Nerd's Eye View blog

How All Financial Planning – Even Fiduciary – Is About Sales, Sales, Sales

February 4, 2013 12:01 pm 17 Comments CATEGORY: Practice Management

As financial planning continues to shift further and further away from selling products and towards the delivery of quality advice, many have suggested that financial planning may soon reach the point where it departs entirely from its "sales" roots - a vision widely supported by both consumers and new financial planners entering the profession, who all view sales with a highly negative stigma.

Yet the reality is that at its purest level, "selling" is really just about persuasion and influencing the decisions of others, and financial planners really are in the business of persuasion, convincing clients to: 1) pay the planner for services; 2) to engage in the financial planning process; and 3) to implement the advisor's recommendations. As a result, if you - as the planner - don't know how to "sell" your clients on the value of you, the financial planning you offer, and motivate them to act on your recommendations, then you simply can't succeed as a financial planner, regardless of whether the sale of an insurance or investment product is ever involved (though especially if clients really do need to implement such products!).

Accordingly, the reality is that perhaps it's time to ditch the sales stigma in the financial planning profession, and take a fresh look at how the noblest implementation of sales, persuasion, and influence is at the very core of what it takes to be a successful practitioner. To do this, however, also requires dropping the embarrassing history of how "sales" has been done in financial services in the past, and instead look to the latest tools and research available, so that we can develop proper training for how to "sell" effectively in the 21st century.

Weekend Reading for Financial Planners (Feb 2-3)

February 1, 2013 07:30 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's issues starts off with a fascinating article that studied brain images of investors working with CFPs or non-CFPs in volatile markets, and found that those following a CFP-credentialed advisor were more likely to stick with the advice and less likely to second guess than with a non-credentialed advisor. A second article looks further at some recent brain research and what it's beginning to tell us about not just how clients behave in general, but about how they interact with advisors and why they often don't implement an advisor's recommendations.

From there, we look at a few articles on the regulatory front, including one that suggests the SEC's recent crackdown on advisors misrepresenting AUM may be partially the regulator's own fault for having such a poor and ambiguous definition of what constitutes AUM in today's complex marketplace, a second looking at how fiduciary rulemaking is very likely to proceed this year from the DOL even if the SEC's own rulemaking progress has slowed, and a third striking piece by Don Trone suggesting that the real roadblock to moving forward on the fiduciary issue is that fiduciary advocates are spending too much time talking about principles the industry already agrees with and not enough time focusing on developing the fiduciary best practices and safe harbors that are really necessary for wider fiduciary adoption.

We also have a few technical articles this week, including guidance from Joe Tomlinson about how to craft better asset class return expectations for financial plans, a fascinating look from John Hussman at how the "great rotation" from bonds to stocks is a myth, a look at how "career asset management" is a new frontier for financial planners to deliver value to clients, and a deep look at the new "play or pay" tax rules for employers offering health insurance (or not) that will kick in starting next year.

We wrap up with three articles looking more broadly at the industry - the first suggests that financial advisor conferences are broken and need to be fixed (with a few suggestions about how to do so), and the last two provide a striking look at the research that's come out in recent years trying to quantify whether or how much value financial advisors really bring to the table for their clients - research that shows promising signs for the value of a financial planner, but research that is unfortunately confounded by the fact that apparently researchers often can't tell who's an advisor and who's a salesperson any more than consumers can! Enjoy the reading!

MailBag: Is A Qualified Charitable Distribution (QCD) From An IRA Better Than Donating Appreciated Securities?

January 31, 2013 12:10 pm 17 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 recent inquiry regarding whether it's still a good deal to donate appreciated securities to a charity, now that the rules are back allowing Qualified Charitable Distributions (QCDs) directly from an IRA to a charity.

Understanding Marginal Tax Rate Vs Effective Tax Rate And When To Use Each

January 30, 2013 01:03 pm 15 Comments CATEGORY: Taxes

Effective financial planning for clients often has tax-related consequences, which in turn requires a good understanding of not only the tax laws themselves, but also the client's tax rates. Unfortunately, though, significant confusion abounds regarding what tax rates should be used when analyzing various problems. Is it the client's tax bracket? Or a marginal tax rate? Or an effective tax rate? When should each be used? The key is that in the end, marginal tax rates should be used to compare strategies, and effective tax rates should be used to compare people.

Accordingly, if you want to know who commits a larger portion of their total income to their tax obligations, use an effective tax rate. But if you want to know whether to do that Roth conversion/IRA withdrawal/annuity investment/sale for a capital gain or loss/etc., the marginal tax rate is what should be used. In point of fact, this actually means that the marginal tax rate is really the only rate that should be used for financial planning scenarios!

The caveat, however, is that in practice determining a client's marginal tax rate requires more than just looking at his/her tax bracket... so be certainly to calculate the marginal tax rate correctly, too!

How The Digital Age Is Turning The Financial Planning Software Industry Upside Down

January 28, 2013 12:01 pm 11 Comments CATEGORY: Technology & Advisor FinTech

Historically, the various software and technology solutions serving financial planners has been very fragmented. Independent firms were often stuck with small, homegrown solutions for financial planning, client relationship management (CRM), and portfolio reporting software, and/or working with providers that simply didn't have enough resources for growth and development; advisors with larger firms often had access to the best software, but since it was a proprietary solution of the parent firm, the advisor effectively faced a world where key client and business data might held captive. As the world transitions into the digital age, though, this landscape is rapidly changing, due both to the accessibility brought about by having near-universal access to "the cloud" from any computer or device and any location, and the emergence of Application Programming Interfaces (APIs) that allow disparate software packages to integrate in a way that has never before been possible.

These changes in turn are driving several new emerging trends. The first is that now independent software companies are often larger and better developed than proprietary solutions, which both invites in new firms to innovate and also makes it easier than ever for advisors to change firms knowing that they will have more portable client and business data and access to similar (or even better) software after making a change. In addition, the growing integrations through software APIs are rapidly bringing advisors towards the infamous "holy grail" of a unified central solution for CRM, portfolio management and reporting, and financial planning software, which is further driven by a growing number of "integrators" - firms that help adapt software packages through their APIs to develop customized advisory-firm-specific holy grail solutions.

As of now, these trends are still underway and will be playing out for many more years. Nonetheless, the direction is clear, and remarkably positive for both startup firms - who have more opportunity for growth and success than ever - and also advisors, who may enjoy software in the future that is simultaneously cheaper, more efficient, more innovative, more integrated, and just downright superior to anything we've ever had in the past!

Weekend Reading for Financial Planners (Jan 26-27)

January 25, 2013 07:30 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's issues starts off with the big regulatory news that Mary Jo White has been nominated to replace interim SEC chairwoman Elisse Walter; White is an industry "outsider" with a background as a U.S. attorney who has prosecuted terrorists and organized crime bosses, raising the question of whether there's about to be a shift in the aggressiveness of the SEC towards Wall Street and in favor of the fiduciary movement. After looking at a second article on the trend towards fiduciary as well, we have a series of more technical articles, including one that suggests potential estate tax reforms may change how ILITs are designed, another that provides a useful checklist of reminders for advisors and their clients when someone passes away, and an interesting look at how education regarding stock options can help employees overcome the mental shortcuts they take that often misjudge the value of their option compensation.

We also have a series of retirement-planning-related articles this week, including: research about how clients can start with significantly higher safe withdrawal rates if they're willing to give up inflationary adjustments in later years (which often happens anyway as clients age); a new research study suggesting that the base safe withdrawal rate may need to be reduced below 4% given today's dangerous combination of high market valuation and low yields; and how it may be worth delaying immediate annuities given today's low return environment until clients are well into their 70s or even their 80s. There's also a striking article looking at how annuities may change in the coming decade, going back to their industry roots from centuries ago where annuities didn't guarantee a lifetime of cash payments, but of lifetime services like food, clothing, and shelter. There are also two behavioral-finance-oriented articles: the first looks at how to manage not the behavioral biases of our clients but our own biases; and the second shows how keeping too much liquidity for clients is a problem not just because it's a return drag but also because clients may actually be happier if their long-term investments are illiquid to reduce temptation to spend!

We wrap up with a nice reminder that working as a professional can lead to a lot of sitting - which can be very unhealthy over extended periods of time. The proposed solution: try "walking meetings" where you actually conduct the meeting while taking a walk, instead of just sitting. The author notes that it's not only a healthier way to meet, but can even lead to more productive meetings as well! Enjoy the reading!

MailBag: What Are The Implications Of A Uniform Fiduciary Standard To Advisors And Consumers?

January 24, 2013 12:03 pm 1 Comment CATEGORY: MailBag

In this week's MailBag, we look at a recent inquiry regarding the proposed changes to the fiduciary standard, and whether the implementation of a uniform fiduciary standard that applies equally to all types of advisors could help or hurt investment advisers and the public.

An Efficient Solution To Implement Intra-Family Mortgage Loan Strategies

January 23, 2013 01:02 pm 34 Comments CATEGORY: Debt & Liabilities

In the ongoing difficult borrowing environment, some potential homebuyers have found the best way to finance a purchase is not from a major commercial bank, but from the "family bank" instead through an intra-family loan. And as long as IRS guidelines are followed, the transaction can be remarkably appealing, with more flexible lending terms, IRS-required Applicable Federal Rates that are still lower than commercial mortgage rates, the potential to still deduct mortgage interest payments for the borrower, avoidance of origination and many other mortgage transaction fees, and the simple benefit that all the interest and principal payments ultimately stay in the family.

A major downside, however, is that to ensure the IRS truly respects the transaction - and to receive some of the tax benefits as well - formalities of the loan should be honored, including drafting a promissory note, recording the mortgage against the residence in the proper jurisdiction, and completing actual payments of interest and/or principal.

Fortunately, a new solution has emerged - a company called National Family Mortgage, that completes all of the required documentation, records the mortgage, helps to service the loan, and even issues the requisite IRS reporting forms, all for a fraction of the cost of a traditional mortgage loan origination fee. While this won't likely mark a great boom in intra-family mortgage lending, it nonetheless makes the strategy far easier for advisors to implement efficiently for clients!Read More...

Why Saying You’re A Fiduciary Destroys Trust Instead Of Building It

January 21, 2013 01:01 pm 12 Comments CATEGORY: Marketing

As financial planning shifts increasingly to a pure fiduciary focus, many advisors have begun to differentiate themselves by explaining to prospective clients their fiduciary obligations, ostensibly in an effort to demonstrate that they are trustworthy. Unfortunately, though, the reality is that saying "You can trust me" is actually a terrible way to establish trust, especially when it's done using complex jargon that most consumers don't even understand! Even worse, in many cases an advisor talking about fiduciary status is less about demonstrating the trustworthiness of the advisor, and more about bashing the competition for not being worthy of trust - despite the fact that may make the advisor appear petty or desperate with little value to offer, and may actually prime clients towards distrust of any advisors! So what should financial planners do instead? Focus on conveying credibility more holistically, which includes a focus not only on motives and intent, but also the advisor's integrity, capabilities to deliver value to the client, and track record for positive financial planning results. And establish your trust and credibility not just by your words, but by your actions and behaviors. Or stated more simply: stop trying to establish client trust by saying you're a fiduciary; instead, build real trust with your clients by actually being one and behaving accordingly!

Weekend Reading for Financial Planners (Jan 19-20) – Practice Management Edition!

January 18, 2013 06:01 pm 3 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's "Practice Management" edition starts off with a nice Journal of Financial Planning Focus article by marketing consultant Stephen Wershing about how to refine your referral process to improve growth, a great list of tools for digital age marketing from technology consultant Bill Winterberg, and a good reminder that digital age marketing strategies should focus not just on building social media followers but ultimately converting them into clients. From there, we look at an interesting article about the rise of "wealth databases" that advisors can engage to find affluent prospective clients, a profile of some firms that are aiming to serve younger clients not just with different services but an entirely different office atmosphere, and a review from Bill Winterberg about the Fox Financial Planning Network and the resources it provides to help firms with workflow efficiency.

We also look at a few articles highlighting some of the difficult challenges that advisors face, including two warnings from both Mark Tibergien and Angie Herbers that the advisor marketplace is becoming more challenging and competitive and that advisors and the vendors who serve them must step up to compete, a discussion from Pinnacle Advisor Solutions highlighting the emerging number of outsourcing providers that are trying to help advisors get past the growth wall, and a look at how some advisors are joining close-knit study groups where they "open the kimono" and share everything in an intimate group setting to get feedback about how to improve their businesses and professional lives.

We wrap up with two interesting articles: the first suggests that while financial planning is slowly moving beyond just focusing on the numbers to look at client personal issues, we're still a long way from truly integrating behavioral finance and a more holistic look at well-being; and another that shows how storytelling may be a more effective way to activate our brains, which is relevant for everything from marketing your services to prospects to helping persuade clients to change their behaviors and implement your recommendations. Enjoy the reading!