Nerd's Eye View blog

Does The DALBAR Study Grossly Overstate The Behavior Gap? (Guest Post)

October 3, 2012 11:02 am 37 Comments CATEGORY: Investments

It is an accepted belief that retail investors, swayed by a barrage of financial news and information, and the wiring in their own brains, tend to systematically buy at market peaks and sell at market lows, resulting in returns that are far lower than what could have been achieved by simply buying and holding.

This so-called "behavior gap" has been quantified most famously over the years by DALBAR, which produces and annually updates a study of the difference between investor (dollar-weighted) returns and index (time-weighted) returns, and currently shows that investors have cost themselves more than 4% per year in returns for the past two decades.

Yet the reality is that DALBAR's methodology confounds the impact of investor behavior, and the simple consequences of return sequences; it's entirely possible that some or all of the low DALBAR investor returns are simply due to the fact that markets rose for the first half of their time sample (the 1990s) and were flat for the second half (the 2000s).

And in fact, that appears to be the case. Once DALBAR updated their projections to compare investor returns to a passive investor who simply invested systematically over the entire time period, the result surprisingly shows that retail investors in the aggregated actually outperformed systematic dollar cost averaging for the past 20 years!Read More...

The Pervasive Effect Of Low Interest Rates On Financial Planning

October 1, 2012 11:06 am 4 Comments CATEGORY: General Planning

The ongoing low interest rate environment in the US has created many challenges in recent years, as the struggle to find yield and return drives planners and investors away from bonds and towards other options for higher returns, from equities to so-called "alternative" asset classes - in turn driving up those prices and reducing dividend yields and prospective future appreciation. Nonetheless, many returns on alternatives are still appealing given an alternative of near-zero interest rates on fixed income! Yet the reality is that low interest rates, as they continue to persist, are beginning to have other effects beyond just the impact to investors. Insurance companies have been forced to raise prices on some types of insurance, or leave the marketplace entirely, as the returns are simply too low to manage risk and generate a reasonable profit. Pension plans continue a slow grind of underperforming their long-term actuarial assumptions, creating a larger and larger deficit that must ultimately be resolved as well. And while many planners have been trying to focus their clients on the risks of what happens to bonds if rates rise, recent research suggests that in fact the greatest surprise of the coming decade could be that rates continue to remain low as the US economy deals with its massive public and private debt levels - which in turn means many of these low interest rate challenges could still be in the early phase!Read More...

Weekend Reading for Financial Planners (Sep 29-30)

September 28, 2012 05:30 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with a response from the CFP Board to the recent challenge about whether their fiduciary standard is "a joke" (not surprisingly, the CFP Board suggests that its standard is no joke), along with an article from the Advisor One blogs by Knut Rostad of the Institute for the Fiduciary Standard suggesting that HighTower Advisors is overstating their lack of conflicts of interest to the detriment of advancing the standard, and another article by Dan Moisand that suggests better regulation of financial planning will ultimately be a necessary step to be fully recognized as a profession. From there, we look at some interesting stats suggesting the fiduciary RIA world is grabbing market share of 401(k) plans just as it has been grabbing market share of retail investment advice, and an article about a planning firm that focuses on career coaching and compensation advice as a core deliverable to clients. There are also a number of technical articles, including a discussion of the emerging investment concept of "risk parity" and why it matters, a look at where and how tactical asset allocation will and won't work, the apparent underutilization of Section 529 college savings plans by financial planners, an analysis of when tax deferral does and does not make sense. and two deep estate planning articles (one focused on estate tax strategies before the end of the year, and the other on recent legal and tax developments over the past year). We wrap up with a lighter article about the importance of body language and what you may be unwittingly communicating in meetings, along with some advice to help ensure you're in the right state of mind heading into a (client) meeting (because if you're not, your body language is going to show it!). Enjoy the reading!

Do New Financial Planners Focus Too Much On A Partnership Career Track?

September 26, 2012 11:06 am 5 Comments CATEGORY: Practice Management

For much of financial planning's history, the only way to be a financial planner was to build your own financial planning business, either alone or with a partner or few. As the industry matures, though, it is increasingly common for financial planners to begin their careers not by starting a firm from scratch, but by joining an existing one, with the ultimate goal of "having your name on the door" as a partner. Yet it's not clear if many newer planners really want the risks and responsibilities of being a partner, or are just trying to find a career track that leads to a professional income - after all, in firms where the only options are administrative staff or professional partner, it appears that partnership is the only path to a higher earning potential.

The model emerging at larger firms, though, is to more clearly delineate between compensation paid for working in the business, and the risks and benefits of ownership for working on the business as a partner. Ultimately, the reality may be that only a few newer planners really have the inclination to be a partner - for the rest, the real key is to craft a career track that will leave planners not as partners at all, but simply well compensated for a job well done!

CFP Board Under Kevin Keller: Not Your Father’s CFP Board Anymore

September 24, 2012 11:13 am 2 Comments CATEGORY: Planning Profession

Five years ago, Kevin Keller became the CEO of the CFP Board, and at a unique and challenging time for the organization. The CFP Board had just announced its decision to relocate to Washington DC, which was likely to turn over most of the staff (at least, those who were left, as prior CEO Sarah Teslik had just slashed the headcount of the organization by nearly 40% in the preceding few years). Beyond staffing issues, the organization seemed to be in turmoil, with one leadership blunder after another, and Keller himself was entering as the 7th permanent or interim CEO to fill the role with the CFP Board in as many years.

Given that Keller was essentially an "outsider" at the time - experienced in leadership at another organization, but with no particular background or connection to the financial planning world - it was not clear how would he (re-)shape the CFP Board as he took over, with the rare opportunity, and danger, of re-staffing the entire organization from the ground up. Would it be the fresh start the CFP Board needed, or would the outsider unfamiliar with the challenges of the industry and the organization blunder?

Looking back over the past 5 years of the CFP Board, the conclusion seems clear now - although the CFP Board's central role in the financial planning profession continues to make its decisions controversial from time to time, the reality is that the organization under Keller's leadership appears to be entirely reinvented, and in a very positive direction. Although there are definitely some challenges that remain, this isn't your father's CFP Board anymore.

Weekend Reading for Financial Planners (Sep 22-23)

September 21, 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 a look at how fiduciary rulemaking progress has slowed so much that any real change may now be years away at best, a discussion of how (despite lack of progress on fiduciary minimum standards) the future of advice may include a small number of mega-firms that are really building a focused, holistic and client-centric approach to advice, and a somewhat disturbing article suggesting that financial planners are becoming a target for cybercrooks that are trying to steal client money by sending advisors fake email transfer requests. From there, we have a few interesting retirement articles, including an interview with Moshe Milevsky, a discussion from Wade Pfau looking at the immediate-annuity-versus-systematic-withdrawal debate, and an analysis of median income for households over the past several decades that shows how retirees are actually faring the best of any age group. We also look at an interesting Journal of Financial Planning article about how to better evaluate cash value life insurance illustrations, a discussion whether it really pays to go to cash waiting for interest rates to rise, and a look from Morningstar at how as more and more people adopt indexing approaches new opportunities may be emerging for active managers. We wrap up with two lighter articles, one with tips on how to get more productivity time back with some good email management tips, and an intriguing discussion of how, in light of the fact that even people who now do what they love often found that path only after a period of time and some difficult early years, "follow your passion" may be bad career advice for Generation Y and that instead we need to paint a more nuanced picture of career paths that acknowledge the (inevitably?) difficult early years. Enjoy the reading!

What Makes Something An (Alternative) Asset Class, Anyway?

September 19, 2012 11:06 am 4 Comments CATEGORY: Investments

The most typical definition of an asset class is a group of securities that have similar risk/return characteristics, and behave similarly in the marketplace. Thus, for instance, stocks, bonds, and cash represent the three most common asset classes, as each have different risk/return characteristics and they behave very differently in response to various economic and market events.

One of the most common ways to attempt to determine whether an investment represents a unique asset class is to examine its correlation with other investments. After all, two investments that have different risk/return characteristics and behave differently in response to market events would likely show little similarity in returns over time, thereby exhibiting a low correlation. In turn, given how Modern Portfolio Theory demonstrates that investments with a low correlation to the rest of the portfolio can lower the overall volatility of the portfolio - even if the underlying investment itself is volatile on its own - advisors have increasingly sought out low correlation "alternative" asset classes and investments to manage risk through diversification.

The caveat, however, is that in an increasingly complex financial world, having a low correlation alone can actually be a remarkably poor and misleading indicator of what constitutes an (alternative) asset class.

The Day I Became Ashamed To Be A CLU

September 17, 2012 11:07 am 13 Comments CATEGORY: Planning Profession

It was August 24th. I had just awakened early in the morning in Sydney, my final day there after serving as a keynote speaker for the Australia Portfolio Construction Forum, and I was looking through my morning email – which was actually the prior afternoon’s August 23rd email at home in Washington DC, given the 14-hour time zone difference. Earlier in the week, I had caught the surprise announcement from the FPA that CEO Marv Tuttle was stepping down, to be succeeded by then-current FPA COO and Associate Executive Director Lauren Schadle, and read with interest Schadle’s comments that FPA would be stepping up its focus on those financial planners who are serious enough about their craft to seek out the CFP certification.

What caught my eye that morning, however, was an unexpected response to Schadle’s comments from American College President and CEO Dr. Larry Barton. The College, through which I have proudly earned 6 professional designations, including the CFP itself, is one into which I had invested a lot of time, money, and effort, both during my studies, and in the years thereafter as I have continued to promote its advanced educational programs and even recently taken part in providing content for their latest RICP designation.

Yet after reading Barton’s response, I felt for the first time a true embarrassment in being an alumni of the American College of Financial Services, and shame in being a holder of what was once its defining credential, the CLU designation.

Weekend Reading for Financial Planners (Sep 15-16)

September 14, 2012 07:03 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with a tough look at the CFP Board's fiduciary standard, raising the question of whether fiduciary is just an advertising gimmick or whether it's really being enforced as such, along with another recent study that finds the majority of investment assets in the country are being managed by firms with questionable and conflicted business models, or an outright series of regulatory infractions. From there, we look at a few more upbeat industry articles, including two recent studies on planner compensation, one showing that income for senior planners is up 14% in the past two years, and another finding that all else being equal CFP certificants average $5,000/year in additional compensation over non-CFPs. There's also a discussion of how some firms are developing new training programs to bring more young people into financial planning, and a look at the firm LearnVest which had a "Best In Show" appearance at this week's Finovate conference with a new iPad app for clients and an announcement of SEC registration as the firm aims to bring financial planning to "the other 99%" of Americans. We also look at two marketing articles, one on how financial advisory firm aggregator HighTower is using social media on a larger firm scale, and an interesting discussion of whether local radio shows still have some marketing value, along with a review of the latest MoneyGuide Pro G3 release. We wrap up with a nice list of market and economic commentaries to check out if you're looking for good content to stay educated, an interesting discussion about whether we are sometimes too conservative in our recommendations as planners and the impact that can have on clients, and an article about whether the social media revolution is about to get "a little less awesome" as investors put increasing pressure on social media firms to shift from the "making delightful and cheap things" stage to the "making money" stage. Enjoy the reading!

Will Australian Financial Services Reform Be A Template For The US?

September 12, 2012 11:06 am 11 Comments CATEGORY: Planning Profession

As regulatory reform for financial services moves along slowly here in the US, half way around the world in Australia a new set of regulatory reforms entitled the "Future of Financial Advice" are now being implemented. The changes will include a ban on all investment commissions, and a fiduciary duty for those giving financial advice, not unlike similar reforms scheduled in the UK under their Retail Distribution Review (RDR) set to take effect in 2013. Notably, though, while Australian reforms may have leapfrogged past the US, the Australian marketplace looks more like the US did nearly 20 years ago, as approximately 80% of advisors work under a small number of dealer groups and there are almost no independent firms. With Australian firms required to adopt fee-only models, including AUM, retainer, and hourly, within a year, the evolution of business models in the US may provide a glimpse to what is coming for Australia. Yet while the US offers Australia a glimpse of fee-only business models, Australia may provide US a first glimpse at how financial services shifts in a fiduciary, fee-only environment - providing a live, real world environment to evaluate questions like whether the less affluent marketplace really is served effectively without commissions, and whether there's still a place for broker-dealers in a fiduciary world.Read More...