Nerd's Eye View blog

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!

Gender-Based Pricing Coming Soon To Long-Term Care (LTC) Insurance

February 20, 2013 12:02 pm 10 Comments CATEGORY: Insurance

As the long-term care insurance industry continues its efforts to restore stability and regain profitability, the latest shoe is about to drop: a new gender-based pricing structure that will mean men and women pay different premiums based on their gender. The first company to venture down the path is the market leader Genworth, which is anticipated to begin receiving approvals to issue new policies with gender-distinct costs as soon as April; once the changes take effect, it's likely that most other major LTC insurance companies will follow suit as well, and the new cost structure may be an industry standard by the end of the year. The primary impact of the cost change will be women who apply for a policy as an individual; premiums are anticipated to be as much as 20% to 40% higher than for men when purchasing a comparable policy at a comparable age.

In the near term, this provides a unique opportunity for those considering a new LTC policy to buy one before the rate increase takes effect. Once the new pricing is in place, though, the only options may be to adjust the selected benefits to try to get premiums down to an affordable point, consider a hybrid LTC policy as an alternative (although such policies have challenges of their own!), or wait to see if the latest commission on LTC (required as a part of the fiscal cliff legislation) can come up with a new national solution to the country's LTC woes. The upshot of the new gender-based pricing changes is that it may ultimately make LTC premiums more stable; accurate pricing reduces the risk of future premium increases for in-force policies. On the other hand, this also means the pressure is on to buy coverage sooner rather than later, as the cost for new policies continues to rise even faster than the increases for existing ones!

Social Media For Financial Planners, Industry Trends, And Papal Securities

February 19, 2013 06:50 pm 1 Comment CATEGORY: Marketing

While the focus of this blog is typically on "the written word" and long articles, I thought you might be interested in some recent material I've recorded, including a 5-minute video for Investment News at the Technology Tools for Today (T3) conference about best practices in social media for advisors, and a 15-minute radio show recording about financial planning industry trends.

On a lighter note, there's also a very entertaining video from last week's Saturday Night Live, showing the ultimate in niche financial planning: Papal Securities, specializing in retirement advice for Popes!

Impressions From The Technology Tools For Today (T3) Conference – The Future Is Bright!

February 18, 2013 12:05 pm 8 Comments CATEGORY: Conferences

The 2013 Technology Tools for Today (T3) conference ran last week from February 11th to 13th in Miami, Florida. Entering its 8th year, the event is hosted by financial advisor technology consultants Joel Bruckenstein and David Drucker, and continues to grow, as this year's conference included more than 600 total attendees and over 75 companies (generally hand picked by Bruckenstein and Drucker) that provide technology-related solutions for advisors - which means it will by far be the largest advisor-centric technology conference of the year. And notwithstanding how the event has grown, the reality is that the conference still has ample room to expand further, given that several problem areas for advisors still had relatively few solutions present. In fact, it was somewhat ironic that the conference had a thriving Twitter hashtag but only one provider of social media archiving tools!

In looking amongst the vendors and solutions available at the conference, several clear themes emerged, including an ongoing shift to web-based "cloud" solutions, the rising trend of software integration around CRM as the hub, and the availability of software on mobile devices. But perhaps one of the most striking themes heard from advisors in the hallways at this year's conference is simply that the available technology solutions have become so numerous, now one of the greatest challenges is just choosing amongst them all!

To say the least, the T3 conference is now a permanent "fixture" of the financial advisor conference space, and the growth of the event suggests the future still looks bright both for the conference itself, and the growth of technology solutions for advisors!

Weekend Reading for Financial Planners (Feb 16-17)

February 15, 2013 07:01 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's issue focuses on practice management and career development, and starts off with an article highlighting the recent results of the FPA's Compensation and Staffing survey, which shows modest but steady gains for financial planners with strong growth for operations and compliance positions in advisory firms.

From there, we look at a number of articles focused on the development of newer planners, including a discussion by Mark Tibergien of the challenges of hiring new planners and training them, some coaching tips from Angie Herbers about how to train and develop newer planners, and some guidance from Dave Grant about the virtue of both being a mentor and seeking one out.

We also have a few articles on the tools of the practice, including a review of a new web-based software that can help clients reconstruct cost basis for legacy investment positions, a discussion of Schwab's new launch of 105 no-transaction-fee ETFs (which still have the same expense ratios as transaction-fee versions on other platforms), a review of Windows 8 and why advisors are expected to ultimately adopt it widely, a discussion of how to measure the ROI of your marketing efforts, and an article that provides a thoughtful reminder not to take your front-of-office look and staff for granted and remember that it's still the first impression most of your prospective clients will ever see.

We wrap up with two articles that look more broadly at the factors that determine success for an advisor, including one suggesting that maybe sheer passion isn't as important as we make it out to be and that honing your craft to be an expert is more important for success, and an interesting discussion suggesting that the key for success for sales, business development, and leadership is not in being an extrovert but instead a steady balance between introversion and extroversion. Enjoy the reading!

MailBag: The Impact Of The Phaseout Of Itemized Deductions (Pease Limitation) On AMT Exposure

February 14, 2013 12:04 pm 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 the interplay between the phaseout of itemized deductions for high income individuals (the so-called "Pease limitation") and potential exposure to the AMT.
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Is Variable Annuity Tax Deferral Worth Paying For Again?

February 13, 2013 12:02 pm 7 Comments CATEGORY: Annuities

Through the 1980s and 90s when tax rates were higher, variable annuities were a popular tool for tax deferral. However, since the late 1990s, the primary focus of the annuity industry has been on risk management instead, offering a series of living and death benefit features that have provided significant guarantees, but at a significant cost. When combined with tax rates that declined significantly with President Bush’s tax legislation in 2001 and 2003, the benefit of tax deferral associated with non-qualified annuities was simply no longer worth the cost.

In a significant shift, though, an emerging new generation of low cost variable annuities, combined with a significantly more progressive tax system since the American Taxpayer Relief Act of 2012, may usher in a new era for the use of variable annuities, especially when the contracts can be used strategically as an asset location vehicle to shelter high-return but tax-inefficient investments. Consequently, while not long ago it was projected to take a decade or two for the benefits of tax deferral to offset the cost, it now can take as little as a year or two for higher income clients! The end result: it may once again be time to seriously consider the cost of variable annuities as an expense worth paying to harness the value of tax deferral.