Nerd's Eye View blog

What’s Your Longevity Assumption – Are Planners Being Too Conservative?

March 20, 2012 03:34 am 16 Comments CATEGORY: Retirement Planning

Monte Carlo analysis has become a fairly widespread tool for financial planners to use to understand the implications of market volatility and return uncertainty on the ability of clients to achieve their goals.

Yet the uncertainty in retirement isn't just about the returns that will be earned on investments that are necessary to support spending, but also how long that spending must last. Notwithstanding the uncertainty of mortality, though, most financial planners select a fixed - albeit conservative - time horizon for the portfolio, such as 30 years for a 65-year-old couple. But can this strategy make the plan too conservative? After all, a 90% probability of success - which corresponds to a 10% chance of failure - is actually only a 1.8% probability of failure when it assumes the couple will live until age 95 (given the low likelihood of a client actually surviving that long), and in turn means the client may be saving more, spending less, or retiring later than is really necessary!

Which raises the question - are we being too conservative with our mortality/longevity assumptions? Read More...

The Delivery of Financial Planning in the Digital Age

March 19, 2012 01:36 pm 7 Comments CATEGORY: Practice Management

As financial planning begins its transition into the digital age, the tools and technology that we use to deliver financial planning will change. Increasing use of account aggregation platforms by consumers like Mint.com will mean that clients come to the first meeting with their financial lives already detailed, from a net worth statement to asset allocation details to a breakdown of cash flow. This in turn will allow planners to greatly expedite the planning process - plugging in data immediately in the first meeting to begin crafting financial planning projections live, with clients, who discuss and input their goals on the spot. The end result - an electronic plan, as there will be no need for paper - will provide clients with both actionable steps and recommendations, and the ability to drill down for further detail (through the client software) if they wish. And the entire process will be completed not in a series of meetings, split up by a multi-week break for analysis, but instead in a single meeting, drastically enhancing the efficiency and productivity of the process for both the client and the planner. In turn, though, planners will be forced to add value not by just helping clients get their financial house in order - thanks to technology, it will already be in order! - but by actually delivering quality advice and a good planning experience!Read More...

Weekend Reading for Financial Planners (Mar 17-18)

March 16, 2012 09:00 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition highlights an interesting article about the benefits and risks of exchange-traded notes, and two new articles about retirement spending and how to consider more flexible retirement spending plans. We also look at two striking investment pieces, one from Morningstar Advisor that highlights upcoming research about how the rise of index trading may be increasing the correlation of markets and reducing the benefits of diversification, and Mauldin's weekly update suggesting that Greece's restructuring deal is not the end of the European debt crisis. We wrap up with a nice article from Bob Veres about what it takes to be a successful financial planner, some tips from a recent Harvard Business Review blog about how to make yourself more focused and productive to reduce feelings of burnout, and the big media news of the week - the very public resignation of a Goldman Sachs executive director named Greg Smith, suggesting that the company has lost its moral bearing. Enjoy the reading!

Does Being A Comprehensive Planner Make It Harder To Be Referred?

March 15, 2012 01:00 pm 2 Comments CATEGORY: Marketing

One of the primary business virtues of comprehensive financial planning is the deeper relationship that is formed as a result of going through the financial planning process. The experience helps to engender trust between the advisor and the client, which in turn can aid in client retention, and make the client more comfortable referring the advisor to others. Yet at the same time, one of the primary challenges of being comprehensive and holistic is that when you do so much for the client, it's difficult for the client to explain what it is the advisor really does, in the process of making a referral.

In fact, a recent survey highlights this striking contrast - clients of holistic advisors were almost 20% more likely to provide referrals, and amongst those who didn't refer, clients still generally felt that holistic advisors were more likely to have earned the right to receive referrals. The survey results also paradoxically revealed that clients who didn't refer their holistic advisors were almost 30% more likely to state it was because they didn't know any referrals or were uncomfortable to make referrals!

In other words, holistic advisors were simultaneously more likely to earn the right to receive referrals, yet ended out making a significant portion of their clients less comfortable and less able to think of anyone to refer!Read More...

Forget Harvesting Losses! It’s Time To Harvest Gains!

March 14, 2012 01:12 pm 26 Comments CATEGORY: Taxes

Prior to the implementation of the so-called "second Bush tax cut" - the Jobs Growth and Tax Relief Reconciliation Act of 2003 - the long-term capital gains tax rate was 20%, which was reduced to 10% for those in the lowest tax bracket. With the 2003 tax legislation, the maximum long-term capital gains rate was reduced to 15%, with a tax rate of 5% for the bottom two tax brackets, and in 2008 the latter rate was reduced to 0%. Those 15% / 0% long-term capital gains rates remain in effect today, and are scheduled under the Tax Relief Act of 2010 to continue until the end of 2012. After that point, the current laws expire, and the long-term capital gains rate reverts to its prior 20% / 10% rates... with the addition of another 3.8% for high income clients under the new Medicare unearned income tax! Not only does the scheduled increase in long-term capital gains rates represent a rising potential tax burden for clients in the future, but it also creates a surprisingly counter-intuitive but beneficial tax planning strategy - instead of the traditional approach of harvesting capital losses, in 2012 it's time to harvest long-term capital gains!Read More...

FPA Experience: The Big Show in Financial Planning

March 13, 2012 01:00 pm 1 Comment CATEGORY: Conferences

Every community has its home - that place we all feel compelled to return to from time to time. In the financial planning world, that home is the FPA Experience conference - the annual convention of the Financial Planning Association that has become the biggest event of the year dedicated to the financial planning profession. Thousands of people from across the country - and increasingly, around the world - feel the need to visit the financial planning "homeland" and attend the conference. Some attend for the continuing education credit; others attend to be a part of their financial planning community. Personally, though, I believe the best reason to attend the conference is to see the latest offerings in the exhibit hall for the financial planning world, from products to services to vendors and technology providers. In fact, I would even say we have a professional ethical obligation to see the "big show" in financial planning at least once every couple of years.

Is It Time to Redefine The Value Of Financial Planning To Expand Its Reach?

March 12, 2012 11:58 am 8 Comments CATEGORY: Practice Management

As financial planning continues to grow, it becomes more and more competitive, and increasingly difficult for firms to differentiate themselves. As a result, firms slow their growth rates, and some struggle to survive or grow at all. While most firms work harder and harder to make marginal improvements in their process, service, and value, to differentiate themselves from their competition, there is an alternative available: to seek to completely redefine the financial planning value proposition, letting go of things that are no longer truly important, and instead focusing on creating value that will make financial planning relevant to new audiences. And as financial planning enters the digital age, there is perhaps more opportunity than ever to begin doing things in a completely different - and better - way. So if you could rewrite the financial planning value proposition from scratch, would you still be doing it exactly the way that you do? Or is the reality that by letting go of "the way things have always been done" we could recreate a financial planning offering that would reach more people than ever? Read More...

Weekend Reading for Financial Planners (Mar 10-11)

March 9, 2012 10:00 pm 4 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition highlights an array of industry practice management articles, leading off with a new discussion of "super ensemble" firms - the emerging regionally dominant wealth management firms with $5 billion or more of AUM that are challenging both small local firms and big institutional competitors. We also look at articles about the quickening pace of consolidation, the rising trend of large firms hiring career changers to replace retiring advisors as there aren't enough young people entering the industry, a prediction that flat fees will soon replace AUM as the primary method of advisor compensation, and a look at a new advisor firm offering from a Wharton professor seeking to provide a client-centric platform for new advisors to build their businesses. We finish with a good article from economist Gregory Mankiw in the New York Times about what carried interest really is and why it's so hard to figure out how to tax it, an intriguing look at the risks that western civilization faces from which it must emerge or face a risk of collapse, and a fascinating look at how the popular 60/40 portfolio may actually be far more risky than we commonly believe. Enjoy the reading!Read More...

Protecting The Public Is About More Than Just Fiduciary; Competence Matters, Too

March 8, 2012 03:25 pm 8 Comments CATEGORY: Planning Profession

Notwithstanding some of the successes of the Financial Planning Coalition in pushing forward the fiduciary battle in Washington, requiring all advisors to act in the best interests of their clients is still an uphill fight.

Nonetheless, the fiduciary movement seems to be gaining momentum, from coming regulations from the Department of Labor to reforms in 401(k) plans to the scrutiny of regulators in the aftermath of debacles from Stanford to Madoff. But what happens if the fiduciary fight is won over the next few years? Does that mean the public is now protected? Perhaps not.

After all, it doesn't really help to ensure that advisors act in the interest of their clients, if there's no assurance that advisors have the actual knowledge, skills, and expertise to craft appropriate recommendations and deliver the right solutions to clients in the first place. In other words, protecting the public is not just about fiduciary. To restore the public's trust in advisors, the fight must be about competence, too.Read More...

Growing a Planning Firm In The Digital Age: The Rise Of Inbound Marketing

March 7, 2012 02:16 pm 22 Comments CATEGORY: Marketing

Over the years financial planners have had a love/hate relationship with marketing. In most of those years, though, it's more of a hate/hate relationship. The traditional methods of outbound marketing - from cold calling to traditional advertising - have had so little benefit for the overwhelming majority of planning firms, that most don't even have a budget for marketing in the first place. To the extent any business development occurs, it's strictly from referrals, and any "marketing" expenses don't extend much further than paying for social events with clients or centers of influence to cultivate more referrals.

But as the digital age reaches financial planning, an entirely new marketing opportunity emerges: inbound marketing. The basic principle: instead of blasting out solicitations hoping you happen to hit a prospective client like finding a needle in a haystack, create content that is useful, relevant, and interesting for your target clients, and let them find you.
Read More...