Nerd's Eye View blog

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...

Adjusting Safe Withdrawal Rates To The Retiree’s Time Horizon

May 1, 2012 11:14 am 7 Comments CATEGORY: Retirement Planning

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?

April 30, 2012 11:15 am 5 Comments CATEGORY: Client Trust & Communication

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)

April 27, 2012 05:00 pm 2 Comments CATEGORY: Weekend Reading

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!