As financial planners, we have a drive to see our clients succeed, as both a mark of successful financial planning, and because no one wants to be the planner whose clients fail (for both personal fulfillment and legal liability reasons!). As a result, planners often encourage a steady path that may entail some "prudent" risk, but nothing excessive. Yet this often puts planners in a difficult position with very entrepreneurial clients, who often take significant career, business, and financial risks in an effort to build their businesses and significant wealth. Even if the planner is not directly responsible for the entrepreneurial client's business outcome, we don't necessarily want to be there when it all falls apart, either. In fact, if the client has a choice between an entrepreneurial venture or a salaried career, the planner typically recommends the path of lesser risk; it's just prudent, good planning. Yet in the end, does that mean good financial planning actually discourages entrepreneurship and makes it nearly impossible for clients to actually accumulate very significant (e.g., $10M+) wealth?Read More...
Weekend Reading for Financial Planners (Mar 3-4)
Enjoy the current installment of "weekend reading for financial planners" - this week's edition highlights an intriguing analysis from Morningstar's new number crunching on investor returns, finding that investors may not actually be chasing hot mutual funds nearly as much as previously believed, along with the latest contribution by Miccolis and Goodman to the Journal of Financial Planning, this time focused on the problems with measuring correlation. From there, we look at a few industry articles, from the possibility that FINRA may open up BrokerCheck data to private vendors to better get information to investors, to Mark Tibergien suggesting how to determine which parts of your firm you should or should not outsource. On the investment side, the focus turns to PIMCO's launch of an actively-managed ETF version of their flagship PIMCO Total Return fund, a primer on how the Euro breakup might go (it's not as bad as the media makes it out to be), and the latest quarterly letter from Grantham. We also look at two interesting recent articles from the New York Times, one by Robert Shiller on how high IQ investors actually invest differently, and another discussing how companies study shopper habits to market more effectively, and conclude with a quick review of the latest US News and World Report "Best Jobs in 2012" ranking which lists Financial Adviser at #23. Enjoy the reading!
Is The Retirement Plan With The Lowest "Risk of Failure" Really The Best Choice?
One of the primary virtues of using Monte Carlo analysis for evaluating a retirement plan is that it frames the conversation in terms of the probability of success and the risk of failure, rather than simply looking at how much wealth is left at the end of the plan. As a result, the focus of planning shifts from maximizing wealth, to maximizing the likelihood of success and minimizing the risk of failure.
Yet the reality is that while "failure" from the Monte Carlo perspective means the client ran out of money before the end of the time horizon, in truth most clients will not simply continue to spend on an unsustainable path right to the bitter end. Instead, if the plan is clearly heading for ruin, clients begin to make adjustments. Some failures may be more severe than others, and consequently some plans may require more severe adjustments than others.
But the bottom line is that a "risk of failure" is probably better termed a "risk of adjustment" instead. However, when viewed from that perspective, it turns out that the plan with the lowest risk of adjustment may not be the ideal plan for the client to choose!Read More...
Why Revenue-Based Incentives: 6 Ways Your Staff Impacts Your Planning Firm’s Revenue
Running a successful planning firm means not only being an effective financial planner, but also having the support of an effective staff. While a good hiring process can help to ensure that the right people are on board, the reality is that providing appropriate compensation with the right incentives can greatly facilitate the success of the firm. Yet there is much disagreement about the best way to provide incentives: should it be based on individual merit, or the revenue of the firm? Many suggest the former, noting that staff can control their individual merit more than they can impact the growth in the firm's revenue. But is it really true that staff - who are not out on the streets trying to find and develop new prospective clients - have so little impact on the revenue of the firm? Recent research suggests otherwise, as firms with revenue-based incentives nearly tripled their revenue growth from the bottom of the markets in 2008, compared to firms with merit-based bonuses. Which means in reality, your staff may impact the planning firm's revenue far more than you realize!Read More...
Do Retirees Spend More, Or Less, In Their Later Retirement Years?
Estimating retirement expenses over the entire duration of a client's retirement years is a fundamental part of retirement planning. Yet there is surprisingly little agreement from planners about the spending behaviors of clients as they go through retirement.
Some suggest that retirement spending rises as clients age, due to the accumulating impact of health care expenses. Others suggest that retirement expenditures decrease, as clients reduce their spending in areas like travel and restaurants. Still others suggest that retirement spending is relatively level and simply keeps pace with inflation, as the increases in one category (e.g., health care) offset the decreases in others (e.g., travel and restaurants) - which, notably, is also the implicit assumption of steady inflation-adjusted spending that underlies the research regarding safe withdrawal rates and how much income is sustainable from a portfolio.
So which is it? A growing cadre of research suggests that in reality, client spending probably does decrease over time... with some notable exceptions. And if you don't use a proper assumption, you may force clients to save more than is needed, or retire later than is necessary!Read More...
3 Ways The Digital Age Will Change Financial Planning In The Next 10 Years
Over the past two decades, the world has begun its transition into the information/digital age. However, the progression has been uneven, and the world of computers are still far more integrated in some industries and professions than others. The pace of change is accelerating, though, and in the coming decade, it will be time for financial planning to enter the digital age, driven in large part by major demographic shifts, as more and more of Generation Y become the newest clients and newest staff members in firms that will increasingly be led not by baby boomers operating their traditional model, but by the more technology-inclined Generation X. And in this future world, where people are connected by so many means, geography itself is less and less relevant; employees can work for employers, and clients can engage planners, even if they are a thousand miles apart, when it's a digital, virtual world. As the importance of geography declines with the transition to the digital age, three key aspects of financial planning - practice management, marketing and business development, and the actual delivery of financial planning services - will be dramatically altered.
Weekend Reading for Financial Planners (Feb 25-26)
Enjoy the current installment of "weekend reading for financial planners" - this week's edition highlights a study from the Journal of Financial Planning suggesting that proactive use of reverse mortgages can actually increase sustainable retirement income, two practice management articles about focusing on organic growth in your business and documenting your office procedures (including the fact that often you, the planner, are the greatest roadblock to that process). We also highlight an interesting piece from the Wall Street Journal suggesting that investors may now be investing so much in index funds that markets really are becoming less efficient and more correlated, a fascinating interview with Woody Brock suggesting that there's a difference between "good deficits" and "bad deficits" for government spending, and an adaptation of the upcoming annual shareholder letter from Warren Buffett in Fortune magazine that highlights why investing in stocks is so much more productive than investing in bonds or gold for the long run. We wrap up with three somewhat offbeat articles, one about how governments could use our behavioral finance irrational tendencies to help be better citizens (and have fun doing it!), a second that questions whether we are all really as busy as we think and claim we are, and a final article that highlights Pinterest, the latest emerging "social network" site that is growing like wildfire (with 73 million users already) and that you'll probably hear more about in the coming year. Enjoy the reading!
The Latest Trend In How Advisors Are Using Social Media (With No Compliance Headaches!)
As social media continues to take the world by storm, advisors are increasingly under pressure to begin using social media in their own practices. Yet the advisory community has generally been slow to adopt, due both to the compliance challenges involved, and a general wariness about whether prospective clients would really make a decision to trust and work with an advisor based on social media marketing. In fact, a recent study by the Aite Group suggested that "the bloom is off the rose" when it comes to advisors adopting social media to bring in new business. Yet at the same time, a new social media trend is emerging - using social media not to develop new clients, but to better communicate and interact with existing clients. And the good news is that this approach to social media potentially has far fewer compliance headaches, too, because it's less about talking, and more about listening.
Why Merely Mediocre Returns Can Be Worse Than A Market Crash
With two market "crashes" in the past decade, prospective baby boomer retirees have grown increasingly afraid of the risk that the next market crash could topple their retirement if it comes at the wrong time. This fear has been exacerbated by the recent stream of research on safe withdrawal rates, that highlights how an unfavorable sequence of returns in the early years of retirement can derail a retirement plan. Yet the reality is that failure is dictated not simply by the magnitude of the market decline, but the speed at which it recovers. As a result, while clients are increasingly obsessed about the risk of a sharp decline in the markets (or a so-called "black swan event"), the true danger is actually an extended period of "merely mediocre" results that are uncommon but not rare, not a black swan market crash!
IRS Revamps Schedule D, Introduces New Form 8949 For 2011 Tax Reporting
On October 3, 2008, then-President Bush signed into law the Emergency Economic Stabilization Act of 2008. Although it was widely known as the "bailout" bill - it was the legislation that authorized the Treasury Secretary to use $700 billion under the Troubled Asset Relief Program (TARP) - the legislation also contained a number of measures to help bring in additional revenue to the Federal government.
Amongst those provisions was the establishment of a new requirement for financial intermediaries to track and report cost basis on securities transactions to the IRS on an updated Form 1099-B, to better ensure that taxpayers properly their gains and losses on investments and pay taxes as appropriate, and the new rules took effect for stocks that were purchased in 2011. Over the long run, the new rules will make it easier for clients to track the cost basis for most of their investments, simplifying reporting and preparing returns during tax season.
However, in the near term, the introduction of cost basis reporting brings new complexities and challenges to manage. To help support taxpayers through this process, the IRS has revamped Schedule D, and introduced the new Form 8949 - which may have to be done three times for many individuals! - for reporting capital gains and losses for the 2011 tax year.
