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?
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
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...
Adjusting Safe Withdrawal Rates To The Retiree’s Time Horizon
Most planners are familiar with the 4% safe withdrawal rate research, first established by Bill Bengen in 1994 and based upon a 30-year time horizon. However, a common criticism of the research is that many clients don't necessarily have a 30-year time horizon - it may be longer or shorter, depending on the client's individual planning needs and circumstances. Yet in reality, there is nothing about safe withdrawal rates that must apply only to a 30-year time horizon. In fact, research exists to demonstrate the safe withdrawal rate over a range of time horizons as short as 20 years (where the safe withdrawal rate rises as high as 5% - 5.5%) or even less, to as long as 40 years (where the safe withdrawal rate falls to 3.5%). And in turn, changing the time horizon and the withdrawal rate also affects the optimal asset allocation, making it slightly more equity-centric for longer time horizons, and far less equity-centric for shorter time horizons. In the end, this means that there is no one safe withdrawal rate; instead, there is a safe withdrawal rate matched to the time horizon of the client, whatever that may be! Read More...
How Do You Combat The (Too) Long Financial Planning Meeting?
Financial planning can often involve some pretty long meetings, simply given the complexity of both the lives of our clients, and the solutions from which they must choose. Unfortunately, though, recent research shows that when we have to stay mentally focused for an extended period of time, it can actually lead directly to less effective decision making. Consequently, asking clients to make important decisions at the end of a long financial planning meeting - even one filled with great information and education - may actually be the worst way to lead the client to a well-thought-out decision, due to mental fatigue! Fortunately, though, there are solutions. Some planners may choose to adjust how meetings are structured, making the meetings shorter and/or presenting decision-making opportunities to clients earlier (before they are so mentally fatigued). Alternatively, it turns out that a remarkably effective solution is to actually refuel the brain, with some carbohydrates/sugars that bring the brain the glucose it needs to refresh itself. But in the end - whether it's a shorter meeting, a cookie, or some fruit juice - it's probably time for planners to pay more attention to the client's state of mind before moving to the decision-making phase of a financial planning meeting!
Weekend Reading for Financial Planners (Apr 28-29)
Enjoy the current installment of "weekend reading for financial planners" - this week's edition highlights the big industry news: legislation proposing that all investment advisors be regulated by an SRO, with an implication the SRO would be FINRA, although another new SRO (perhaps SROIIA?) could fill the void instead. Continuing the theme, we also look at an article by Don Trone exploring how we might measure just how much of a fiduciary an advisor really is. From there, we have a brief look at the other 'big' news this week - the release of Google Drive - and why advisors should steer clear, at least with their client and business files, along with a review of the last article from this month's Journal of Financial Planning, building on the idea that the best withdrawal strategies should not just defer pre-tax accounts as long as possible but instead should whittle them down bit by bit over time. Next, we look at three practice management articles: one about how firms are increasingly developing talent in-house because the young advisor shortage is putting upward wage pressure on hiring from the outside; how it's crucial to have compensation conversations upfront to avoid resentment and problems later; and how hiring friends and encourage friendships in the workplace can actually be a good thing, despite the common taboo. We wrap up with three interesting investment articles: the first from Morningstar Advisor about why absolute return funds are failing to deliver; the second about how to change the Sharpe ratio to better account for real world market risk and volatility; and the third by Jeremy Grantham of GMO, highlighting that as money managers try to manage their career risk and avoid getting fired, they create some incredible market volatility and inefficiencies along the way. Enjoy the reading!
Are We Overstating The Consequences Of Social Security's "Insolvency"?
The latest release of the 2012 Social Security Trustees Report shows once again that the Social Security trust fund is not only heading for insolvency, but doing so at an increasingly rapid rate, with current projections showing total depletion by 2033. Yet the reality is that the Social Security trust fund is only used to pay Social Security benefits that can't be funded from Social Security taxes alone - which even by 2033 are projected to cover 75% of payments due! Consequently, for most financial planning clients, who may only rely on Social Security retirement benefits for 25%-50% of total retirement income (or even less in some cases), the impact may not really be very severe at all; a 25% reduction in Social Security payments that are only 25% of retirement income constitutes a 6.25% pay cut, that doesn't even occur for over 20 years! Are we overstating the impact of Social Security's fiscal woes for the average financial planning client? Read More...
In The Future, The Best Firms Won’t Find New Clients; The New Clients Will Find Them
As the financial planning world continues its journey into the digital age, marketing and growing a financial planning practice faces new challenges. Some firms suffer as methods no longer work the way they once did, while others struggle to implement new strategies like blogging and social media without any clear strategy or understanding of how to do it successfully. Yet through it all, recent marketing research on advisory firms has shown a new category of marketing that has quietly emerged as the marketing method with the greatest growth on an absolute and relative basis: online search, where the firm attracts clients through Google, Bing, other search engines, and social media sharing. While the rise of online search is still in a nascent phase, its prospects are bright as the world goes digital. Accordingly, the best firms are beginning to take the key actions now that will be necessary for success, from better defining target clientele, to creating relevant content and distributing it, to beefing up the raw aesthetic quality of their websites so they leave a good impression - so that in the future, they won't have to find new clients, because the new clients will find them!Read More...
The Asymmetric Value of Delaying Social Security Benefits As The Ultimate Hedge
Despite a growing body of research suggesting that most retirees would benefit by delaying the onset of Social Security payments, the majority who are eligible still elect to begin receiving them as early as possible. In no small part, this appears to be attributable to a "take the money and run" mentality from retirees, who simply don't see the value of delaying as being worth the risk of foregoing benefits. And without a doubt, there is a material risk that the retiree will not live to the so-called "breakeven point" where the delay in benefits is worthwhile.
However, what most retirees fail to recognize is that while there is a risk to delaying benefits and never fully recovering them, the upside for living past the breakeven point isn't just that the money is made back; it's that the retiree can make exponentially more. And in fact, these asymmetric results - where the retiree only risks a little by delaying, but stands to gain far more in the long run - are further magnified in situations where the client lives dramatically past life expectancy, experiences high inflation, and/or gets unfavorable portfolio returns - which are, in fact, three of the greatest risks to almost every retiree.
As a result, the reality is that delaying Social Security benefits may actually be one of the best triple-hedges available to any retiree - simultaneously protecting against poor returns, high inflation, and longevity!
Are Financial Planners About To Get Blindsided On Their Qualified Plan Clients?
Over the past few years, the Department of Labor has been working to bring transparency of fees and pricing to qualified plans, culminating in new regulations going into effect this year that will require new disclosures of direct and indirect compensation of service providers to the plan and the plan participants. While generally targeted at the segment of qualified plan consultants and advisors who regularly work with qualified plans, the reality is that any financial planner who has even just one qualified plan may be subject to the new rules - a fact that many are unaware of.
Yet with the new 408(b)(2) rules set to go into effect in just 2.5 months, financial planners who provide any consulting, investment advisory, or other services have very little time to get up to speed on drafting and preparing the appropriate disclosures, or deciding whether to just walk away from their qualified plan clients. The decision may vary from firm to firm, but inaction is no excuse - especially since if the disclosures aren't provided in a proper and timely manner, the plan fiduciary will actually be required by the Department of Labor to fire the advisor!Read More...
