Nerd's Eye View blog

Weekend Reading for Financial Planners (May 19-20)

May 18, 2012 08:02 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with a discussion of the latest shot fired in the SRO debate, as BCG and the Financial Planning Coalition respond to the latest FINRA estimate of SRO costs.

From there, we look at three significant articles on retirement income planning, including: the latest thoughts from Bill Bengen showing that the 4.5% withdrawal rate is still working just fine, even for a 2000 retiree; an article from the Journal of Financial Planning showing how holding several years of the portfolio in a cash reserve INCREASES retirement failure rates; and a discussion from Bob Veres in Financial Planning magazine about whether we need to change our retirement spending assumptions.

Beyond that, we have a number of interesting markets and investment pieces this week, including highlights from James Montier's opening keynote speech from CFA Institute earlier this month, a look at how 'adaptive' asset allocation holds more promise than traditional strategic allocations, a prediction from Mauldin that Germany is waving the white flag and clearing the way for the ECB to print Euros to solve the Eurozone problems, and ongoing worries from Hussman that we may be dancing at the edge of an investing cliff.

We wrap up with three interesting articles: a scathing 'anonymous' insider letter to Mark Zuckerberg shining a light on the investment bank realities of the IPO marketplace; an article by Angie Herbers about how the greatest problem in most advisory practices is the owner (and how to better get out of your own way for your firm's success); and tips for stressed-out advisors to try to (re-)gain a hold of some balance and efficiency in their practices. Enjoy the reading!

Do Our Brains Really Even Know How To Evaluate A Monte Carlo Analysis?

May 17, 2012 11:03 am 21 Comments CATEGORY: Retirement Planning

As a growing body of research shows, our brains are not quite the logical, rational decision-making machines we think they are – or at least, wish they could be. Instead, our brains take shortcuts; we substitute easier questions for difficult ones, often without realizing it, and respond accordingly with our words and our actions. This can be especially problematic in the world of financial planning, where we often ask clients to make difficult decisions with limited information.

As a result, questions like “what is an acceptable probability of success/failure for your retirement plan?” often get switched for other questions, like “how intensely bad would you feel if your retirement plan failed?” While the questions are still similar, there is an important difference: if you have not clearly defined both the meaning of success and the meaning of failure, your clients may misjudge the intensity of the consequences, leading to an irrational and inappropriate decision about how much or how little “risk” to take.Read More...

Is The Fiduciary Standard Alone Enough To Protect The Public?

May 16, 2012 11:02 am 4 Comments CATEGORY: Planning Profession

One of the major reasons that advocates recommend the fiduciary standard is the belief that if only everyone were subject to the standard, fewer client abuses would occur, because advisors would fear the repercussions (i.e., legal liability) of inappropriate recommendations that fail to meet the standard. Yet at the same time, the financial services industry has been plagued with scandals, and it's not just Bernie Madoff, Allen Stanford, and numerous commission-based advisor improprieties; in the past three years, there have even been investigations against two former NAPFA presidents for malfeasance. Which raises the question - if even people who have led such a fiduciary-centric organization as NAPFA can still conduct such misdeeds, does fiduciary really provide the necessary consumer protections? Or is the fiduciary standard really only effective for those who weren't likely to violate its principles anyway?Read More...

Is Quarterly Performance Reporting Too Frequent For Clients… Or Not Frequent Enough?

May 15, 2012 11:02 am 10 Comments CATEGORY: Practice Management

As financial planners - especially those who provide comprehensive financial planning services - try to convey the overall value of the services they provide, it is increasingly popular to reduce how often portfolio performance is reported to clients. As the theory goes, if performance is reported less frequently, clients will fixated on it less often.

Yet perhaps the reality is not that performance reporting is making clients focus on investments, but instead that clients are simply being prudent stewards of their wealth who want to know how they're progressing towards their goals?

If that's the situation, then the reality is that restricting access to good portfolio information may not make clients think about it less, but instead may make them worry about it more! Which means, counter-intuitively, that the best way to make clients focus less on investments may be to make information available even more often!
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Technology Will Improve Financial Planning And Augment Planners, But It Won’t Replace Them

May 14, 2012 11:03 am 12 Comments CATEGORY: Planning Profession

The financial planning world is in a state of change, as the rise of the digital age begins to exert its impact upon the profession. Thus far, trends have included the shift to outsourcing, the rise of web-based software, and a growing number of planners using services like GoToMeeting and Skype to supplement face-to-face meetings with more virtual interactions. As the coming decade wears on, technology will play an increasing role in the financial planning world, driving change in everything from how we deliver services to the client experience.

Nonetheless, while technology will continue to augment financial planners, it will never replace them, for one simple reason - real financial planning solutions require clients to implement recommendations and make changes in their lives, and there are few forces for behavior change more effective than the accountability of another human being. Which means, simply put, as long as we are human beings and our brains operate the way that they do, effective financial planning will require another human being at the other end of the relationship, especially in times of stress and when we need an outside perspective. Technology alone may give clients the answers... but the fact that we all don't get the right amount of exercise, eat a perfect diet, and take all the other steps necessary to become optimal human beings, makes it clear that technology delivering information alone will never be the solution.

Weekend Reading for Financial Planners (May 11-12)

May 11, 2012 06:02 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition focuses entirely on practice management issues, leading off with a discussion in the Journal of Financial Planning about whether the profession needs to institute a process of peer review to both clean up those delivering poor advice, and to help challenge everyone to deliver better advice. From there, we look at some articles about how to navigate the challenges of being in a small firm, from how to demonstrate that you can compete with the services of larger firms, to supporting the career development of staff in a small firm environment, to managing the challenges when you're both the business owner and the financial advisor driving the firm. We also look at some articles that share how to know whether your website is a clunker, how advisors are adopting video on their websites, and how your marketing efforts should be certain to both capture target clients and allow unqualified clients to slip through your marketing net so you don't waste time finding out you can't work with them anyway. We also look at a good article by Mark Tibergien about the key traits for an enduring advisor firm, and a discussion by Bob Clark of how some independent broker-dealers are stepping up to define a new offering - with remarkably high payouts for the B-D world - to be appealing to the new independent advisor. Wrapping up, we look at an interesting article from the Harvard Business Review about how Gen X and Y are redefining a new, more human definition of what it means to be a "professional" and a nice article from Bill Bachrach reminding us how important it is to take a real vacation - with some concrete tips about how to really do that, especially if you're not good at taking vacation in the first place. Enjoy the reading!

Will Veralytic Reform The Life Insurance Industry?

May 10, 2012 11:06 am 11 Comments CATEGORY: Insurance

Life insurance policies - permanent ones in particular - have long been difficult to accurately evaluate, due to the relative opacity of actual pricing representations comingled with performance assumptions in policy projections.

To address this challenge, a company called Veralytic has developed a tool to "x-ray" through a life insurance policy illustration, evaluating and benchmarking the underlying policy expenses and their viability.

In the near term, Veralytic's analytical tools may provide a way for financial planners to finally conduct effective due diligence on client proposed and existing life insurance policies.

In the longer run, though, the transparency and benchmarking that Veralytic is bringing to the life insurance industry has a chance to truly reform the industry, making it clear which products and companies are truly competitive and which are not. But Veralytic cannot reach a tipping point without getting more users on board; accordingly, they've offered readers of this blog a special deal to take a test drive!Read More...

Why Continuing Education Plus Multi-Disciplinary Networking Makes For A Bad Chapter Meeting

May 9, 2012 11:07 am 6 Comments CATEGORY: Planning Profession

Continuing education content has long been the anchor of the professional association chapter meeting. It creates a common purpose and bond for the community to meet, break bread, and form relationships with colleagues and peers.

Yet in recent years, several financial services associations have shifted from making CE the centerpiece of core membership community-building, to the anchor around which multi-disciplinary networking is supposed to occur.

Unfortunately, though, the approach is fatally flawed, as affiliated professionals are unlikely to find the content and sponsors relevant, and CE can take up so much of the meeting time there is little left to actually network!

As a result, many organizations are at a crossroads – to either really restructure meetings to allow for proper and structured networking opportunities, or to refocus on using the chapter meeting once again to build community around a core membership.

Paying For Long-Term Care Insurance With A 1035 Exchange

May 8, 2012 11:05 am 18 Comments CATEGORY: Insurance

While the tax code does allow for the tax deductibility of long-term care insurance premiums, the treatment is very limited. Only premiums up to prescribed IRS limits are allowed, and the premiums (in addition to other medical expenses) must exceed the 7.5%-of-AGI threshold to be deductible at all. (Now 10% of AGI for those under age 65, and 10% of AGI for those age 65 or older after 2016!)

However, new rules under the Pension Protection Act of 2006 - delayed to only take effect beginning in 2010 - provided a new means for tax-favored LTC payments: by completing a 1035 exchange from an existing life or annuity policy into a long-term care policy. While the 1035 exchange merely defers the gains associated with the life or annuity policy, the tax-free nature of LTC benefits effectively ensures that the taxable gain disappears entirely.

As a result, clients with an existing life or annuity policy with a gain may wish to complete a 1035 exchange - or more commonly, a partial 1035 exchange each year as the LTC insurance premium is due - to gain more preferable tax treatment for funding their LTC coverage.Read More...

LearnVest – A Glimpse Of Financial Planning’s Future Serving The Masses In The Digital Age?

May 7, 2012 11:03 am 17 Comments CATEGORY: Planning Profession

Although financial planning seeks to improve the lives of all who need help making better financial decisions, in practice its scope has mostly been limited to those with a relatively high level of affluence, at least compared to the "average" American. Due in large part to a perceived limitation of business models, the profession has struggled to find ways to effectively serve the broad middle market.

Where financial planning firms have failed, though, a technology company is finding success, as "start-up" firm LearnVest - a hybrid of technology and financial planning, seeded with enough money to make it one of the larger independent financial planning businesses in the country - leaps forward with a goal of reaching tens of thousands of people or more every year, and potentially hires the dozens of CFP certificants it will take to serve them.

Are we catching a glimpse of what the middle market financial planning firm of the future will look like? Will a technology firm employing financial planners set the model that solves the challenge the financial planning profession couldn't?Read More...