Nerd's Eye View blog

Impressions From The FPA Business Solutions Conference – What Does Practice Management Mean To You?

March 11, 2013 11:07 am 2 Comments CATEGORY: Conferences

The FPA Business Solutions conference ran last week from March 7th to 9th in Chicago, Illinois. Located conveniently at the Westin O'Hare airport, the conference drew about 200 total attendees and just under 30 companies that provide financial planning or practice management-related products and services to advisors.

The practice management content followed a wide range, from how to view disruptive technology - or even become a disruptor! - to recognizing that for most firms, the real challenge is not the technology (whatever it happens to be) but how to really utilize it most effectively. No matter what type of practice, every advisor was able to find something of use in the lineup of sessions.

At the same time, though, the conference still is not as large as it could (and perhaps should) be. Attendance by exhibitors was spotty, with most key areas like financial planning and CRM software represented by a handful of providers, but only a handful. Some service providers, like custodians, were sparse, and other types - like broker-dealers - were not present at all. In addition, the turnout of consultants seemed light, despite the fact that practice management conferences are typically a great place to meet experts to help you solve the unique and particular problems of your own business.

Nonetheless, the reality is that FPA Business Solutions remains one of the only independent practice management conferences available for those who want to see something beyond whatever their custodian or broker-dealer serves up to them. From that perspective, the conference remains a stalwart of the financial planning space. Nonetheless, if the goal is to really see a wide range of products and services - and especially technology - dedicated to financial planners, FPA Business Solutions continues to face tough competition from the Technology Tools for Today event and the FPA Experience national conference.

Weekend Reading for Financial Planners (Mar 9-10)

March 8, 2013 06:15 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's issue starts off with a look at how financial planning may be different by 2023 (and the trends driving those changes), from the rise of Gen X and Gen Y to the impact of technology as computing power continues to grow exponentially.

From there, we have a few practice management articles, including a look at how LPL's NestWise financial planning offering for the middle market is beginning to gain momentum, a review of useful technology tools and apps for financial planners from a panel at the Technology Tools for Today (T3) conference, and a review of the recent 2013 Investment News Advisor Technology Survey.

In additon, there are a couple of more technical financial planning articles this week, including a preview of how health insurance will work for clients beginning in 2014, how estate planning trust strategies are shifting given the permanence of higher estate tax exemptions and portability, some guidance about how to debunk questionable investment sales pitches that may come to your clients, and an overview of the increasingly popular risk parity funds.

There are also a pair of articles tying to psychology and behavioral research for planners: the first finds that perhaps the perceived differences in risk tolerance between men and women are actually just a myth (or at least, can be explained by their personal and financial circumstances, not any biological difference in risk aversion); and the second article provides some guidance about how we can help clients de-stress their financial decision-making process.

We wrap up with two much lighter articles: the first is by Vivek Wadhwa and explains how, despite having no journalism degree, never taking writing classes, and nearly failing English in grade school, he became such a prolific business writer (and you can, too!); and the last article highlights 10 things that really amazing employees do, which can either be a suggestion for how to better succeed if you are an employee, or what to look for and better reward if you are a boss/owner/employer. Enjoy the reading!

Asset Location: The New Wealth Management Value-Add For Optimal Portfolio Design?

March 6, 2013 12:03 pm 25 Comments CATEGORY: Investments

For the past several decades, asset allocation has been the cornerstone of portfolio design, with a focus on diversification and the addition of non-correlated investments to the portfolio to reduce overall volatility and improve risk-adjusted returns. This trend has been accelerated in recent years, as weak returns in both bonds and stocks have helped to fuel a drive towards "alternative" investments that further increase the intended diversification and the number of asset classes in the portfolio.

Yet running in parallel with this trend has been the rise of various types of tax-preferenced accounts, with first the IRA and 401(k) and more recently the Roth IRA and Roth 401(k), in addition to the ongoing presence of tax-deferred annuities and the standard taxable brokerage account. As a result, a new challenge is beginning to emerge: the question becomes not only which asset classes should be owned and in what amounts, but also where should those asset classes be held? In other words, it's not just about allocation of the assets to build a diversified portfolio now, but also about the locations in which to place those diversified investments.

Given that recent research has shown effective asset location strategies can add 20-50+ basis points of "free" value to annual returns, providing guidance on asset location is becoming increasingly popular. Yet unfortunately, asset location strategies are often dominated by myths and misperceptions! Ultimately, the reality is that good asset location decisions actually should be influenced by both the tax efficiency of investments and also their expected returns, which makes the analysis somewhat more complex... but also reveals why in today's environment most bonds actually should NOT go into tax-deferred accounts!

News Highlight – SEC Issues Request For Cost-Benefit Analysis Information on Uniform Fiduciary Standard

March 5, 2013 03:01 pm 1 Comment CATEGORY: Planning Profession

In the next key step of the progression towards a uniform fiduciary standard for all brokers and investment advisers in the delivery of personalized investment advice, the SEC has issued a request for data and information to conduct a cost-benefit analysis on the potential consequences of implementing such a rule. The analysis is expected to include not only an evaluation of the potential benefits to the consumer, and costs to the industry (which become indirect costs to consumers as well), but also the prospect costs and benefits of various approaches to harmonize regulation and oversight between the rules-based broker-dealer system and the principles-based fiduciary RIA approach.

What the outcome of the cost-benefit analyses will be, though, is still anyone's guess. While fiduciary advocates tend to emphasize the weaker advice and conflicts of interest inherent in the broker suitability framework, it's less clear how to precisely quantify the financial impact of such conflicts, and the exact amount that consumers could benefit from a fiduciary standard. Yet the reality seems to be that demonstrating a cost-benefit analysis that favors consumers may be crucial if fiduciary rulemaking is to move forward.

On the other hand, a strong cost-benefit analysis may show surprising results as well - for instance, is it really true that the fiduciary model is more costly, or could it actually be less costly to administer as so many gray ambiguous areas that result in consumer complaints would simply be outright disallowed? If the fiduciary model is more costly, why are so many brokers breaking away to start independent RIAs that appear to be more profitable, not less? Why is it that the volume of complaints appears to be greater against suitability-based brokers than fiduciary-based investment advisers if fiduciary is really a "higher cost" model? Could the truth really be that a higher standard that eliminates ambiguity may actually result in lower costs to consumers?

Ultimately, the comment period will remain open for four months, so expect to hear a lot more about this issue as various organizations submit their own cost-benefit studies. And if you're interested, you can submit your own comments as well through the SEC's website.

Three Financial Planning Business Models To Effectively Serve Gen X And Gen Y Clients

March 4, 2013 12:03 pm 13 Comments CATEGORY: Practice Management

As the financial planning profession continues to grow, it also continues to struggle to reach and effectively serve Gen X and Gen Y, as most planners tend to focus their businesses on baby boomers - no great surprise, given that baby boomers both control the most wealth in the country, and that most financial planners themselves are baby boomers and simply find it comfortable to serve their peers.

Nonetheless, the reality is that it's actually quite possible to build business models that can effectively serve at least a fairly wide swath of Gen X and Gen Y, whether on an AUM basis by serving the "emerging affluent" clients that larger RIAs reject, an ongoing retainer basis to provide as-needed guidance in an ongoing planning relationship for the cost of a gym membership and cable TV, or even using a more "traditional" comprehensive financial planning business model that simply combines a modest level of assets-under-management with implementing the basic life and disability insurance which those in their 20s, 30s, and 40s will need anyway.

Ultimately, the true challenge of building a successful firm to serve Gen X/Y clients is not really about the business model, per se, which can easily produce a healthy personal income at a reasonable 100-150 clients, but instead how to grow and get to that number of clients in the first place. In other words, while designing the right business model helps, in the long run the real problem serving Gen X and Gen Y is a marketing problem. However, given how underserved the younger generations are right now, simply differentiating yourself by establishing a niche practice focused on Gen X and Gen Y clients may itself be an effective marketing cornerstone for growing a successful business to serve them!

Weekend Reading for Financial Planners (Mar 2-3)

March 1, 2013 07:01 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's issue starts off with a few regulatory articles, including a discussion of the SEC's regulatory examination priorities for 2013 - with a special warning to hybrid advisors - and a look at whether RIA firms need to reconsider how they check off the boxes of what services they offer on their From ADVs.

From there, we look at a few practice management and business succession articles, including a look at the HighTower model used to acquire advisory firms, a look at the so-called "valuation gap" between what most advisors think their firms are worth and what a buyer is really willing to pay for them, and a very frank discussion from a veteran advisor who has been through four failed succession planning attempts and can speak first-hand to the problems that arise in the process. We also have two technology-related articles, including a nice recap of the financial planning software panel from the recent Technology Tools for Today (T3) conference, and an industry-star-studded technology trends roundtable from the Journal of Financial Planning.

In additon, there are a couple of retirement planning articles this week, including a look at the top 5 issues in retirement research and policy, a fascinating analysis from Moshe Milevsky showing how the best strategy for variable annuity guaranteed income riders may be to start taking withdrawals immediately (even if the client doesn't need them!), and an analysis from retirement researcher Wade Pfau on whether we may be over-projecting retirement returns.

We wrap up with two much lighter articles: the first provides a great reminder that a client complaint should be viewed as an opportunity to improve your business for all your clients, and the second provides an important reminder of the value of saying "thank you" from time to time, whether to a boss, co-worker, or especially employee; while offering nice pay and benefits (and a job in the first place) is a great start, don't underestimate the positive motivating effects of showing simple gratitude, too. Enjoy the reading!

HUD Eliminating Fixed-Rate HECM Standard Reverse Mortgages, But HECM Saver Option Remains

February 27, 2013 12:04 pm 14 Comments CATEGORY: Debt & Liabilities

On January 30th, the Department of Housing and Urban Development (HUD) issued Mortgagee Letter 2013-01, which announced that beginning April 1, 2013, reverse mortgage borrowers will no longer be able to obtain a fixed rate on HECM Standard reverse mortgages; instead, only the HECM Saver loans, with smaller loan limits, will be available with a fixed rate option. Those who wish to borrow a lump sum using a HECM Standard reverse mortgage in the future will be required to select an adjustable rate structure, just as they must do now under either the monthly income or line-of-credit payment options.

While the change is significant to the reverse mortgage industry, given that a large and rising percentage of reverse mortgages in recent years have been established under the fixed-rate structure, from the planning perspective the impact is likely to be more limited, as many planners have only recently begun to consider reverse mortgages for clients when the less expensive HECM Saver loan became available (and which can still be done with a fixed-rate structure). In addition, many reverse mortgage strategies - including some highlighted in recent years in the Journal of Financial Planning and The Kitces Report - are based upon the monthly income or line-of-credit payment options, which require an adjustable interest rate loan structure anyway.

Perhaps the greatest irony of the HUD change, though, is its reported reasoning: a rise in defaults by fixed-rate borrowers who extracted the maximum equity from their home, found it wasn't enough, and subsequently began to fail making their property tax and homeowner's insurance payments, triggering a reverse mortgage default. In other words, HUD is finding that it's very problematic when consumers use reverse mortgages as an income-of-last-resort solution, instead of engaging in the reverse mortgage earlier as an income source coordinated as a part of the individual's overall financial plan - guidance that would perhaps be more useful to both consumers, and financial planners too!

News Highlight – SEC Concerned About Hybrid Advisors With Outside RIA

February 26, 2013 12:03 pm 9 Comments CATEGORY: Industry News

Late last week, the SEC announced its Examination Priorities for 2013, which provides some guidance on what the SEC views as the greatest issues for concern and focus, especially amongst its Investment Adviser-Investment Company (IA-IC) program that is responsible for examining nearly 11,000 Registered Investment Advisers (RIAs) along with 800 Registered Investment Companies (RICs, e.g., mutual funds). In addition to a usual array of focus areas, from monitoring the safety of assets, conflicts of interest, and marketing (especially regarding performance marketing), this year's announcement was notable in one other regard: the SEC specifically cited dually registered IA/BD advisors (i.e., "hybrid" advisors) as a new and emerging risk area, especially regarding how advisors make a determination of whether to direct a particular client to the brokerage account versus an investment advisory account.Read More...

How Do You Nudge Clients Towards Their Financial Planning Goals?

February 25, 2013 12:02 pm 4 Comments CATEGORY: Client Trust & Communication

A common challenge in financial planning is getting clients to actually implement the recommendations they've been given to help themselves progress towards their financial planning goals. While in theory, rational human beings should easily be able to take the necessary steps to improve their situation - especially once an expert has provided a list of recommendations and required action items to do so - the reality is that we're far less rational in practice. External influences that "shouldn't" be relevant can often impact our decisions and actions anyway, and in turn this means it's possible to influence decisions, or "nudge" people in certain directions, by paying attention to how the choices are presented.

This concept of "choice architecture" - acknowledging that the way choices are presented can influence their outcomes - is relevant not only for those making public policy decisions, but also anyone who is trying to help people make positive behavior changes... such as financial planners. Whether it's helping clients to change their own behaviors, to implement your financial planning recommendations, or even to help them determine whether to hire you in the first place, it may be time to pay a lot more attention to how those decisions are delivered to clients in the first place.

Weekend Reading for Financial Planners (Feb 23-24)

February 22, 2013 09:01 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's issue starts off with a great article for newer advisors (although experienced practitioners will it relevant as well!), providing guidance on how to cultivate new relationships with centers of influence.

From there, we look at a number of practice management articles, including one looking at the costs and challenges of starting up an independent advisory firm, another that includes an interesting discussion of whether the new training programs being rolled out by large firms will help to bring in the next generation of advisors or is more like rearranging deck chairs on a sinking wirehouse Titanic, a third providing a fantastic summary of the various rebalancing software platforms discussed at the Technology Tools for Today (T3) conference, and the last an interview with technology consultant Bill Winterberg.

We also have a few more technical articles on advanced financial planning issues, including one from Jon Guyton on how to structure client retirement accounts to help them manage their own discretionary expenses (so the planner isn't stuck in the position of parenting client spending), another from Wade Pfau looking at how to craft an "efficient frontier" of retirement income products, a discussion of a recent tax court case the IRS lost that may lead to a significant boost in deferred private annuity estate planning strategies, and a look at how managing online accounts (or just trying to access them!) after death can lead to a lot of new world estate planning problems.

We wrap up with three very interesting articles: the first takes a deep look at the history of hyperinflations for the past century and how the government just printing money alone does not lead to an inflationary spiral; the second takes a look at how to rebuild consumer trust in financial services globally, making the notable point that just increasing disclosures may provide more/better information to consumers but may also be providing them more reasons not to trust; and the last providing a poignant reminder for all planners that being a good advisor also means living your own advice, which means make sure your own financial house is in order and that you're fitting your business into your life, not the other way around. Enjoy the reading!