As professionals, we take financial planning very seriously, and generally hope that our clients do as well. After all, if clients don't take their financial situation and its outcomes seriously, how will they ever change their behavior for the better? However, the reality is that in many fields, some of the best progress in helping people change their behavior comes not from raising the seriousness and penalties for making mistakes, but for turning the subject into a gaming experience that rewards positive outcomes. In the context of financial planning, this process of "gamification" creates the potential to help clients making the changes they need to achieve financial success. Although some aspects of financial planning would be difficult to turn into the kind of instantaneous feedback necessary for gamification to work - at least until technology moves along a few more years - other parts can be implemented now. For instance, even just making a financial planning action items list continuously available to clients, with checkboxes left blank until the task is completed, can help compel clients to finish what they need to in order to get to check the box! Will gamification have the potential to help clients having difficulty with change get to the financial planning outcomes they need and want?Read More...
Weekend Reading for Financial Planners (Sep 8-9)
Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with a surprising interview from Barbara Roper at the Consumer Federation of America, suggesting that given how the SEC is dragging its feet, perhaps FINRA would be the better solution for investor protection after all. Tying into the regulatory theme, we also look at Bob Veres' latest Financial Planning magazine column, suggesting that RIAs should come to the table with their own fresh proposals rather than waging a FINRA vs SEC battle, a recent study by Financial Advisor magazine, Boston Consulting Group, and 3ethos that attempts to benchmark how well advisors currently execute fiduciary best practices (the answer is not as well as we might have hoped and expected), and a disturbing investigation from the SEC into financial advisor and radio personality Ray Lucia that digs deeply into the backtesting models that Lucia used to support his strategies (raising the question about whether other advisors may also have made errors in assumption or process in their own in-house backtesting efforts regarding the strategies they recommend). From there, we look at a few more aspirational articles, including a vision from hiring consultant Caleb Brown about how financial planners may learn their craft in the future, an interview with practice management consultant Angie Herbers about how to develop great employees, and a great checklist for information you should be certain to cover on your website to give prospective clients what they want/need. There's also a nice technical summary of some of the planning implications of the Affordable Care Act in the coming years, some thoughts about where the ETF/ETN industry is heading (notwithstanding the growth, it might still be in the early stages!), and a good explanation and comparison of two different types of P/E ratios and what they tell us about whether stocks are cheap or not. We wrap up with some intriguing new research from Morningstar, suggesting that it's a myth that investors are dumb and pick bad funds; instead, the Morningstar research suggests investors tend to be pretty good at selecting high quality funds, but have a problem in timing the purchase of those funds poorly. Enjoy the reading!
Should Practice Management Really Be Eligible For (CFP) CE?
With the first major changes to the continuing education requirements for CFP professionals in nearly two decades, the CFP Board has proposed that in the future up to 10% of the CE requirement could be satisfied with content on practice management. Distinct from education on trust and communication, the proposal would allow for CFP CE for practice management topics tied to the business of operating a financial planning practice.
While many have long requested CE credit for practice management content, though, it seems that allowing practice management CE strays away from the fundamental purpose of continuing education, and risks creating a double-standard for technical competence between financial planners that work in a practice, and financial planners who own a practice.
Perhaps that means the better solution is to improve the practice management tools, resources, and content that are available in the first place, so that practice management can simply be its own reward, and justify its own ROI, for those who choose to own and operate a financial planning business?Read More...
Building A Financial Planning Business In The Long Tail World
In the financial planning world, most firms are small businesses that are struggling to get larger, trying to grow the practice by simultaneously competing for the same biggest clients and at the same time serving anyone who is able and willing to pay for financial planning services while slowly raising minimums to become more profitable. In response, many practice management consultants have suggested that financial planners establish a niche to build their businesses, focusing on a smaller market they can dominate rather than a larger market they struggle in. Notwithstanding this advice, few firms have adopted the niche approach, most commonly out of a fear that if they narrow the focus of the practice it will simply lead to fewer clients. Yet the reality is that in other industries, firms are growing like never before by focusing not on the biggest clients and opportunities, but by capitalizing on "the long tail" of smaller, niche segments that can add up to real dollars, and become accessible because of the how the internet facilitates business in the digital age. Is it time for financial planners to similarly adopt the long tail approach?Read More...
Weekend Reading for Financial Planners (Sep 1-2)
Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with a fascinating interview with Ron Rhoades where he shares his thoughts about the history of fiduciary and regulation of financial advisors, with some surprising insights, and also look at the recent back-and-forth between incoming FPA CEO Lauren Schadle and American College CEO Larry Barton about the CFP marks and whether there should be one designation for financial planning. From there, we look at a few good articles from Advisor Perspectives, including a list from Bob Veres of the top ten faulty assumptions in financial planning, and a good article by Joe Tomlinson looking at how safe annuity companies are. There are a few retirement articles as well this week, including a look at the "critical path" approach to setting a threshold for when clients can and cannot afford to take risk, a new framework for evaluating various retirement income strategies and alternatives, and an article looking at how disability can threaten retirement success yet may be neglected by advisors (especially for their female clients). There's also an article that presents a good discussion about risk (and the difference between risk and uncertainty), and the latest from John Mauldin showing some surprising employment trends (older workers are actually taking job market share from younger workers!). We wrap up with two very interesting articles - one looking at the dynamics between patients and doctors in providing recommendations that has some striking parallels for what we do as financial planners, and the other exploring some surprising research that demonstrates we actually value the potential for future success more highly than a demonstrated track record of prior success (which may help to clarify why many clients are always so attracted to the next great thing, even when the current thing is working just fine). Enjoy the reading!
Are Baby Boomers Actually Right Where They Should Be For Retirement Savings?
As the baby boomers move inexorably closer to retirement, many have lamented the plight of the generation, which appears to have dramatically undersaved and therefore is ill prepared for retirement.
Yet the reality is that given how spending fluctuates through the working years - especially when raising a family - it may be entirely normal for couples to save less during the bulk of their working years, and instead save substantially in just the final years before retirement when the cost of raising children winds down. In turn, savings in the early years can actually be less effective than reinvesting into the individual's "human capital" and increasing lifetime earnings. And in such an environment, the real issue is not effectively saving in the early years, but instead is to proactively manage spending to ensure it does not ramp up too rapidly in the later years.
Combined together, this suggests that the reality may be that back-loading retirement savings into the final years before retirement doesn't mean baby boomers are "behind" but instead that they have been following a remarkably normal and even "optimal" path!Read More...
3 Reasons Why Your Minimums Should Be Clearly Stated On Your Website
As financial planning practices grow and become more focused, they generally establish a minimum for new clients. Depending on the nature of the firm, that might be a minimum of investment assets, a minimum net worth, or simply a minimum fee amount; the fundamental purpose is to ensure that the firm can generate an appropriate minimum amount of revenue per client to maintain its financial viability and profitability given its costs. Yet many firms do not actually state their minimums on their website or other marketing materials; instead, advisors wait until a prospect comes in to the firm for a first meeting or "approach talk" and then assess on the spot whether the potential client is "qualified" to work with the firm. While this may seem like it makes the process easier and affords the ultimate flexibility for the advisor to make a judgment call about whether the prospect is a good fit, the reality is actually the opposite. It's an extremely expensive and wasteful process for the firm, it discourages new prospects from contacting the firm, and perhaps worst of all, it makes referral sources less willing to refer prospects at all!Read More...
Weekend Reading for Financial Planners (August 25-26)
Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with a number of surprise announcements in industry news, including the early retirement of FPA CEO Marv Tuttle due to family reasons, the decision by incoming NAPFA chair Ron Rhoades to resign his leadership position due to a compliance infraction, and a letter by the CFP Board to the Consumer Financial Protection Bureau suggesting the creation of a ratings system for advisor designations and certifications to help reduce elder abuse. We also look at an article explaining some of the upcoming changes with the CFP Board's new sanction guidelines, a discussion from Advizent's Steve Lockshin about how all advisors must help to raise the industry's low minimum standards, and the conclusion of the Investment Advisor/ActiFi study examining how advisors are being served on practice management issues. Wrapping up, there's an(other) article on the rise of the so-called "Robo Advisors", a discussion of how some stress in your business can actually be a positive but it's important to handle the stress so it doesn't become too much, and a technical discussion of some of the unique tax burdens of MLPs, along with a look at how advisors are adjusting investments for a potential inflationary cycle, and a striking article from Texas Tech's Michael Finke about how aging of the brain may reduce financial literacy in later years. Enjoy the reading!
Is A Goal To Save A Percentage Of Income Every Year Bad Retirement Advice?
"Save a healthy portion of your income every year from the start of your working years to the end" is a standard of retirement planning advice. Although we may debate about whether the exact number is 10%, 15%, or 20%, or more, the focal point is the same - as long as you save a sufficient portion of your income, you'll have enough savings to fund your retirement.
However, it can actually be even more effective to not save in the early years, and instead invest in one's "human capital" by trying to boost earnings instead of the retirement account balance. In order to make this work, though, it's crucial to keep future spending from rising as fast as future income.
Consequently, the reality is that maybe baby boomers are "behind" in their retirement savings not because they failed to save a percentage of their income, but instead because saving "just" a percentage of income allowed them to consume the rest and increase their spending to unsustainable levels. In turn, this suggests that in the future, the better path to retirement success may not be to save a flat percentage of income every year, but instead to target an appropriate standard of living, raise it conservatively, and save all the rest, however much that may be!Read More...
Options For When Retirees Have A Change Of Mind About Starting Social Security Benefits
You have an appointment with a client who has already elected Social Security and now realizes he has made a mistake. Whether because he didn’t think about how his election would affect his spouse, or he was unaware of the options, or for some other reason, he has now changed his mind. What are his options?
While the so-called "Social Security withdraw and reapply" option is mostly gone as a strategy, there are actually still several ways to "undo" benefits, including choosing to pay back benefits within the first 12 months, going back to work to deliberately cause the Social Security Earnings Test to apply, voluntarily suspend benefits after full retirement age, or adjust the timing that a spouse starts benefits. Read More...
