Nerd's Eye View blog

Who’s Really At Risk When Avoiding Overvalued Stocks?

November 7, 2011 11:27 am 15 Comments CATEGORY: Investments

A common complaint about the use of tactical asset allocation strategies - which vary exposure to bonds, equities, and other asset classes over time - is that they are "risky" to the client's long-term success. What happens if you reduce exposure to equities and you are wrong, and the market goes up further? Are you gambling your client's long-term success?

Yet at the same time, the principles of market valuation are clear: an overvalued market eventually falls in line, and like a rubber band, the worse it's stretched, the more volatile the snapback tends to be. Which means an overvalued market that goes up just generates an even more inferior return thereafter. However, greedy clients may not always be so patient; there's a risk that the planner may get fired before valuation proves the results right.

Which raises the question: is NOT reducing equity exposure in overvalued markets about managing the CLIENT'S risk, or the PLANNER'S?Read More...

Weekend Reading for Financial Planners (Nov 5-6)

November 4, 2011 05:01 pm 3 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - highlights this week include a few blockbuster articles, from a new call to the profession to adopt a more scientific and evidence-based approach to advancing financial planning, to an incredible new research report on how to develop staff and grow a firm, to a scary warning about the current regulatory winds buffeting financial advisors. We wrap up with three striking-but-bearish articles on the mortgage markets, the stock markets, and the economic situation in Europe and here in the US. Enjoy the reading!Read More...

Why Are Financial Planners So Afraid Of The Conference Exhibit Hall?

November 2, 2011 02:24 pm 9 Comments CATEGORY: Conferences

Every financial planner delivering advice to clients must, at some point, help the client interact with and implement advice with a financial service or product provider at some point. Depending on the planner's business model, the implementation of the advice may or may not directly command a commission, but even a fee-only planner ultimately recommends financial products and services. After all, you can't investment in an IRA without an IRA custodian, you can't buy mutual funds or ETFs inside the account without interacting with mutual fund and ETF product providers, and you can't buy insurance without an insurance company as part of the transaction. In fact, implementation of the advice IS the 5th step of the financial planning process. Which raises the question: given the reliance of financial planning on implementation using financial services and products, why do so many financial planners try so hard to avoid the conference exhibit hall? Are we shirking our professional due diligence obligations, or is there another issue at hand?

Making The Data Gathering Meeting Into A Client-Centric Positive Experience

October 31, 2011 01:59 pm 9 Comments CATEGORY: Practice Management

From the planner's perspective, the data gathering meeting is a core part of financial planning. As the 6-step financial planning process itself stipulates, you can't begin to analyze a client's situation and formulate recommendations until you have the client's data in the first place. Yet from the client perspective, the data gathering meeting can be an arduous process, and is also easily procrastinated, potentially delaying the entire planning process. It certainly is not something that most clients would describe as a positive or enjoyable experience. So what would it take to re-formulate the entire data gathering interaction, to change it from a planner-centric process into a client-centric positive experience? For starters, it needs lose the name: let the "data gathering" meeting become the "Get Organized!" experience!Read More...

Weekend Reading for Financial Planners (Oct 29-30)

October 28, 2011 08:18 pm 3 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - highlights this week include an article on the new coming wave of active ETFs, a few practice management pieces, a striking article on insurance companies using social media information for claims and even underwriting, and one of the best pieces I've seen yet on what Occupy Wall Street is really all about. Happy reading!Read More...

Why Is It Risky To Buy Stocks On Margin But Prudent To Buy Them "On Mortgage"?

October 24, 2011 01:48 pm 45 Comments CATEGORY: Debt & Liabilities

Clients who need to improve their prospects for retirement generally have three options: spend less, save more, or retire later. Technically, there is a 4th option - grow faster - but it is typically dismissed due to the risk involved in investing for a higher return. In practice, clients rarely seem to dial up the portfolio risk trying to bridge a financial shortfall in retirement, and taking out a margin loan just to leverage the portfolio to achieve retirement success would most assuredly be deemed imprudent and excessively risky. Yet at the same time, a common recommendation for accumulators trying to bridge the gap is to keep any existing mortgages in place as long as possible, directing available cash flow to the investment portfolio, and giving the client the opportunity to earn the "risk arbitrage" return between the growth on investments and the cost of mortgage interest. There's just one problem: from the perspective of the client's balance sheet, buying stocks on margin and buying stocks "on mortgage" represent the same risk and the same leverage, even though our advice differs. Are we giving advice that contradicts ourselves?

Weekend Reading for Financial Planners (Oct 22-23)

October 22, 2011 04:24 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - highlights this week include two new articles on safe withdrawal rate research, an investment discussion about Europe from John Hussman, a few practice management articles about business development and cultivating relationships (or not!), a controversial piece that 401(k) plans should have no more than 10(!) investment offers, and more. Happy reading!

Do Frequent Account Statements Make Clients More Concerned About Markets, Or Less?

October 19, 2011 04:21 pm 14 Comments CATEGORY: Investments

A common debate in the financial planning world is what we can do to make clients less focused on the short-term volatility of the markets. As the viewpoint goes, if we can help clients to pay less attention to the markets, they won't be so stressed in times of turmoil and will be less likely to make rash, impulsive decisions like bailing out in the midst of a downturn.

Accordingly, one common conclusion is that as planners, we should send statements to clients less often; after all, if we don't want clients to look at the markets so much, why do we keep sending them so many reports about what's going on in their portfolio?

Yet a recent new service for advisors, that in part provides even more regular reporting for clients, is discovering that the opposite may be true: that in fact, the best way to calm clients is not less reporting and information, it's more... as long as it's clear and relevant and puts the situation in context. Read More...

Charging Separately For Planning Can Make Clients Value It Less, Not More

October 17, 2011 01:02 pm 21 Comments CATEGORY: Practice Management

As planners continue to seek ways to make their businesses more stable, successful, and profitable, it has become increasingly popular lately to talk about including separate fees for financial planning services, often in the form of a retainer. As the general view goes, doing so allows you to stabilize your income with a steady retainer base, and simultaneously helps you to better reinforce the value of your financial planning by setting a clear price tag on it.

There's just one problem: When you look at business models outside of our industry, we see the reality is that setting a separate price tag on standalone services does NOT help consumers value and appreciate the service more. In fact, it helps them to minimize use of the service, and absorb the cost only reluctantly (and sometimes even resentfully) when absolutely necessary.

So does that mean by charging separately for financial planning, we're proactively DISCOURAGING clients from utilizing our financial planning services and encouraging them to think more investment-only!?Read More...

Weekend Reading for Financial Planners (Oct 15-16)

October 15, 2011 02:33 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - highlights this week include a number of articles on new investment vehicles coming down the pike, some interesting investment discussions from two of my favorite investment writers, John Hussman and John Mauldin, an interesting article suggesting perhaps we need to give clients MORE performance reporting information instead of less, and a white paper on implementing internships. Happy reading!Read More...