Nerd's Eye View blog

Is The Financial Planning Succession Crisis Just A Mirage?

December 3, 2012 12:02 pm 6 Comments CATEGORY: Practice Management

As the wave of baby boomer advisors move closer and closer to retiring, so too is the pressure building for a wave of selling of financial planning practices. Yet the reality is that the retirement wave may not be nearly as large as anticipated - in part because difficult markets have left many advisors behind on their retirement savings (not unlike so many other baby boomers!), but more significantly because many advisors enjoy doing financial planning and feel capable of continuing to do it even in their later years! The latter is especially true if the practice can be transitioned to a somewhat lighter load with fewer staff and management responsibilities; a so-called "lifestyle" practice.

Unfortunately, though, advisors planning to continue a lifestyle practice and "die with their boots on" face another problem: how to capture the value of the business when a death or disability event really does remove them from the picture. Fortunately, new options are beginning to emerge - from acquiring firms that will take over the ownership and management responsibilities and just let advisors live a lifestyle practice within a larger firm, to firms that are beginning to offer contingent purchase agreements tied to outsourcing platforms that will allow them to buy the business if/when/as needed but not before. Given the new choices emerging, does that mean when we finally reach the point where advisors are supposed to retire, we'll find it's nothing more than a mirage? Is there really a near-term succession planning crisis looming for advisors, or just a distant exit planning problem?

Weekend Reading for Financial Planners (Dec 1-2)

November 30, 2012 07:00 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with a negative review of President Obama's decision to appoint Elisse Walter as a replacement for SEC Chair Mary Schapiro. From there, we look at a number of practice management and career related articles, including a discussion of how the ranks of dually registered advisors are growing ever faster than pure RIAs, some tips from Sallie Krawcheck for new advisors, a review of the rising trend of ETF asset managers, a look at some of the little things you can do to help build trust with a new client, how Google AuthorRank is changing the face of Search Engine Optimization, and a discussion of survey results from Bob Veres about the greatest fears of financial advisors in today's environment. From there, we have two more technical articles, including a discussion of the tax rules for Master Limited Partnerships (MLPs), and a response from Laurence Siegel to the rather economically forboding article last week by Jeremy Grantham. We wrap up with two more offbeat articles: one suggesting that the primary reason clients have trouble saving for retirement is that their brains physiologically think of their retired selves like a stranger; and the other that there's an important difference between persuading and convincing, with the implication that we as planners may focus too much on the latter. Enjoy the reading!

MailBag: Roth IRA Conversions With Higher Tax Rates And Hybrid Life/LTC Insurance Policies

November 29, 2012 12:03 pm 3 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 two recent inquiries: 1) whether or not it's a good plan to do a significant Roth IRA conversion if your client has a high conviction that tax rates are going up in the future (and/or what the downside risks of the strategy are); and 2) what is and isn't guaranteed if you purchase one of the new hybrid life/LTC insurance policies, and the potential risks of owning such policies.
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Why Being Invested In Bonds At Today’s Rates May Be Entirely Rational After All

November 28, 2012 12:03 pm 16 Comments CATEGORY: Investments

As retail investor surveys show money continuing to rotate from stocks to bonds - despite sky-high bond prices and their associated ultra-low interest rates - there is increasing concern that investors may soon be blind-sided by at best a savage bond bear market, and at worst a bond bubble that pops. But are investors really buying into bonds because they're bullish on bonds, or because they're bearish on stocks with few appealing alternatives?

After all, if there really is a bond market bubble that's going to pop, the precipitous rise in interest rates could do even more harm to stock prices than bond prices, both from the relative value perspective (who wants to buy the S&P 500 at today's 2% dividend yields when bonds pay 6% again?) and from the economic perspective (a sharp rise in interest rates isn't exactly bullish for economic growth!).

Which means the reality may be that today's bond buying is not about hunting for return in bonds, but about managing the risk of equities (and/or other risk assets). Of course, if the investor really thought the popping of a bond bubble was looming, the best decision may simply be to go to cash. But given the uncertainty of timing, the next best choice for the bearish investor: stay invested, tilt the portfolio towards bonds (and likely shorten duration), and wait and see. Who knows, maybe rates will manage to go even lower from here, as they have 'surprisingly' done for the last 3 consecutive years!

IMCA Defines The Difference Between Private Wealth Management And Financial Planning

November 26, 2012 12:02 pm 2 Comments CATEGORY: Planning Profession

In recent years, it has become increasingly popular for many financial advisors to call themselves "wealth managers" to differentiate themselves, just as a decade or two ago it was popular to use the term "financial advisor" to differentiate from the stockbrokers and insurance agents.

Yet a recent job task analysis study from IMCA has sought to better define what "wealth management" really means - and their conclusions imply that it is far more than just a fancy label for advice, and instead constitutes unique job tasks and specialized knowledge and skills different from financial planning and designed to serve a unique type of client: those with at least $5 million of net worth.

If it gains momentum, the implications of the IMCA study are significant, as it implies that some advisors are using a label that is not actually an accurate description of the knowledge they have and services they provide, and that those who really do wish to work in this area may need to get further training and education. While that is arguably a conflicted perspective for IMCA, as their Certified Private Wealth Advisor (CPWA) certification is intended to target this exact space, it nonetheless remains a valid point: if the job tasks, knowledge, and skills of wealth management really are different than financial planning, then people should use labels that describe what they really know, do, and deliver to clients, and should be educated accordingly.

Weekend Reading for Financial Planners (Nov 24-25)

November 23, 2012 07:15 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with two good articles from the Journal of Financial Planning: one is a research study that shows how client "money scripts" can predict dysfunctional financial behaviors, and the other provides a nice overview of the current marketplace for long-term care insurance benefits. There are also two good articles from Advisor Perspectives: one by Wade Pfau discussing how the RetireOne "Stand Alone Living Benefit" (SALB) income guarantee works in protecting client retirement income, and the either by Bob Veres challenging our traditional inflation assumptions for retirees based on some research by Jim Shambo. From there, we look at a pair of industry articles, including a discussion of how Merrill Lynch's new training program is becoming increasingly RIA-like, and how some advisors are beginning to choose to not be in charge and voluntarily take employee rather than employer/business owner roles. There are also two investment articles, one from Nicholas Nassim Taleb (of Black Swan fame) about the concept of market and economic "fragility" and how we need to focus on systems and policies that make us more "antifragile", and the latest quarterly letter from Jeremy Grantham of GMO which provides an interesting but somewhat bleak outlook for US growth prospects in the coming decades. We wrap up with three practice management articles focused particularly around online marketing: one looks at how most advisors are due for a website update; the second provides some great ideas about how to create more content for your website and get more mileage out of the content you already are creating; and the last is a fascinating article that points out how being too polite, professional and "perfect" online may actually be detrimental to connecting with clients. Enjoy the reading!

Actuarial Guideline 38 Puts Even More Pressure On No-Lapse Guarantee Universal Life

November 21, 2012 12:03 pm 0 Comments CATEGORY: Insurance

As QE3 and low interest rates persist into the indefinite foreseeable future, the weak return environment may be claiming another casualty: no-lapse or "secondary guarantee" universal life policies. Although many insurance companies have already been raising premiums on new no-lapse UL policies for several years now, or ceased offering such coverage entirely as interest rates have fallen, the process of change is being accelerated by the NAIC's new Actuarial Guideline 38 (AG 38, also known as Regulation XXX), which will require insurers to hold greater reserves on both new and some existing no-lapse UL policies.

The consequence of AG 38: new secondary guarantee UL policies will become more expensive, and although existing policies cannot retroactively have their premiums altered, their cash value may perform even worse than originally projected and be even slower to respond with increases in the crediting rate whenever interest rates finally do rise. Although AG 38 is not anticipated to cause the total demise of no-lapse UL policies, the time window is short to obtain coverage before all the premium increases are finalized. And heading into 2013 and beyond, the choices for policies (and carriers offering them) will continue to be fewer, the premiums may continue to rise on subsequent new policies, and some insurance companies may experience earnings hits or outright ratings downgrades - at least until interest rates finally return to more "normal" levels again!Read More...

10 Tips For New Financial Planners To Maximize Career Progression

November 19, 2012 12:05 pm 33 Comments CATEGORY: Personal/Career Development

Getting started as a financial planner is difficult.

Although not quite the ugly environment of decades ago, where every prospective advisor was simply thrown out into the cold to fend for themselves trying to find clients in a brutal demonstration of natural selection and survival of the fittest, the fact that financial planning is still dominated by small firms with limited experience in hiring and training makes formal career paths rare.

Sadly, financial planning still has quite a ways to go to create the sorts of clear career progression paths that exist in the fields of medicine, law, and accounting. Nonetheless, there are certainly ways to increase the likelihood that each step you take in your early career will be a positive step forward.

Weekend Reading for Financial Planners (Nov 17-18)

November 16, 2012 07:30 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with some big announcements from industry associations, including the retirement of NAPFA CEO Ellen Turf next year, and a staff restructuring by the FPA that will result in outsourcing both the organization's lobbying efforts in Washington and meeting operations for its conferences. From there, we have a few highlights articles from this week's Schwab IMPACT conference, including a discussion from Bernie Clark that wirehouses are increasingly shifting to an AUM-based model to compete directly with RIAs, and some new technology tools from Schwab including DocuSign e-signatures and the new Schwab OpenView MarketSquare which will provide advisors a chance to provide ratings and reviews on various vendors and service providers to the advisor community. We also look at a recent announcement from the SEC that it has been stepping up enforcement and cracking down on investment advisers, a discussion of how young planners are often choosing to start their own firms or go with large institutions because the independent firms continue to try to hire more experienced planners instead of newer ones, an exploration of what does and does not constitute a niche for financial planners targeting their business, and some thoughts about how the regulatory debate on financial advisors may still be too narrow because it doesn't capture the conflicts of the financial media. We wrap up with four interesting articles: the first is an article by Angie Herbers about recent research showing what does and does not create client stress, and that often advisors themselves contribute to client stress; the second looks at how "wealth management" is increasingly distinguishing itself as a separate discipline with its own unique body of knowledge; the third is a discussion of how effective data management is not only a matter of efficiency and productivity but also impacts the client experience; and the last is an intriguing interview with LinkedIn CEO Jeff Weiner about leadership and what it really means to be a leader and not just a manager. Enjoy the reading!

IRS Rules For Paying Investment Management Fees From Taxable And Retirement Accounts

November 14, 2012 12:01 pm 60 Comments CATEGORY: Taxes

Given the costs associated with investment advice, clients often want to maximize any available tax benefits to help mitigate the cost. Fortunately, the IRS does allow a tax deduction for certain investment-related expenses, and while the treatment isn't ideal - a miscellaneous itemized deduction subject to the 2%-of-AGI floor, and an AMT adjustment - something is better than nothing. In fact, the IRS even allows investment advisory fees to be deducted when paid on behalf of retirement accounts like IRAs and 401(k) plans. Alternatively, the IRS also allows investment advisory fees to be paid directly from a retirement account - which effectively allows the fee to be paid with 100% pre-tax dollars.

However, an important caveat is that while retirement accounts can cover their own fees, paying any other fees from such accounts can trigger highly adverse results, including taxable distributions, early withdrawal fees, and even a prohibited transaction disqualification of the entire retirement accounts! In the end, the power of tax deferral means that most clients will probably simply pay fees from taxable accounts and claim whatever tax deduction they can, but clients with shorter time horizons - including and especially retirees - should consider paying fees directly from their IRAs and other retirement accounts... but be certain those fees are only for the associated retirement accounts!Read More...