Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with three nice articles from this month's Journal of Financial Planning: the first is about planning techniques and issues for non-traditional couples; the second is an interview from Tiburon Strategic Advisors CEO Chip Roame about trends and developments in the industry; and the third is an article by Rick Adkins noting that financial services advertising has taken a distinctly planning-centric tilt in recent years, which may be a boon to the profession going forward. From there, we look at a few good practice management articles, about the importance of conducting staff meetings for your firm (and how to do them well), policies and procedures to handle departing employees (whether a voluntary or involuntary termination), and a good piece by Tom Giachetti about how honoring the fiduciary duty means more than just giving good advice - it's also about important "details" like ensuring clients are getting best execution on their investment transactions. This week's reading also includes a review of the new Morningstar forward-looking fund ratings, the rise of Zephyr Associates as a potential alternative for evaluating investments, an article on the difficulties of ETFs in penetrating the 401(k) marketplace, a look at whether today's low real return environment may be setting up retirees for unique new retirement challenges, and a good article from The Economist about the emerging LIBOR rate fixing scandal. We finish with two very interesting articles - one from practice management consultant Angie Herbers about how for many advisors the real challenge is not building a successful advisory practice, but how to deal with success once it's achieved and not undermine it, and another from the Harvard Business Review blog suggesting that, contrary to cliche and popular opinion, the most successful people may not be those who are most confident, but instead those who pair high ambition with relatively low confidence and who consequently bring a healthy dose of skepticism and self-improvement to everything they do. Enjoy the reading!
Is The Cloud Really A More Secure Place For Your Client Data?
As financial planning slowly transitions into the digital age, and increasingly common discussion is whether to transition client information to the cloud, where it will be hosted on servers in a data center, instead of the planner's office. Given the frequency of high profile data breaches announced in the media, is it really safe to move client information out of the office? Yet in most cases, the planner's office, and the client's home, are not nearly as secure as we make it out to be. Data centers have fences, guards, sophisticated security monitoring, and intrusion detection systems built to rebuff those trying to access data inappropriately, while the client's best data defense is often little more than opening the door of the mailbox, and planning firms often lack the size and scale for truly effective security either. In point of fact, most firms don't even have the systems to know if they've been "hacked" in the first place, and wouldn't know until clients began to report identity theft problems! In addition, a persistent media bias that highlight major companies with data breaches but not small businesses that lose client files, may be misdirecting focus and causing us to misjudge the relative safety of the options. Which means ultimately the reality is that, notwithstanding the occasional high profile story, cloud security may actually still be far more effective at protecting client data than we realize!Read More...
3 Estate Planning Strategies That May Die Soon
As Congress and the White House continue to search for revenue to close the gap on the US fiscal deficit, numerous estate planning strategies - especially for high net worth clients - are coming under attack. Recent legislative or budget proposals have threatened the use of both Grantor Retained Annuity Trusts (GRATs) and Intentionally Defective Grantor Trusts (IDGTs), both popular strategies to "freeze" the value of hopefully-rapidly-appreciating assets for transfer to the next generation. In addition, the new rules on portability - currently temporary, but likely to become permanent at some point in the future - threaten the even more popular and common estate planning strategy, the bypass trust. While the exact timing for when these new rules become permanent law, the reality is that change appears to be coming. As a result, some clients may wish to accelerate the implementation of strategies before the laws change... while others may prefer a wait-and-see approach before deciding what estate planning strategies to implement at all!Read More...
Splitting After-Tax 401(k) Distributions For Roth Conversion
As more and more baby boomers retire, an increasingly popular strategy is to split pre- and after-tax funds in a 401(k) at retirement, with the goal of rolling over the pre-tax funds into an IRA, and converting the after-tax funds into a Roth IRA, taking advantage of the non-taxable nature of the after-tax contributions.
Yet the effectiveness of the strategy is ambiguous at best; recent guidance from IRS Notice 2009-68 would suggest that the approach shouldn't be allowed at all, and although some esoteric and technical workarounds have been suggested, none have truly been tested or subjected to IRS scrutiny. As a result, while many 401(k) plans are willing to issue separate checks to accommodate those who wish to try the strategy, and the odds of getting caught are low, caution is still merited about whether the client will really end out with the desired tax treatment.Read More...
A Unique Way Planners With Niches Grow Business That Others Can't
As the steady drumbeat continues to beat about the value of planners creating niche practices, most discussion of niches focuses on having a more clearly defined value proposition for clients and being able to make yourself more relevant for a target client market. Yet a recent article points out another important benefit that emerges when lots of planners all begin to establish niche practices - the opportunity for cross-referrals between planners with different, non-overlapping niches! In a world where most planners are generalists who all do everything for everyone, there is little need to ever cross-refer; but when most planners specialize in niches, cross-referrals can become increasingly common. And if planners will well-defined niches are more effective in converting prospects into clients, then the reality is that a collaborative group of niche planners may generate more clients in total than all of them could achieve by each acting as an individual generalist, as the whole really can act more effectively than the sum of its parts!Read More...
Weekend Reading for Financial Planners (June 30-July 1)
Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with an article about the FPA, its declining membership, and prospective organizational changes as the CEO retires in 2014. From there, we look at a number of practice management articles, including an overview of the emerging niche of firms that provide quality lead generation for financial advisors, how to sustain a study group, the importance of e-delivery of documents not only for your firm but for your clients, a new software package to help with investment advisory fee billing, and two marketing articles - both emphasizing the value of being unique and different and having a niche to grow the business effectively. From there, we look at an interesting interview with Jeremy Grantham about investing opportunities, a striking article that suggests the giant pile of cash corporations are sitting on may be a bad sign and not a good sign, an article from the Journal of Financial Planning about a new way to manage tail risk for client portfolios, and coverage of an emerging new product called a "stand-alone living benefit" designed to provide all the lifetime income guarantees contained in today's variable annuities but wrapped around a client's own investment account instead. We wrap up with a slightly more light-hearted list of investing tips and maxims that would probably be a good reminder for almost any planner and his/her clients. Enjoy the reading!
What’s The Point Of A Standard Of Care If It Can’t Be Enforced?
In the ongoing effort to differentiate, many financial planners are engaging in a "race to the top" to assert themselves as delivering the best quality advice subject to the highest standards. At the same time, the financial planning membership organizations are similarly competing to attract more quality members by implying their existing members are of the highest quality due to the organization's high Standard of Care.
Yet the reality is that most of the major financial planning organizations now have an almost identical standard of care... and as a result, the real differentiation is not what the standard of care is, but whether the members really adhere to it, even though most associations have no feasible way to monitor the activity of their members. Which raises the question - what's the point of even claiming a standard of care as a differentiator, if the organizations can't enforce those standards to deliver on the promise anyway?Read More...
Variable Annuity Guarantees May Be Too Risky Or Too Expensive, But They Can’t Be Both!
The variable annuity industry has a long history of criticism, generally stemming from the relatively high cost of their guarantees relative to less expensive investment alternatives. To burnish their value, in the past 15 years variable annuities have stepped up the guarantees that they provide, delivering a far wider range of income and death benefit features. However, in the face of wild market fluctuations – especially the 2008 financial crisis – many critics now also point out that the new guarantees of variable annuities pose new risks about whether the company will even be able to make good on its guarantees when the time comes. Yet the reality is that suggesting that variable annuities are risky and that the companies might not be able to pay on their guarantees would suggest that they’re not charging enough – implying that actually, variable annuities are too cheap, not too expensive! Alternatively, if the reality is that the current world of variable annuity guarantees really are too expensive, then there should be no risk at all, as the companies would have more than enough excess profits to handle the risks. So which is it at the end of the day? Are annuities really too expensive, or are they actually too cheap? Read More...
Treasury Releases Proposed Regulations For Portability Of Estate Tax Exemption
Since the beginning of 2011, clients who pass away and leave their assets to their spouse have been able to bequeath not only their property, but also their unused estate tax exemption. As a result, bypass trusts are no longer necessary to preserve the estate tax exemption of the first spouse to die. Unfortunately, though, the portability of the estate tax exemption is only temporary, and is scheduled to expire at the end of the year.
Recently, though, the Treasury put forth Proposed and Temporary Regulations, intended to clear up some areas of confusion around portability, and invite public comments to further press towards Final Regulations.
While the regulations bring some welcome clarification - and a few positive changes for planners as well - the fact that the Treasury went through the trouble of working on regulations also suggests that they, too, expect portability to ultimately become permanent. While most planners aren't counting on the change yet, the new regulations do provide a good opportunity to better understand the details of portability and how it may play out in the future.Read More...
Social Media Is Just Another Medium For Being Social
As the visibility of social media continues to grow, many advisors have become skeptical about whether it represents a new trend for growing a business that's here to stay, or simply a fad that will soon be gone. Yet the reality is that when done best, social media isn't really a new strategy for growing a business at all, it's simply a new medium to facilitate the same strategy advisors have always engaged in: to become someone that people know and trust, to whom they would be comfortable to refer, and cultivating a network of prospective referrers. The difference is that with social media, the potential exists to reach both a larger and more focused network of potential target clientele, allowing the growth strategy to be implemented even more effectively. Read More...
