Nerd's Eye View blog

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...

Weekend Reading for Financial Planners (May 4-5)

May 4, 2012 07:05 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition leads off with a proposed change by the CFP Board to develop sanction guidelines to that financial planner wrongdoing can be disciplined more consistently, as the organization continues to refine its enforcement efforts. From there, we look at a review of the FPA's Financial Plan Development and Fees study, and some regulatory discussion about the Financial Planning Coalition's recent effort to push the SEC forward on fiduciary rulemaking, along with an article where Don Trone explores the importance of discernment - to ability to know between right and wrong - in applying a fiduciary standard. The Journal of Financial Planning has several interesting articles around long-term care issues for clients, ranging from a contributions article on continuing-care retirement communities, a look at how advisors are dealing with rising LTC insurance costs, and an interview with doctor-turned-financial-planner Carolyn McClanahan. We continue the look at elder planning issues with Ed Slott's review of the new proposed Treasury regulations to allow longevity annuities inside of retirement accounts (although the products have yet to gain any momentum outside of retirement accounts, either!). Wrapping up includes a look at why Mark Hanson thinks the housing market still may not be a bottom (despite calls for it during the spring season for the fourth year in a row), why Hussman thinks 5-year forward returns for stocks are negative and that a bear market may be coming soon, and an interesting story from NPR about the psychology of fraud and new research to suggest that an important way to keep people from wrongdoing is to make sure they stay in an ethical frame of mind when evaluating their own actions. Enjoy the reading!

(How) Do You Estimate Your Client’s Life Expectancy?

May 3, 2012 11:17 am 13 Comments CATEGORY: Retirement Planning

In order to do a financial plan for a client, it's necessary to determine the client's time horizon - which at the most fundamental level, is the time the client is expected to live. The client's life expectancy can impact the number of years of anticipated retirement, and even the age at which the client chooses to retire. Unfortunately, though, it's difficult to really estimate how long a client will live, and the consequences of being wrong and living to long can be severe - total depletion of assets. As a result, many planners simply select a conservative and arbitrarily long time horizon, such as until age 95 or 100, "just in case" the client lives a long time. Yet in reality, the life expectancy statistics are clear that the overwhelming majority of clients won't live anywhere near that long - unnecessarily constraining their spending and leading to a high probability of an unintended large financial legacy for the next generation. As a result, some planners are beginning to use life expectancy calculators to estimate a more realistic and individualized life expectancy for a client's particular time horizon. Will this become a new best practice?Read More...

Why Keeping A Mortgage And A Portfolio May Not Be Worth The Risk

May 2, 2012 11:17 am 49 Comments CATEGORY: Debt & Liabilities

Planners have long recommended that clients save and invest, even while they have a mortgage, since the long-term return on equities generally exceeds the interest rate on a mortgage. Yet in reality, investors don't simply choose to invest in equities because the return is higher than a fixed alternative; instead, investors demand an equity risk premium over and above the risk-free rate to make equity investing worthwhile. For the traditional investor, the equity risk premium has represented the excess return of stocks over long-term government bonds. Yet for the mortgage borrower, the available "risk-free return" isn't just a government bond, but to prepay the mortgage and eliminate the interest cost! As a result, while the investor looks for an equity risk premium over government bonds paying 2%, the mortgage borrower actually shouldn't invest in stocks unless there's an expectation to earn an equity risk premium over a mortgage interest rate that might be 4% to 5%! Consequently, clients should prepay their mortgages unless they expect a full 9%-10%+ return on equities in the current environment that sufficiently rewards them for the risk!Read More...