As baby boomers continue into their retirement transition, two portfolio-based strategies are increasingly popular to generate retirement income: the systematic withdrawal strategy, and the bucket strategy. While the former is still the most common approach, the latter has become increasingly popular lately, viewed in part as a strategy to help work around difficult and volatile market environments. Yet while the two strategies approach portfolio construction very differently, the reality is that bucket strategies actually produce asset allocations almost exactly the same as systematic withdrawal strategies; their often-purported differences amount to little more than a mirage! Nonetheless, bucket strategies might actually still be a superior strategy, not because of the differences in portfolio construction, but due to the ways that the client psychologically connects with and understands the strategy!Read More...
Would Financial Planning Be More Valuable If It Focused On The Short-Term?
What is the value of financial planning? What do you get from it? What does it really do for you? Historically, the profession has tended to answer these questions with explanations like "financial planning brings you peace of mind" and "financial planning gets you on track for retirement [or other] goals."
The problem is that these results are intangible and long-term, which makes them hard to define clearly and difficult to be held accountable to over a relevant time period. In fact, arguably one of the greatest challenges for the advancement of financial planning is our inability to clearly explain the value proposition and what clients will get out of it.
So what's the solution? Financial planning needs to redefine itself from long-term intangibles to short-term tangible results; after all, clients who can really see that the outcome of the planning experience has benefited them become true advocates of our services, and build the habits that ultimately lead to long-term success! Which in turn raises the question: what are some short-term tangible results we can establish to better demonstrate the value of financial planning?
Utility Functions in Financial Planning – A New Framework For Decision Making?
Making decisions about trade-offs that only have distant, future ramifications, and deal in abstract projections can be difficult for clients. Yet while we can always revisit decisions as time passes, the reality remains that in order to establish a plan in the first plan, we need to assess such uncertainties and make some initial decision. Would you rather have a plan that has a little risk of spending cuts and a high probability of excess wealth, or a plan with lots of risk of spending cuts that is less likely to leave over wealth you failed to use during your lifetime, none of which will be relevant for years to come? How do you weigh the risk of spending cuts against terminal wealth, or the volatility of a portfolio against the future impact it may have on spending?
Recent research suggests a new way to evaluate these problems, adopting utility functions that have been applied elsewhere in economics to the financial planning world, and opening up a new body of research in the process. While we may still have a ways to go before utility functions become commonplace in planning, this may be an early glimpse at the future of how we craft recommendations for clients... at least, if we can overcome some hefty hurdles, first.Read More...
Coming Soon: A Fiduciary Standard That Allows Fees AND Commissions?
For many years, the battle lines for the fiduciary standard have been drawn. On the one side are those who support the standard, suggesting that commissions and conflicted business models must be eliminated to protect the consumer. On the other hand are those who argue against the standard, suggesting that an option to purchase financial services products compensated by commissions is a choice that consumers can make for themselves and may even represent a less expensive option, especially for the small client. As a result, the battle for the fiduciary standard has been not only about what's best for the consumer, but whether entire business models could be eliminated in the process. In a new turning point, though, a recent letter by many organizations supporting the fiduciary standard have broken new ground in requesting that the SEC move forward with rulemaking by implementing a fiduciary standard that still allows commissions, suggesting that the two are actually compatible and can co-exist. Will this be a new turning point in the advancement of the fiduciary standard - a focus on client-centric fiduciary advice, regardless of compensation model?Read More...
Weekend Reading for Financial Planners (Mar 31 – Apr 1)
Enjoy the current installment of "weekend reading for financial planners" - this week's edition highlights a new analytical tool from Morningstar that can apparently help you to benchmark your (AUM) fees against the industry, an interesting perspective on what really makes clients refer you (hint: it's about what's in it for them, not for you), and a look at how easy it is to build a website these days (yet how many advisors still haven't done so). We also look at an article about how to have difficult conversations with clients, and two industry trends articles about Hartford's departure from the variable annuity space, and Prudential's departure from the long-term care insurance market (with Genworth stepping up to fill the void). We finish with an article about fixed income strategies that advisors are using in today's marketplace, a look at how the term financial planner is being misused around the world and what the Financial Planning Standards Board has to say about it, and a lighter look from the Harvard Business Review at two lists you should maintain every day - what you will focus on doing, and what you will commit to ignoring - to enhance your productivity and success. Enjoy the reading!
Why Celebrating The Decline of Wall Street Firms Makes Us Look Bad
As Wall Street firms continue to struggle, beset from all sides by a waning public image, financial uncertainties, numerous regulatory battles that could drastically change their business model, and an ongoing defection of brokers and clients, the independent financial planning community continues to grow. In fact, within a few years, Cerulli predicts that wirehouses will no longer be the largest financial services channel. Yet at the same time, an increasing number of financial planning practices are not only taking business away from traditional wirehouse firms, but proactively focusing client attention on it with every media article that discusses troubles on Wall Street, to emphasize how their firm is different. The challenge, though, is that by trying to differentiate from the Wall Street firms by talking about their problems, we don't actually elevate ourselves - we remind clients of the trust problems in the financial services industry. The end result - celebrating the decline of Wall Street wirehouses may actually help to drag us down with them!Read More...
Butchers, Dieticians, Brokers, and Advisors
In the ongoing debate about the fiduciary standard, it continues to be difficult explaining to the public just what fiduciary is and means, and how there's a difference between brokers who sell products and fiduciaries who give advice. A recent video by Hightower Advisors tries to illustrate the point by comparing butchers who sell meat to dieticians who give advice about what to eat; you wouldn't expect your butcher to give objective dietary advice, and by analogy you shouldn't expect your broker to give you objective financial advice, either. If you want advice about what to eat, you go to a dietician, and by analogy when you want financial advice, you go to a fiduciary. Yet while the video does a good job drawing the distinction between brokers and fiduciaries, it perhaps unwittingly implies that recent regulatory and advocacy efforts may be misguided. It would be nonsensical to pass a law requiring all butchers to become trained dieticians to give advice about eating under a uniform dietary advice standard, when at the end of the day their job is simply to be a butcher and sell meat; extending the analogy, does that mean it is equally absurd to expect a uniform fiduciary standard for brokers? Is a better alternative just to require butchers to call themselves butchers, and brokers to call themselves brokers, and let neither give advice or hold themselves out as an advisor in the first place?Read More...
Roth vs Traditional IRA: The Four Factors That Determine Which Is Best
To Roth or not to Roth. It is a question that planners and their clients commonly face, whether making the decision regarding an annual contribution, or about converting (or not) an existing retirement account.
Yet while the appeal for lifetime tax-free growth from a Roth may be appealing, the reality is that the Roth is not always the winning choice, and there are many myths and misunderstands about Roth accounts that make it difficult to know which is best.
The reality is that there are four (and only four!) fundamental factors that determine whether a Roth will or not will be more effective than a traditional pre-tax retirement account. Some factors are always in favor of the Roth account, but others can work against the Roth account; in fact, blindly choosing a Roth and ignoring the relevant factors can actually lead to wealth destruction! By knowing the four factors and avoiding the Roth myths, though, planners and clients can be assured of making an effective wealth-building decision.Read More...
Monitoring A Financial Plan in the Digital Age
Historically, the update of a financial plan has been a somewhat arduous process, as new data is gathered manually from the client, entered into financial planning software, analyzed for problems or opportunities, and then finally delivered to the client. Perhaps even more challenging is the fact that it's never quite clear when or how often to do the plan update; annual updates are proactive but often produce a lot of work when nothing has actually changed, yet waiting for the client to request an update can be too reactive. In the digital age, though, monitoring a financial plan will be very different. As integrated technology allows plan details to updated automatically and continuously, we will reach the point where you don't notify the client that it's time for a plan update; the planning software will notify you!Read More...
Weekend Reading for Financial Planners (Mar 24-25)
Enjoy the current installment of "weekend reading for financial planners" - this week's edition highlights some recent activity regarding fiduciary, from an surprising alignment between NAPFA, the FPA, and FSI against the latest Department of Labor proposals on fiduciary, to an article exploring how wirehouses may already be shifting their brokers towards fiduciary, and a profile of a former broker who suggests that the wirehouse model (at least in its current form) will be dead by the end of the decade. From there, we look at a review by Bill Winterberg of the latest iPad, along with how mobile apps are evolving in the RIA marketplace. On the investment front, there's an interesting new type of annuity that may be coming soon, which would allow advisors to attach an income guarantee to an investment account without tying up the entire account itself inside the annuity, an interesting article by Larry Swedroe suggesting that "buy what you know" is actually not a good investment strategy, and a striking look at the Wall Street meltdown in the financial crisis suggesting that the SEC's change in net capital limits for broker/dealers in 2004 may not have actually been to blame. We wrap up with a warning from Hussman that an army of angry Aunt Minnies may be signaling a market peak and the onset of a new bear market, and a much lighter piece pointing out that you can lose so much productivity by working long weeks that you'd be better off cutting back to 40 hours. Enjoy the reading!
