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2017 Highlights – The Top 20 Nerd’s Eye View Blog Posts You Might Have Missed

December 25, 2017 07:01 am 0 Comments CATEGORY: Nerd's Eye View

As 2017 comes to a close, I am once again so thankful to all of you, the ever-growing number of readers who continue to regularly visit this Nerd's Eye View blog, and have been kind enough to share the content with your friends and colleagues as well (which I greatly appreciate!). Over the past year, the cumulative readership of the blog has grown yet another 25%, with more than 200,000 unique readers coming to Nerd's Eye View last month. And we're gearing up for a number of major new upgrades in early 2018 as well, from new CE opportunities, to back-end changes to our platform that will help to further improve your own reader experience.

Yet notwithstanding how many of you have made reading the Nerd's Eye View a weekly habit, I realize that the sheer volume of articles can feel overwhelming at times, and that it's not always possible to keep up with it all. And once published, blog articles are usually quite quickly left in the dust as the next new one comes along.

Accordingly, just as I did last year and in 2015 and 2014, I've compiled for you this Highlights list of our top 20 articles of 2017 that you might have missed, including some of our most popular episodes of the Financial Advisor Success podcast. So whether you're new to the blog and #FASuccess podcast and haven't searched through the Archives yet, or simply haven't had the time to keep up with everything, I hope that some of these will (still) be useful for you! And as always, I hope you'll take a moment to share podcast episodes and articles of interest with your friends and colleagues as well!

In the meantime, I hope you're having a safe and happy holiday season. Thanks again for another successful year in 2017, and I hope you enjoy all the new features we'll be rolling out in 2018, too!

Weekend Reading for Financial Planners (December 23-24)

December 22, 2017 02:58 pm 6 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the passage of the Tax Cuts and Jobs Act of 2017 (which was formally signed into law by President Trump today), which will brings substantive corporate tax reform, and a slew of tax changes for individuals... many of which impact financial advisors directly, from the potential for a new deduction for pass-through advisory businesses (as long as their income remains below a certain threshold), to the repeal of the deduction for investment advisory fees.

Also in the news this week was the release of the 2nd version of the CFP Board's proposed changes to the Standards of Professional Conduct (which would keep the "fiduciary at all times" rule, but removes the presumption that consumers can even rely on a CFP professional to actually be providing financial planning), a new TD Ameritrade study on breakaway brokers finding that they are increasingly forsaking the idea that broker-dealers will be able to successfully navigate the DoL fiduciary rule (and thus are opting for the RIA channel instead), the latest Fidelity RIA benchmarking study that finds advisory firm growth rates, profit margins, and fees are all under pressure, and a new Investor Bulletin from the SEC warning about hybrid B-D/RIA firms that may be inappropriately using (and/or failing to fully disclose) the costs of their wrap fees.

From there, we have several practice management articles this week, including guidance on why it's so important to find a business focus in the face of declining profit margins for advisory firms, why RIAs need their own "Zillow" platform that can reasonably estimate a true value of the advisory firm in an increasingly unbalanced market of one-time sellers and experienced serial buyers, what advisory firms should be doing now (while times are good) to prepare for the next inevitable bear market (whenever it may occur), and the reasons why Millennials require a fundamentally different approach to engaging financial planners (because they don't need advice on how to manage their accumulated resources... they need help developing policies that will allow them to accumulate those resources in the first place!).

We wrap up with three interesting articles, all around the theme of sexual harassment and diversity issues within our own financial advisory world: the first notes that recent sexual harassment revelations from Morgan Stanley's Harold Ford, and Sallie Krawcheck's #metoo story, may only be the tip of the iceberg in what is still a very male-dominated advisory industry; the second raises the question of whether sexual harassment in advisory firms may be even worse in the small-firm environment (where the harasser may be the boss and founder, and there's no HR department to file a complaint with); and the last looks at how to better have these conversations about diversity and inclusiveness, which can be challenging and awkward even for those who are well-intentioned.

And be certain to scroll down to the end, for a light-hearted video on the ongoing Bitcoin crazy, as the cryptocurrency experiences yet another highly volatile week.

Enjoy the "light" reading, and have a happy holidays!

First Look At CFP Board’s Revised Proposal For Professional Standards Of Conduct

December 21, 2017 01:27 am 9 Comments CATEGORY: Regulation & Compliance

Beginning with the CFP Board's formation of the Commision on Standards back in late 2015, the CFP Board has been in the process of updating our Standards of Professional Conduct for CFP certificants for the first time since 2007. After an 18-month process, in early summer of this year, the Commission on Standards released its first proposal of the new Standards of Professional Conduct. Due to the complexity of adopting new standards for nearly 80,000 CFP professionals, the CFP Board put the newly proposed standards out for a 60-day comment period. During that time, the CFP Board received a lot of feedback (over 1,300 public comment letters), which was incorporated into a newly revised version of the Proposed CFP Standards of Professional Conduct. Yesterday, December 20th, the CFP Board released the 2nd version of these proposed standards, and announced that a second comment period will open on January 2nd and run for 30 days, until February 2nd of 2018.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at at the changes made in the 2nd version of the Proposed CFP Standards of Professional Conduct, including the things the CFP Board got right in the revisions, some things they unfortunately walked back on, and some areas of focus for those drafting comment letters for the second comment period beginning on January 2nd of 2018.

First and foremost, when you subject a 17-page standards document to 1,300 hundred public comment letters, there are a lot of small tweaks that get made. Fortunately, the CFP Board is taking feedback seriously and should be commended for this. In the latest revision, important adjustments include: clarification was provided to the gifts and other "benefits" CFPs cannot receive from clients if it will compromise their objectivity; the requirement that CFP professionals cannot use the term "fee-based" to imply they're fee-only was expanded to stipulate that CFPs cannot use any other not-fee-only term to imply they are fee-only either; clarification that salary-based advisors who receive bonuses for product sales must still disclose this compensation as sales-related; and a new exclusion allowing advisors who use TAMPs to not run afoul of the fee-only rules simply for outsourcing investment management functions. Overall, these are good and reasonable changes.

However, there are a few areas in the new revised Standards of Professional Conduct that are more concerning. The first is that under the original proposal, the CFP Board significantly expanded the disclosure requirements for CFP professionals. Not only at the time the client engages the advisor, but also with a new “Initial Disclosure Information” document that would have to be provided to prospects, detailing the nature of the CFP professional’s services, a description of how they are compensated, and a summary of their conflicts of interest (basically an RIA’s Form ADV Part 2). But here, the broker-dealer community pushed back very hard in their comment letters, claiming that this new initial disclosure requirement would simply be too onerous for them. Which, in reality, really is hard to supervise, as this kind of upfront information document would likely itself be treated as “advertising” communication with the public under FINRA Rule 2210. And so the CFP Board backed off the upfront disclosure requirement, albeit while still keeping the requirement for disclosure at the time the client actually engages the CFP professional. Overall, it’s very unfortunate that the CFP Board backed off this initial disclosure requirement, but understandable, as higher standards do need to be administratively feasible.

The other, perhaps more concerning change that came through under the revised Standards of Professional Conduct, is a shift in the presumption of when a CFP professional is actually doing financial planning or not. This distinction has actually been a major issue under the CFP Board’s Standards of Conduct for a long time. Under the current rules, there is effectively a “loophole” that allows CFP professionals to escape their fiduciary duty under the CFP Board’s Standards, because the current rules state that a CFP professional only has a fiduciary duty to clients when doing financial planning or material elements of financial planning (which meant CFP professionals could avoid their fiduciary obligation by just not actually doing financial planning). Accordingly, it was a big deal that under the new Standards of Professional Conduct the new rule would become “fiduciary all the time” as a CFP professional, with a presumption that any time a CFP professional engages with clients, they are doing financial planning (unless proven otherwise). In the revised standards, though, the CFP Board has dropped this rebuttable presumption. As it stands, all CFP professionals will still be fiduciaries when providing financial advice – which includes product sales – but there’s no presumption that they’re actually doing financial planning just because they’re CFP professionals (which means they don’t have to adhere to the full Practice Standards for delivering financial planning). As a result, there are now basically have two types of CFPs: those who provide financial planning advice, and those who provide non-financial-planning financial advice and don’t have to adhere to the Practice Standards for financial planners. Confusing? Exactly.

In other words, all marketing to the contrary, the CFP Board's revised standards are effectively telling the public "it's not even safe to assume that engaging a CERTIFIED FINANCIAL PLANNER professional for financial advice will result in any actual financial planning." Which is problematic both for the weakened consumer protection, and the fact that it's not even clear how to apply a fiduciary duty to non-financial-planning financial advice, or what standards such a CFP would be held to.

If you agree that this is concerning as well, I hope you’ll submit a public comment letter next month. The point is not that every CFP professional must do financial planning for every client, but to emphasize to the CFP Board that when a CFP professional holds out to the public as a CFP, that the consumer should be able to safely assume they will be getting financial planning subject to the full standards that apply to financial planning, unless a clear advisory agreement and scope of engagement stipulates otherwise and the CFP professional clearly discloses this is not financial planning advice. Otherwise, the CFP marks risk simply becoming a misleading marketing label that implies to consumers a breadth of financial planning expertise and advice that the CFP Board doesn't actually require of those CFP professionals in the first place.

Why Two Incomes Aren’t Always Better Than One

December 20, 2017 07:01 am 14 Comments CATEGORY: General Planning

As gender dynamics in the home and workforce have continued to change (e.g., girls now outperform boys at every level of school and breadwinner mothers are increasingly becoming the norm), parents are no longer burdened with as strong of stereotypes influencing which parent (or both) should work. Which means parents have more opportunity than ever to be strategic in deciding how to structure their household, but with that increased flexibility also comes greater financial stakes – particularly for affluent households who are generally presumed to have both the most income potential as a dual-income household and the most opportunity to live off of one spouse's earnings.

In this guest post, Dr. Derek Tharp – a Kitces.com Researcher, and a recent Ph.D. graduate from the financial planning program at Kansas State University – examines why having two household incomes is not necessarily better than one, particularly given the ways in which real-world households tend to structure their expenses, and the potential to leverage the "non-linearity premium" to boost lifetime earnings for households with one earner instead of two.

Households with two incomes are generally considered to be more financially secure than households with one. However, research from Elizabeth Warren and Amelia Warren Tyagi indicates that despite the dramatic rise in total household income as families moved from a single-earner to a dual-earner structure (from the 1970s to the early-2000s), total discretionary income actually declined over that same time period. Which means total fixed expenses also rose dramatically (primarily due to the need to purchase a second vehicle and housing inflation as parents engaged in bidding wars to get their children into the best school districts), at the same time that families were losing an important financial safeguard: the ability for a non-working spouse to enter the labor force during a financial shock. Ultimately, this leads to the counterintuitive insight that dual-income households may actually be more fragile when facing a sudden loss of one spouse's income... but also an important corollary, that dual-income households can be most secure when they live off one spouse's income instead of two!

Additionally, while it would seem that dual-income households have an obvious advantage in total earning potential, this isn't necessarily the case. In some fields – particularly business, finance, and law – earnings potential exhibits what Harvard economist Claudia Goldin calls a "non-linearity premium", which means that someone who works half-time is generally going to receive less than half-time pay, whereas someone who works double the normal hours has the potential to receive more than double the compensation. In other words, a lawyer working 80 hours per week will generally outearn two lawyers each working 40 hours per week, and this is particularly true considering that a lawyer working 80 hours per week can expect to "peak" much higher in their career (e.g., making partner at a prestigious firm) than two lawyers each working 40 hours per week and sharing household responsibilities.

Ultimately, there are many financial considerations for households contemplating a dual-income versus a single-income approach... from emergency fund savings and disability insurance, to maintaining the earning capacity of a non-working spouse and considerations for divorce... and there are certainly many other non-financial considerations as well, but the reality is that it's not necessarily true that two incomes are always best. In terms of increasing financial stability and lifetime earnings potential, sometimes two incomes are not better than one!

#FASuccess Ep 051: What Robo-Advisors Can Teach Human Advisors About Evidence-Based Behavioral Finance with Dan Egan

December 19, 2017 07:01 am 3 Comments CATEGORY: Financial Advisor Success Podcast

Welcome, everyone! Welcome to the 51st episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Dan Egan. Dan is the Director of Behavioral Finance and Investments at Betterment, the so-called "robo-advisor" that now manages more than $12 billion of assets under management for over 300,000 clients.

What's fascinating about Dan, though, is not simply that he was an early employee and Director at Betterment as the company as grown, but specifically his role as the Director of Behavioral Finance at a robo-advisor. In a time when the primary criticism that financial advisors levy at robo-advisors is their supposed inability to help clients with their behavioral issues when it comes to investing.

In this episode, we talk in depth about the nature of the "robo-advisor" movement, why the reality is that Betterment and its ilk aren't really in competition with financial advisors because they serve a different kind of consumer with different needs, how Betterment over the years has built an increasingly more robust goals-based financial planning process for its clients, and the challenges and opportunities that come with trying to deliver financial planning and investment advice at scale - in a world where Betterment serves more than 300,000 clients, while the typical advisory firm has no more than about 100 clients per advisor.

We also talk about what Betterment is doing specifically from the behavioral finance perspective, how Betterment is actually testing behavioral finance interventions to help their clients using a robust scientific process, the kinds of evidence-based insights they're gleaning about how we can help clients better – including how the conventional wisdom of strategies like "proactively communicating with clients during times of market volatility" can actually backfire – and the ways that companies like Betterment may actually be better positioned to help clients with certain behavioral issues, because unlike most financial advisors Betterment doesn't have to rely on third-party technology firms and instead can build its technology tools to nudge clients in the exact direction they need.

And be certain to listen to the end, as Dan discusses some of the insights he's gleaned about where and how human advisors will continue to be superior to technology in some areas, even as technology makes other aspects of what advisory firms do less and less valuable and more automated for everyone.

So whether you have been contemplating offering your own robo-advisor solution, are interested in how you can better incorporate insights from behavioral finance into your practice, or are curious about the areas in which human advisors will continue to be superior to technology, I hope you enjoy this episode of the Financial Advisor Success podcast!

Individual Tax Planning Under The Tax Cuts And Jobs Act Of 2017

December 18, 2017 07:01 am 188 Comments CATEGORY: Taxes

Major tax reform typically only occurs once every decade or few. But after a tumultuous series of negotiations in both the House and Senate, a final reconciled version of the Tax Cuts and Jobs Act of 2017 appears to be heading shortly to President Trump for signature.

The legislation will result in substantive tax reform for corporations, with the elimination of the AMT and consolidation down to a single 21% tax rate, all of which are permanent. However, when it comes to individuals, the new legislation is more of a series of cuts and tweaks, which arguably introduce more tax planning complexity for many, and will be subject to a(nother) infamous sunset provision after the year 2025.

Nonetheless, the new tax laws have a lot to like for individual households, almost all of whom will see a reduction of taxes in the coming years (though not after the 2025 sunset). While 7 tax brackets remain, most are decreased by a few percentage points (to a top rate of 37%), along with the repeal of the Pease limitation. The AMT remains, but its exemption is widened. Most common deductions remain, though they are more limited, and an expanded standard deduction means fewer will likely claim itemized deductions at all in the future. There is a new crackdown on the Kiddie Tax (subjected to trust tax rates instead of parents' tax rates), but a much wider range of families will benefit from a great expanded Child Tax Credit (with drastically higher income phaseouts). And a doubling of the estate tax exemption amount – to $11.2M for individuals, and $22.4M for couples with portability, will make estate tax planning irrelevant in 2018 and beyond for all but the wealthiest of ultra-HNW clients.

Of particular interest for financial advisors are a number of key provisions. The controversial rule that would have eliminated individual lot identification, and required all investors to use FIFO accounting, is out and not included in the final legislation. However, also out is the ability to deduct any miscellaneous itemized deductions subject to the 2% of AGI floor – which means all investment advisory fees will no longer be deductible starting in 2018. In addition, several popular Roth strategies will be curtailed by the repeal of recharacterizations of Roth conversions (although the backdoor Roth rules remain). And while the deduction for pass-through businesses remains in place in the final legislation, and may be appealing for “smaller” advisors whose total income is under the $157,500 for individuals (and $315,000 for married couples) threshold. Although for larger advisory firms, the service business treatment is so unappealing, that large RIAs may soon all convert to C corporations (or at least, become LLCs and partnerships taxed as corporations under the “Check The Box” rules).

Ultimately, the new tax rules are actually complex enough that it will likely take months or even years for all of the new tax strategies to emerge, from when it will (or won’t) make sense to convert to a pass-through business, to navigating the new tax brackets, and the emergence of strategies like “charitable lumping” to navigate a higher standard deduction. In the near term, though, most are simply focused on taking advantage of end-of-year tax planning… especially taking advantage of deductions in the next two weeks that may not be available after 2017 once the Tax Cuts and Jobs Act is signed into law.

On the “plus” side, though, at least ongoing tax complexity means there will continue to be value for tax planning advice?