Financial planning is hard work. It's hard work for the clients, who must spend far more time than they are accustomed in the process of digging through their personal financial lives and their goals. It's also hard work for the financial planner, who invests an incredible amount of time into the process of creating a financial plan for the client, entering client data into financial planning software, "crunching" the numbers, and then crafting a written plan to explain and justify the results and the associated recommendations. Yet as planning software becomes increasingly more complex, we are approaching a difficult crossroads: the depth of the planning software requires more and more time to do the analysis, and necessitates more and more written detail to support the software output. As a result, the planning process itself drags out, taking hours and hours to create a plan and weeks and weeks to deliver recommendations to clients. But when did the complexity of financial planning software begin to drive the planning process, instead of being a tool to expedite it? Has our financial planning software become the enemy that's ruining our productivity, instead of improving it? Read More...
Weekend Reading for Financial Planners (Jan 28-29)
Enjoy the current installment of "weekend reading for financial planners" - this week's edition (similar to last week) highlights several more recent studies on trends in the financial services industry, including what financial planners tend to charge for their services, trends in wealth management in 2012, and some dramatic differences in how RIAs view investment management versus the rest of the investment industry, as well as the new ways young planners are entering the industry. We also look at some practice management articles, from a brief overview of what the cloud computing movement is all about, to the use of coaches, and different ways to manage your staff for optimal growth. In addition, there's some coverage of this week's FSI OneVoice conference, and we wrap up with an especially interesting (although not terribly optimistic) article from John Mauldin about the current outlook in Europe, and the risk of a "tail event" that could dramatically impact markets in 2012. Enjoy the reading!
Are Today’s Low Rates Making Young Adults Save Less? Or More?
With stocks experiencing a lost decade, bonds barely keeping up with inflation, and savings accounts generating virtually no yield at all, it is a daunting environment for clients to save and accumulate. Many question whether saving is even worthwhile; if the client can't earn anything on money saved, there's little economic benefit to delaying gratification, and the incentive is to just spend it now. On the other hand, low returns also mean that if the client ever hopes to retire, it may require more saving than ever, given that low returns mean less compounding. And so the real question for Generation Y - today's young adults - is which way will it go: will low returns disincentivize saving, or help people redouble their efforts to save even more? Read More...
CFP Board Relaxes Its Position On Financial Planner Bankruptcies… Sort Of
As the difficult economic environment continues, bankruptcy filings in the United States continue to occur at an elevated rate. And it appears that financial planners are having their share of bankruptcies as well... requiring the CFP Board via their disciplinary process to adjudicate whether a CFP certificant should receive a public letter of admonition, or has his/her marks suspended or revoked.
With a rising number of financial planner bankruptcies putting pressure on their disciplinary resources, the CFP Board has proposed a change to how it treats such bankruptcy situations.
The upshot: a bankruptcy by a financial planner will no longer bar him/her from getting or keeping the CFP marks. However, going forward, any bankruptcy by a financial planner will be publicly disclosed for the following 10 years on the CFP Board's website.Read More...
Backdoor Roth IRA Contributions – Strategy Or Step Transaction Abuse?
As a part of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), income limits on Roth conversions were repealed, starting in 2010. However, while TIPRA removed income limits for Roth conversions, it did not eliminate the income limits for new Roth contributions.
As a result, a new creative use of Roth conversions opened up: just contribute to a non-deductible traditional IRA, and then complete a Roth conversion immediately thereafter. Since neither transaction individually has a contribution limit, the client can still get money into a Roth IRA each year, regardless of the still-remaining income limits on Roth contributions. The end result: accomplishing a "backdoor Roth IRA contribution" for someone who wouldn't normally be eligible to make a Roth IRA contribution in the first place.
There's just one problem: the IRS can still call a spade a spade, and the rising abuse of this backdoor Roth IRA contribution "loophole" may bring about its permanent end.
Does Making A Planning Firm Saleable Reduce The Desire To Actually Sell It?
Over the past decade, an increasing number of financial planner baby boomers have reached the point that they would like to retire out of their practices; as a result, the 2000s saw a dramatic increase in the focus on succession planning, including how to prepare a financial planning firm for sale and steps to make the business more saleable and valuable.
Yet the reality is that once a financial planning firm is saleable and able to function effectively without the daily involvement of the founding principal, it's simply an investment holding like any other one; except it has an incredible cash dividend yield on top of significant appreciation potential.
Consequently, as the process of transitioning firms to saleability continues, a new challenge is beginning to emerge: planners who are successful in making their planning firm saleable and valuable are suddenly finding that once that point is reached, they no longer necessarily want to sell (all of) their business after all, which would force them to reinvest the proceeds into lower-return investments that could diminish their own retirement!
Weekend Reading for Financial Planners (Jan 21-22)
Enjoy the current installment of "weekend reading for financial planners" - this week's edition highlights a number of recent studies on trends in the financial services industry, including the tendency of investment advisors to claim they're financial planners without really having the expertise or providing the comprehensive planning services, to the rapidly growing market share of RIAs (and the shrinking share of wirehouses). We also look at an article about the dramatic shift underway towards tactical asset allocation, some new research about how to adapt safe withdrawal rates to more customized investment and time horizon assumptions, and two investment pieces about the economic outlook in Europe and here in the US for 2012. At the end is a good reminder that the specific choice of words we speak in meetings can really matter to clients, and a profile of Texas Tech University as a leader in providing financial planning education... even though many firms still seem more interested in hiring based on "Who You Know" than "What You Know" these days. Enjoy the reading!
How Soon Will States Close Their Estate Tax Loopholes?
The implementation of the Economic Growth and Tax Relief Reconciliation Act of 2001, which both increased the Federal estate tax exemption and more importantly eliminated the state estate tax credit, started the process of "decoupling" between the Federal estate tax and various states. As the years moved forward, many states retained a $1 million estate tax exemption amount, decoupling their exemption from the Federal amount that has ultimately risen to its current $5 million level. However, the reality is that a second decoupling just occurred in 2011 - the decoupling of state estate tax exemptions from the Federal gift tax exemption. As a result, a new state estate tax planning "loophole" has opened up, creating a planning opportunity for many clients... but only until the states close the loophole.Read More...
Your Clients Don’t Care THAT you do Financial Planning; It’s About WHY You Do It
In the early years of my career, I genuinely hated the concept of marketing. I had learned about the powers of persuasion in school. I was taught during an internship that the success rate of closing a client was x times greater if you can stir up emotions like fear and uncertainty. I understood the role of marketing in the world of widget makers as a way to introduce their commodity to the market, but struggled to reconcile the use of these forces when dealing with individuals and families, many of which have little to no education around money and investing.
In recent years, however, I have made a few discoveries that have completely reshaped my viewpoint on marketing. And while I may still not have all of this figured out, it has become painfully clear to me over the last several years that marketing our services and our value is something we, as a profession, are absolutely horrible at doing.
Why I Still Ask Firms About Their AUM
In recent years, as more and more planners have shifted their businesses to an AUM model, it has become increasingly popular for the media, when quoting planners, to note the firm's AUM. In response, a backlash has also begun to emerge, as many planners justly point out that the magnitude of the firm's AUM does not necessarily correlate with the quality of the firm's financial planning advice or how "good" the planner really is, and consequently suggest that the media stop quoting AUM statistics in articles. Yet while I agree with the criticism - AUM is not likely a very effective measure of how good a planner's advice might be - I still think it's highly relevant. Not because I'm trying to understand the quality of the planner's financial advice, but because it provides immediate insight into the nature of their financial planning practice and the relevance of the challenges the planner may face.Read More...
