Nerd's Eye View blog

Treasury Releases Proposed Regulations For Portability Of Estate Tax Exemption

June 26, 2012 11:01 am 1 Comment CATEGORY: Estate Planning

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

June 25, 2012 11:09 am 3 Comments CATEGORY: Marketing

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...

Weekend Reading for Financial Planners (June 23-24)

June 22, 2012 07:04 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with an editorial from Bob Veres about whether the Financial Services Institute is going to find itself on the wrong side of history, defending the status quo broker-dealer model against the underlying trend towards fiduciary advice. From there, we look at a recent announcement of FPA's new PlannerSearch tool for consumers, a new CRM package for smaller advisory firms, a nice article about how to select the right CRM package for your firm, and some tips about how to run a seminar marketing strategy effectively to grow your practice. We also look at an interesting article about important conversations to have with your clients, that includes a lot of stuff financial planners already know but a few good tips as well, and a nice article by Roy Diliberto pointing out that the best way to get extraordinary results from your firm is to make your employees extraordinary by giving them the opportunity to succeed and making sure you, the business owner, aren't being part of the problem. This week's reading also includes three investment articles: one that suggests the fate of municipal bonds may be more tightly linked with equity returns than we realize; the second providing a nice primer on the European crisis and how we got to where we are; and the last suggesting that Europe's moment of truth may be arriving, and that they will not be able to substantively kick the can further down the road. We wrap up with a nice article from Robert Shiller - a prospective commencement speech for finance graduates that provides a nice reminder of both the challenges that finance must tackle in the coming years, and the underlying social purpose for why the finance sector exists in the first place. Enjoy the reading!

The Impact of Fees And Investment Costs on Safe Withdrawal Rates

June 21, 2012 11:02 am 8 Comments CATEGORY: Retirement Planning

While the safe withdrawal rate research provides useful guidance to understand how much clients can safely spend as a baseline, it is based on historical index returns - even though in reality, clients cannot even invest directly in an index without incurring some investment costs, and many pay for the cost of a financial advisor in addition. As a result, many planners recommend that clients adjust their spending downwards to account for the costs and fees.

Yet the reality of the research is that while investment expenses do have a real cost, it has far less of a spending impact than most assume; a 1% expense ratio might reduce a 4% withdrawal rate not to 3%, but instead to 3.6%. This surprising result occurs because of the self-mitigating impact of investment expenses that are recalculated based on the client's account; when accounts are declining, the fees decline as well, while inflation-adjusted spending rises.

The end result is that while financial planners should not ignore the impact of expenses on sustainable spending, it's important not to overstate the impact, either, or clients may unnecessarily constrain their spending when they could be safely enjoying more of their money!Read More...

The Rise of Tactical Asset Allocation

June 20, 2012 11:06 am 16 Comments CATEGORY: Investments

The foundation of investment education for CFP certificants is modern portfolio theory, which gives us tools to craft portfolios that effectively balance risk and return and reach the efficient frontier. Yet in his original paper, Markowitz himself acknowledged that the modern portfolio theory tool was simply designed to determine how to allocate a portfolio, given the expected returns, volatilities, and correlations of the available investments. Determining what those inputs should be, however, was left up to the person using the model. As a result, the risk of using modern portfolio theory - like any model - is that if poor inputs go into the model, poor results come out. Yet what happens when the inputs to modern portfolio theory are determined more proactively in response to an ever-changing investment environment? The asset allocation of the portfolio tactically shifts in response to varying inputs!Read More...

Does Your Portfolio Have The Right Default Cost Basis Method?

June 19, 2012 11:04 am 12 Comments CATEGORY: Taxes

Although the tax laws have technically always required that, when investments are sold, the specific lots and their associated cost basis are identified to determine the amount of any gains or losses, in practice most clients have simply chosen after the fact - when the tax return is prepared - which shares were sold, selecting the lots that produce the most optimal tax result.

However, under new laws coming into effect, brokers and custodians will begin to automatically report transactions - including which lots were sold, the cost basis, the amount of gain/loss, and the date of acquisition and character of the loss - directly to the IRS, with sales locked in at the time the transaction settles. As a result, clients and their advisors must make proactive decisions regarding a proper method of accounting for portfolios, or run the risk that the "wrong" lots will be sold, with no way to remedy the situation after the fact!

And while the IRS does provide a default method of accounting that will apply, in reality most clients will find the default a sub-optimal solution. Which means the burden really shifts to clients and their advisors to put the optimal method in place... which first requires making the right decision about whether it's better to harvest gains or losses in the first place, depending on the client's situation!Read More...

3 Ways The Lack Of Young Planners Will Harm Financial Planning

June 18, 2012 11:03 am 15 Comments CATEGORY: Planning Profession

As the baby boomers move inexorably closer to the point where they begin to retire en masse out of the workforce, so too does financial planning move closer to the point where the majority of experienced practitioners and firm owners will begin to exit the business. Industry guru Mark Tibergien estimates that as many as 2/3rds of all financial advisors may look to exit in the next 10 years, requiring more than 200,000 new planners to enter the industry just to keep the total number of practitioners even. Yet the reality is that so far, the industry appears to be woefully behind. As a result of this prospective workforce distortion, financial planning will potentially undergo significant changes in the coming years, and not necessarily for the good. In a "seller's market" for talent, large firms that can compete with both training and resources, and that have the profit margins to absorb higher compensation costs, will survive and grow; on the other hand, smaller firms may find themselves in a plight of being "stuck" small, unable to attract or even afford the young talent necessary to grow. And in the process, the greatest loser may be the majority of the American public, who simply will not be served when a dearth of planners inevitably causes the few practitioners that remain to be attracted to the most lucrative high net worth clients.Read More...

Weekend Reading for Financial Planners (June 16-17)

June 15, 2012 06:00 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with a rather scathing article by NAPFA Chairman Ron Rhoades on why FINRA not only shouldn't be the SRO for investment advisors, but is failing its original charter and should be disbanded altogether. From there, we look at two technical estate planning articles - one on the different ways that incapacity is defined for trigger powers of attorney or even the competence to sign a Will or trust in the first place, and the other on how beneficiaries can potentially try to "bust" trusts that are no longer working as desired. We look at three practice management articles this week, including Mark Tibergien's latest offering on the importance of managing expenses as well as revenue growth, reporting on the recent FA Insight study showing firms with more widely distributed ownership are consistently better performers, and results from an Investment Advisor / ActiFi study at what practice management issues are most important to advisors and where they're currently getting help (surprising result - broker/dealers may be stepping up far more than custodians). We also look at an interesting retirement income analysis from Joe Tomlinson suggesting that SPIAs might be particularly effective for retirement portfolios despite - and in fact, because - of low current rates, and an analysis by Geoff Considine about why advisors may be giving short shrift to Master Limited Partnerships in their portfolios. We finish with a sharp analysis by John Hussman about what's really at the heart of the ongoing global economic malaise, an interesting write-up by Bob Veres about several presentations about trust at the recent FPA Retreat conference, and a lighter article by Abby Salameh on RIABiz abuot how to take a breath and relax to avoid being overwhelmed as a busy advisor. Enjoy the reading!

Fees And Fiduciary: Good Business, Bad Marketing

June 14, 2012 11:00 am 26 Comments CATEGORY: Marketing

As the financial planning profession continues its inexorable march towards a fiduciary client-centric standard of care that minimizes or outright avoids conflicts of interest, those most passionate about carrying the torch have often been the most vocal in promoting those standards within their own businesses. Yet recent research shows that from the consumer's perspective, "fiduciary" is confusing and the word "fees" evokes an outright negative response; the special meanings we attach to those words inside our industry have translated poorly to the general public. The key, then, is to figure out how to operate in the interests of clients, while communicating a message that is less about the battles being fought inside the industry and more about how the client benefits. Otherwise, while it's true that those firms doing the best job of truly serving clients may be rewarded with the most referrals, they may not be able to convert those referrals to clients and grow their businesses if they have dug themselves a hole they can't climb out of by using consumer-unfriendly terminology in the first place!Read More...

Will BrightScope Clean Up The Financial Services Industry?

June 13, 2012 11:02 am 13 Comments CATEGORY: Planning Profession

Between FINRA, the SEC, 50 state investment advisor regulators, and 50 state insurance departments, the world of financial advising is highly regulated, albeit in a very piecemeal manner. As a result of this fractured regulatory dynamic, the reality is that it can often be remarkably difficult for a prospective client to really check out information about an advisor, potentially requiring contact to as many as 102 different regulatory agencies just to determine if the advisor has a clean conduct record.

A new company called BrightScope is seeking to change that dynamic. By collecting publicly available data on advisors from the various regulatory agencies and aggregating it together on a single site that is easily accessible by consumers, BrightScope is helping consumers understand the conduct history of their advisors, in a manner better than the problematic FINRA BrokerCheck system.

And in the long run, BrightScope hopes to expand this even further beyond conduct alone by establishing standards and metrics for everything from advisor experience to education and credentials to investment recommendation performance results. But in the end, will BrightScope really be able to clean up the financial services industry - reaching enough consumers to make itself relevant and turn its service into a viable business model - or is this just another short-term fad that will fizzle away?Read More...