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
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...
Morningstar Tries To Quantify The Value Of Financial Planning – 1.8% Gamma For Retirees?
A longstanding challenge of financial planning has been the fact that its value is usually defined in intangible terms (e.g., "bringing peace of mind") or at least over time horizons too long to effectively evaluate (e.g., "helping people achieve their long-term goals"). Yet arguably, the value of financial planning could be better quantified, by trying to measure how much economically better off clients are by engaging in financial planning strategies than what they would have otherwise done.
And in a recent research paper entitled "Alpha, Beta, and Now... Gamma" David Blanchett and Paul Kaplan of Morningstar have attempted to do exactly this - evaluating how the financial outcomes of retirees are improved by engaging in five financial planning strategies, from more effective asset allocation to dynamic withdrawal rate spending approaches to proper asset location decisions.
Quantifying the difference between the baseline and financial-planning-optimal strategies as "Gamma", Blanchett and Kaplan find that good financial planning decisions increase retirement income by 29%, which is the equivalent of generating 1.82%/year of higher returns. Although there are some important caveats to the research, the new Morningstar paper may open the door to a wave of new research attempting to measure the "Gamma" of good financial planning.
Weekend Reading for Financial Planners (Nov 10-11)
Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with a nice article from Financial Planning magazine highlighting the top 25 schools teaching financial planning, including both adult certificate education programs and the rapidly rising number of undergraduate and graduate degree-based programs. From there, we look at a number of practice management articles, including an interesting discussion of whether it's better to segment clients based not on their assets or wealth but instead by how engaged they are with your financial planning services, a young planner's "NexGen" look at succession planning as a buyer, a look at how to keep your best new employees rather than driving them away, and a discussion about how if turnover does happen it can still be taken advantage of as a growth opportunity for the firm. From there, we look at a few more technical articles, including a discussion from Texas Tech financial planning professor Michael Finke about how neuroscience research is changing our understanding of how to manage and motivate clients towards their financial goals, a discussion of important caveats to bear in mind for clients looking to create a Spousal Lifetime Access Trust (SLAT) before the end of the year for estate planning, and a discussion from John Hussman that notwithstanding recent data the US may already be entering a recession. We wrap up with three interesting articles, one a look at how FINRA is opening up their arbitration process for (Registered) Investment Advisers that want a less expensive alternative, a list of 31 tips to improve your financial planning firm's blog, and a discussion about how technology is magnifying the positive results of good managers but also the negative results of bad ones. Enjoy the reading!
MailBag: Problems With RMD Method For Retirement Income And 1031 Exchanges To Avoid New Medicare 3.8% Tax
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 deal to use 1031 real estate exchanges to avoid the new 3.8% Medicare surtax on investment income that begins in 2013; and 2) some thoughts on the recent Center for Retirement Research brief about using the RMD method as a retirement income/withdrawal strategy.
Are The CFP Board Leadership Resignations A Sign Of Weakness Or Strength?
The financial planning community was recently stunned by the unexpected announcement that Alan Goldfarb, chairman of the Board of Directors for the CFP Board, along with two unnamed members of the CFP Board's Disciplinary and Ethics Commission (DEC), had resigned amidst allegations that they had violated CFP Board's Standards of Professional Conduct. Critics of the CFP Board were quick to step forward and use the announcement as a moment of weakness and an opportunity to bash the organization. Nonetheless, it's still notable in a sign of strength that the CFP Board does have an enforcement process, and isn't afraid to use it - even to the point of ousting its own board chair and some DEC members.
In the long run, though, whether this proves to be a sign of strength or weakness for the CFP Board depends upon the transparency it uses in resolving the matter. While light on the details right now - it is, after all, an ongoing investigation - the real question is how much the CFP Board ultimately discloses about what the allegations were, the process of the investigation, the outcomes of that process, and how the matter was adjudicated - along with whatever steps it intends to take to ensure the problems, whatever they were, don't happen again. We can't ask for or expect any answers yet, but we can ask for and expect a commitment, now, for transparency at the end of the process to maintain the integrity of the organization.
6 Ways The New Normal Is (Re-)Shaping The Growth Of Financial Planning Firms
The past 5 years have been difficult for most firms, as the financial crisis has wreaked its havoc on the economy and consumers, and we enter a "New Normal" environment where growth and returns are lower than they were in the past. In fact, data from the Federal Reserve indicates that in the aggregate, US households still have not recovered in their total net worth back to where they were before the crisis began. As a result of this difficult environment, where household net worth in the aggregate has stagnated, the financial planning industry too has been suffering, as firms struggle to grow their revenues in the midst of sluggish organic growth, rising costs, and the lack of any tailwind from markets that mostly still haven't recovered to their pre-2008 highs. These difficulties in turn have led to numerous trends emerging and underway in the financial planning world, from the turn towards alternative investments, to the search for new and different revenue models, to a struggle for marketing to new segments to reignite organic growth, an urge to merge and increase the size of firms to get better economies of scale, or outsource instead, and a drive to grow by acquisition. Overall, as long as the growth in household wealth in the aggregate remains sluggish, firms will be forced to spend more and more time fighting to capture a larger slice of the pie, since the pie itself is not growing the way that it used to.Read More...
Weekend Reading for Financial Planners (Nov 3-4)
Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with a big announcement from the CFP Board, that the current Chair of the Board of Directors and two members of the Disciplinary and Ethics Commission are resigning amid an ethics probe. There's also another article from the CFP Board explaining their current position on when the fiduciary duty does, and does not, apply to CFP certificants. From there, we have an article on how popular investment bear Gary Shilling is remarkably upbeat and bullish about the financial advising business itself, an article about how young millionaires under age 44 have dramatically higher expectations for digital and social media presence from their advisors, an interview with Behavior Gap artist and author Carl Richards, and an interesting technical article about how to plan for clients' digital assets. We also have a few investment and retirement articles, including an analysis by Wade Pfau of the new "Stand Alone Living Benefit" (SALB) income guarantee for investment accounts, a study by David Blanchett regarding a new metric and approach to measuring the efficacy of various retirement income approaches, and a discussion from Bob Veres about investment advisor Gary Miller and has rather unique and analytical approach to making investment decisions. We wrap up with two very intriguing articles - one a study that finds that the brain is actually physiologically incapable of both empathizing and analyzing at the same time, and the other a discussion about how setting bold, ambitious, unrealistic goals can actually be the best path to success. Enjoy the reading!
The Challenges Of Planning For Irregular Expenses
Getting a handle on client expenses is often difficult - and only exacerbated by the fact that most people don't exactly enjoy the budgeting process. Nonetheless, failing to accurately estimate ongoing expenses makes it almost impossible to plan. While in many situations, it's possible to get a reasonable estimate of spending by looking at ongoing household expenses, the reality is that many people have large expenses that occur irregularly throughout the year - or even interspersed across several years - and as a result, "just" focusing on recurring monthly expenses can lead to a significant underestimate of true spending.
The end result is that a lot of clients and planners may systematically underestimate spending by failing to fully take into account large irregular expenses, such that there is never as much money left at the end of the year to save as originally anticipated. Some planners adjust for this by trying to estimate every expense and convert it into a monthly amount, just to get a more accurate estimate of ongoing spending; others simply try to estimate the amounts of irregular expenses and when they might occur, and project accordingly. So how do you handle irregular expenses?Read More...
One Profession, One [Minimum] Designation
After years of wavering, the Financial Planning Association has recently re-focused itself back to specifically supporting financial planners who pursue the CFP certification and advocating for the CFP to be recognized as the one true designation, recalling back the famous "One Profession, One Designation" refrain first uttered by financial planning luminary P. Kemp Fain nearly 25 years ago. Yet the reality is that while the CFP certification has advanced significantly since Fain's first comments in 1987, so too have many "competing" designations, some of which represent very high quality advanced educational content, albeit often in narrow and focused specialties under the financial planning umbrella. Nonetheless, many "bogus" designations have also proliferated over the years, contributing significantly to consumer confusion. As a result, while there is still virtue to having the CFP certification as a minimum baseline designation to cut out the other bogus designations, there needs to be room for the advanced specializations that have begun to emerge as well. Which means perhaps it's time for the FPA to extend Fain's famous speech one step further, from "One Profession, One Designation" to "One Profession, One [Minimum] Designation" - where the CFP certification serves as a minimum baseline for anyone who wishes to become a financial planner, but beyond which a growing number of "post-CFP" educational programs can flourish to support the emerging fields of financial planner specialization.Read More...
