations and help to distinguish the signal from the noise, and determine when results are likely randomness and luck versus when there is at least a high probability that skill or some other factor is at play.

When inferential statistics is applied to evaluating active management, the results are questionable at best - a small subset of managers are clearly inferior, and for virtually all the rest, there are simply no clear indicators of skill at all; even when some modest level of outperformance occurs, the results are rarely ever statistically significant. Of course, just because an actively managed fund has outperformance that is not statistically significant doesn't mean the manager isn't actually generating real outperformance and adding value. It's just that the outperformance isn't large enough relative to overall market volatility to clearly show whether the results are due to luck or skill.

Unfortunately, though, the caveat is that given just how incredibly volatile markets really are, searching for "statistically significant" outperformance may actually be a lousy approach for evaluating managers; even if a manager really does outperform for an extended period of time, the available tests simply are not capable of distinguishing skill from market noise given the tenure of even long-standing managers. In fact, when tested to determine the effectiveness of the approach in the first place, the reality is that even if a manager is adding several hundred basis points of outperformance, annually, for more than a decade, there is still a more-than-90% likelihood that inferential statistics will FAIL to identify the signal that really is there.

In other words, if the goal is actually to determine which active managers really do add value, searching for statistically significant outperformance is an approach with an overwhelming likelihood to fail, even in situations where it should be succeeding! Which means in the end, failing to find statistically significant outperformance amongst active managers may actually be less a failure of active management itself, and more a problem with using an approach that was unlikely to successfully identify good managers in the first place!

Using Photos To Humanize The Connection Between Clients And Their Financial Planning Firms

July 15, 2013 11:05 am 2 Comments CATEGORY: Marketing

As communication becomes increasingly virtual, from telephone calls to emails, it becomes harder and harder to ensure that interactions between the staff and clients of any firm maintain their personal touch. Yet maintaining that personal connection with the individual client is crucial; in fact, a recent study in medicine found that radiologists are dramatically more effective in their analysis of scans of patients they've never met, simply by attaching a photo of the subject to help make the interaction more personal.

The opportunity to reinforce such connections is equally relevant in a financial planning firm, and equally feasible to implement. Just as the radiologist demonstrates a better connection to their patients with the photo - and report feeling more empathy on behalf of their patients - so too can client photos be attached to client files, or loaded into the main page of a client's CRM record, to ensure staff bear in mind the human being at the other end of the account/phone call/email message.

In addition, the reality is that the need for a visual personal connection in a virtual environment goes both ways. As a result, it's perhaps equally important to include a picture of all your staff members on your website - or even in the signature of their emails - to help clients understand who they're relating to as well. And the issue is relevant for the financial planners themselves, too; while planners will typically meet with their clients in person, at some point before a client is a client, they're a prospect who might visit your website to do their due diligence. When a potential client looks you up on your website, what is their first impression? Do they have a chance to make a visual connection and actually SEE you?