Choosing a financial advisor is difficult, and as a result it's helpful to provide the public with guidance about how to select one. Unfortunately, though, in recent years recommendations to the public from many organizations have increasingly focused on whether the advisor is a fiduciary, without any acknowledgement of whether the advisor has the training, education, and experience to provide effective financial advice. Consequently, the public increasingly runs the risk of being poorly served by a well-intentioned advisor whose advice is totally incompetent. Ultimately, protecting the public will require setting forth a standard that meets fiduciary and competency requirements. And as it standards right now, the clearest choice for a professional minimum standard appears to be the CFP certification. While the CFP marks - as with any standard - don't unequivocally mean someone will get the best and most optimal advice because the advisor has the CFP, that's not the point; in the end, the purpose of such a standard is not to define a best practice, but instead the minimum acceptable standard to ensure the fundamental protection of the public.Read More...
Weekend Reading for Financial Planners (July 21-22)
Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with an interesting Journal of Financial Planning article suggesting that a uniform fiduciary standard would not, in fact, reduce access of the mass market to financial advice or increases costs. We also look at an article from Bob Veres questioning why it is that more independent broker-dealers and registered representatives don't object to the Financial Services Institute's lobbying for FINRA as an overarching regulator for all advisors. From there, we look at several practice management articles, including one up-and-coming RIA custodian Scottrade Advisor Services, another on succession planning, and a discussion of how client communication supports business growth. We also look at a series of technology-related articles, including how to stay safe when using the cloud, a new secure client vault solution, a new retirement income modeling tool to do simplified/expedited basic retirement projections for clients, and a discussion of the incredible return-on-investment that firms see when adopting rebalancing software. We wrap up with a good discussion from John Mauldin of the current plight in Europe, a nice list of social media timesaver tips for those who are looking to dabble or have become active with social media, and an intriguing article from the Harvard Business Review showing how several companies are beginning to increase their sales and growth activity by eliminating commissions for better results. Enjoy the reading!
IRS Crackdown On IRAs Threatens To Catch Financial Planners In The Crossfire
As the so-called "fiscal cliff" looms, and the debate continues about whether to solve the country's fiscal woes with tax increases and/or spending cuts, a third option to help the situation is also emerging: do a better job collecting the taxes already due under the laws as they're written now. In the latest such shift, the word is out that the IRS is becoming less and less lenient regarding IRA mistakes, given the significant potential penalties involved - for instance, failing to take a required minimum distribution results in a penalty that is a whopping 50% of the RMD itself, and the penalty for an improper IRA contribution is 6%, per year, potentially accumulating for years on end. And there is potential that the IRS' efforts could extend further, leading to a crackdown on perceived abusive IRA strategies. As a result, clients should be more cautious than ever to comply properly with all IRA rules, including the timely distribution of RMDs, and proper compliance with all IRA contribution and rollover limits, and be wary of aggressive IRA strategies. From the planner's perspective, it's more important than ever to not only help clients comply properly with the rules, but to be cautious about giving accurate IRA advice, or run the risk that if the client ends out with IRS penalties, that the advisor - or his/her E&O insurance - may end out sharing in the high penalty cost to fix the mistake.Read More...
How Secular Market Cycles Can Change The Optimal Investment Strategy
While we often focus on the long-term return of stocks, the reality is that market growth is very uneven, not just due to volatility, but as markets go through long-term cycles called secular bull and bear markets. In the midst of a secular bull market - such as the one that exploded stock prices upwards from 1982 to 2000 - the optimal investment strategy is fairly straightforward - buy-and-hold, buy more on the dips, and dial up the leverage and risk exposure. In the midst of a secular bear market, though, buy-and-hold tends to merely produce the flat returns associated with the overall markets, and instead concentrated stock-picker portfolios, sector rotation, alternative investments, and tactical asset allocation become more effective. Using the wrong strategies in the wrong investment environment can produce poor results - just as many styles of active management generated little to no value and just became a cost drag in the 80s and 90s, so too does buy-and-hold now generate benchmark returns that may do little to achieve client goals. The ultimate key is to match the investment strategy to the market environment, given that such cycles can persist for 1-2 decades at a time. And notwithstanding the fact that a secular bear market has been underway for 12 years, it appears that the secular bear market still has a ways to go - which means its dominant investment strategies still have many more years to shine.Read More...
Yet More Big Changes Underway In The Long-Term Care Insurance Marketplace
The long-term care insurance marketplace has struggled tremendously over the past decade, as premiums have risen on both existing and new policies, and companies have become increasingly more stringent in their underwriting process. Over the past two years, however, the pace of change has accelerated, as major players like Prudential and MetLife have stopped offering long-term care insurance entirely.
And with the low interest rate environment continuing to persist, a new round of changes is underway, with industry leader Genworth announcing the elimination of both so-called "limited pay" options (10-pay and pay-to-65 policies), and also declaring that it will no longer offer unlimited (i.e., "lifetime") benefits on policies anymore. In point of fact, while Genworth has not been the first or only company to make these changes, it's notable when even the top carrier feels the need to cut back on its exposure to long-term care insurance policies. Ultimately, this is probably not the beginning of the end for long-term care insurance, but it's also not clear if or when clients in the future will ever be able to get policies as "generous" as those offered in the past.Read More...
Why Robo-Advisors Will Be No Threat To Real Advisors
As the world moves inexorably forward into the digital age, technology increasingly takes on a role in both augmenting and competing against traditional businesses. The world of financial services is no exception; in recent years, technology has taken leaps and bounds to augment and enhance what financial planners do, but now a new breed of technology firms threatens to challenge advisors as well. The rise of the so-called "robo advisor" - online startup firms that aiming to replace traditional advisors, as TurboTax did to tax preparers - has begun.
But so far, it's unclear whether the current breed of robo advisors will really make a dent in what real advisors do; in fact, the scope of most robo advisors is so narrowly focused on delivering passive, strategic, low-cost index portfolios, that arguably their greatest competition is not from comprehensive financial planners but instead from do-it-yourselfer alternatives like Vanguard and Charles Schwab!
The real test for the robo advisors, though, is the one they have not yet faced - will clients really be willing to stay the course through turbulent markets and change their behavior for the better because a computer told them to do so?Read More...
Weekend Reading for Financial Planners (July 14-15)
Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with an interesting article by Bob Veres, suggesting that most advisors may be undercharging their clients, by as much as 50%! From there, we look at a number of practice management articles, including a nice piece from Bill Winterberg about using online video, the shift to a more 'conversational' approach to marketing, a strongly-worded article from Mark Tibergien suggesting that women are NOT a practice niche, and an article highlighting the recently enacted 408(b)(2) fee disclosure rules for retirement plans (is your practice in compliance?). We also look at a number of investment articles this week, including one from Dan Moisand questioning the use of many types of "alternatives", another from Ed Easterling of Crestmont Research suggesting that we may still be in the early stages of the secular bear market (a nightmare for Wall Street and the advisory world?), and an intriguing article in the Journal of Financial Planning showing how guaranteed products may deserve less of an allocation after adjusting for their credit and illiquidity risks. We wrap up with two interesting policy articles - one about healthcare "myths" we must confront to move forward with reform, and another exploring how government policy decisions might be better shaped with input from behavioral scientists - and close with a nice light article from Morningstar Advisor with "23 Best Practices" tips for planners to implement. Enjoy the reading!
Why Blogging Will Replace Marketing Newsletters For Financial Planners
Using newsletters for drip marketing has long been a cornerstone of marketing for financial planners. However, the newsletter process itself is relatively inefficient - costs of production can be high if it's printed, the process of building a distribution list is slow, the content often cannot be effectively shared, and there is no means for someone to find and access the content if they aren't already on the mailing list.
By contrast, operating a digital blog has no printing cost, has content that can be distributed on multiple digital channels, can easily be shared by readers and prospects with others, and can even be found by search engines without any further effort from the planner.
The challenge, of course, is that a financial advisor blog requires content - yet the reality is that for firms already producing a newsletter, the content is already being created. In which case, the blog is simply a more efficient way to get the content out there and drip market to a growing a list of prospective clients!Read More...
The End Of Qualified Dividends For Small Business Owners
With the looming "fiscal cliff" at the end of 2012, a wide range of tax increases are scheduled to occur at the start of 2013. One of the most dramatic is the treatment of dividends, which will nearly triple from a current maximum rate of 15% to a top rate of 43.4% (or higher when accounting for high-income phaseouts). In the case of small business owners with closely-held C corporations, this presents a unique planning opportunity, because the client can actually control the timing of dividends, choosing to extract cash and profits from the business by the end of 2012 instead of waiting for 2013 and beyond. And given the magnitude of the scheduled tax increase, it may well make sense to do so. While some clients may at least adopt a wait-and-see approach until the election and potential end-of-year tax legislation, the reality is that it's prudent to at least begin planning now - because getting this "wrong" for a business with $1,000,000 of accumulated profits could cost the client a whopping $284,000 in lost taxes!Read More...
Mind-Mapping Your Way Through The Data Gathering Meeting
For most clients and planners, the data gathering process is simply viewed as a necessary evil to obtain the information required to produce a financial plan. The planner proceeds through a long list of questions, covering everything from financial details to client goals and aspirations, recording it on a data form or notepad to be used later. A new approach is emerging, though - to complete the data gathering process using mind mapping, which organizes information visually, in a manner that both the planner and client can build upon. The end result is a data gathering meeting that is more collaborative and interactive, as clients become part of the process of building a mind map that takes shape before their eyes - and also becomes an actual takeaway from the meeting, as the mind map document itself is provided in print or electronically to the client as well. Which means in the end, mind mapping may be a way to improve the financial planning experience itself.
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