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What Cyborg Chess Can Teach Us About The Future Of Financial Planning

July 24, 2017 07:01 am 5 Comments CATEGORY: Planning Profession

The recent rise (and subsequent decline) of robo-advisors has generated much discussion about the threat (or lack thereof) that technology poses to human advisors. Yet, as discussed previously on this blog, the man vs. machine framing of the role that technology will play in the future of delivering financial planning advice may be too narrow. Instead, the combination of man and machine (i.e., the “cyborg advisor”) may pose the greatest opportunity to human advisors in the long run… and threat to those who lag behind.

In this guest post, Derek Tharp – our Research Associate at Kitces.com, and a Ph.D. candidate in the financial planning program at Kansas State University – examines how the game of 'cyborg chess' provides support for the idea that human-computer teams will remain superior to either humans or computers on their own (even when the intelligence of computers vastly outweighs that of humans), as well as some of the insights cyborg chess can provide about how the skills of cyborg advisors will differ from the traditional skills of advisors today.

'Cyborg chess' (or freestyle chess) is a version of chess in which humans can use any resources they want to improve their play… including today’s increasingly-sophisticated computer chess software. One interesting fact about of cyborg chess, as was previously noted by Tyler Cowen in his book Average is Over, is that human-computer duos consistently defeat both the best humans and the best computers. What's even more interesting, though, is that the humans in some of the world's best human-computer duos aren't even all that great at chess themselves! Which means the skills that let humans most effectively assist and execute chess software may be different than the knowledge needed to be a great chess player!

In fact, it turns out that to be skilled at cyborg chess, humans have to be good at letting computers do what they do best, and then excel in areas where humans are more effective. And while there are some obvious applications to financial planning, in areas such empathy and building client relationships (where humans will certainly remain relevant in the future), the same is even true in technical areas of financial planning as well, where computers are typically thought to have an advantage over humans. Specifically, humans can play an important role in areas such as helping computers know where to look for the best solutions, examining inconsistencies generated by different computer programs, helping computers to be more efficient in their calculations and analyses, and knowing the limitations of various programs and when they may generate recommendations that don't align with the real world. And of course, as technology becomes even more prevalent in financial planning, “finology”-focused soft skills and human aspects of giving financial advice will become increasingly important.

The bottom line, though, is simply to recognize that despite the view that computers will come to dominate certain areas within financial planning, the reality is that there are still ways that computer-human duos can be more effective than computers or humans alone. Additionally, this has some profound implications for the skills and knowledge that are needed to be a great financial advisor in the future, and those skills and knowledge may not necessarily align with what we think of (and currently teach under the CFP Board’s curriculum!) as the core competencies of great financial advisors today!

Weekend Reading for Financial Planners (July 22-23)

July 21, 2017 02:51 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the news that robo-advisor Betterment has raised yet another $70M round of venture capital funding, and boosted its valuation up to $800 million... though the company intends to use the dollars primarily to hire more human financial advisors, and launch new products, suggesting that even the leading pure robo-advisor is pivoting away from its roots to try to become a broader wealth management platform and brand.

From there, we have several more articles around the theme of advisor technology, including a fascinating look at how Morgan Stanley is planning to use big data and AI to augment the productivity of its financial advisors (with everything from tools that automatically monitor and provide updated portfolio recommendations to clients, to solutions that pre-draft relevant emails to clients and allow advisors to more easily customize and then send), a review of the advisor technology platforms of some of the smaller RIA custodians (including RBC Advisor Services, TradePMR, and SSG), a new advisor technology solution called "BizEquity" that helps advisors to do business valuations for their small business owner clients (either as a value-add, or a prospecting tool), and some tips on how to run an effective internal cybersecurity training session for your advisory firm.

We also feature a few practice management articles this week, from the reason why advisory firms should do less customization of their financial advice as the firm grows and adds more advisors, to how the rise of back-office custodians and technology has powered a growth of independent advisors and made it possible for even small "solo" advisory firms to be very successful (without the resources of a traditional wirehouse), why advisory firms need to focus on building a firm foundation before executing new growth initiatives, and a look at the relative dearth of internship opportunities in the independent advisory community (and some steps to take to fill that void).

We wrap up with three interesting articles, all looking at the ongoing evolution of investment theory: the first looks at how, even with the rise of passive index funds at an ever-lower cost, the fact that retail investors can't effectively own a market-cap-weighted index of global wealth means all investors ultimately have to make some "active" decision when it comes to asset allocation across the available indices and asset classes; the second is an in-depth look at the Adaptive Markets Hypothesis, and how it aims to explain the behavior of markets better than the Efficient Markets Hypothesis; and the last is a good discussion about the fundamental purpose of investing itself, and how a true goals-based approach to investing may entail different kinds of investment choices than asset allocations than the classic diversified equity portfolio (although for very long-term goals, even goals-based portfolios still end up being rather equity-centric!).

Enjoy the "light" reading!

Switching From Wirehouse To RIA – AUM And Revenue Requirements To Break Away

July 20, 2017 12:39 pm 1 Comment CATEGORY: Practice Management

The breakaway broker trend, which gained momentum in the aftermath of the financial crisis, has been underway for several years now. And in an environment where many 7- to 9-year post-crisis retention deals are expiring at the same time that wirehouses are reigning in their signing bonuses, there is a fresh wave of interest in potentially breaking away from wirehouses and transitioning to the independent RIA channel for the potential of greater income. However, there are many motivations which may lead to a desire to break away, and pursuing a greater "payout" alone is actually not the best reason to break away.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss different motivations for breaking away from a wirehouse to become an independent RIA, as well as the team characteristics – including revenue, AUM, and desire for independence – that tend to lead to better break away outcomes for advisors!

First and foremost, it is important to recognize the different ways that "take-home pay" are calculated in a wirehouse versus an independent RIA. In the wirehouse environment, brokers at the low end might take home 35% of GDC, while the biggest producers and teams may get to 50% to 55% in some circumstances. By contrast, independent advisory firms typically follow a "40, 35, 25 rule", that 40% of gross revenue goes towards paying advisors and the investment team, 35% goes towards overhead and administrative staff, and 25% is the profit margin left over. For a solo advisor, this may effectively equate to a 65% payout, by paying themselves both the "employee advisor" compensation and the profit margin. For a larger team, the calculation is messier, but in the end advisors are often able to keep 10% to 20% more of their gross revenue after making the switch.

That being said, there's a really important caveat to the comparison between wirehouses and an independent RIA. When you’re at a wirehouse, a lot of those cost decisions – about staffing, overhead, compliance, office leases, technology, etc. – are made for you. At an independent RIA, though, the responsibility is on you, as the owner-advisor. The flexibility of being able to make those decisions is what gives advisors some more operational leverage as an independent RIA, but it is also a lot of additional work - or at least responsibility - for you as the advisor. That’s the double-edged sword of going independent, and it's the reason why most advisors who break away don't do it for the money.

However, if they are independently minded, want to control their own destiny, want to be the owner of their business, and want to make all the decisions that go along with that... then breaking away may just be a small sacrifice to make for the long run. But if you're happy to have a firm make those decisions for you, then you're not going to be happier getting a few more points of take-home on your GDC but being required to shoulder the burden of all the responsibilities and decisions.

It's also worth noting that there are more and more options today for brokers who are breaking away and want assistance with the transition, to reduce the burden of responsibility. From platforms like HighTower Advisors and Dynasty Financial - who can recreate a lot of the infrastructure advisors are used to from their wirehouse - to consulting firms like Matt Sonnen at PFI Advisors that help with the transition, to technology benchmarking studies and compliance firms to help guide advisors, there are a lot of resources available. And the truth is that larger firms with higher levels of revenue (e.g., $5 million) can afford to hire staff to handle much of the responsibility, while solo brokers can also be successful in the transition, particularly those around the $50M to $100M of AUM level where brokers may be getting a 40% payout whereas successful solo RIAs are taking home 65% to 85% of their revenue (providing ample revenue to cover some additional expenses as an independent).

The key point in all of this, though, is simply to recognize that if you're considering whether to break away from a wirehouse to an independent RIA, have a clear picture in your head of why you’re breaking away before you do so. And just trying to make a few more points on your revenue is not the best reason. It may work out okay, but the biggest success stories amongst brokers who go to the independent RIA channel are the ones who want to be independent. In other words, ultimately it's not really a revenue or a size consideration that drives success during a breakaway - as it's viable at almost any AUM or revenue level - but rather, an advisor's desire for independence, with the burdens of responsibility and upside opportunity that comes with it!

Choosing An Appropriate Discount Rate For Retirement Planning Strategies

July 19, 2017 07:00 am 16 Comments CATEGORY: Retirement Planning

For most people, making financial planning decisions involves an evaluation of financial trade-offs. In fact, any decision about whether to save (or not) effectively boils down to a trade-off about whether to consume now, or later.

Of course, all else being equal, we virtually always choose to consume now, if we can. Delaying gratification requires at least some kind of incentive, to make it worth delaying. Or viewed another way, we “discount” the value of something in the future – because we have to wait for it – which means waiting must make something more valuable to ever be worth the wait.

Mathematically, we can quantify this “time value of money” as a discount rate, which represents the rate of growth that would have to be earned to make the waiting worthwhile. And the use of a discount rate is especially helpful when trying to compare strategies or choices that are dispersed or occur over time, where it’s not always intuitively obvious which is the better deal in the long run.

For instance, discount rates are used to evaluate whether it’s better to take a lump sum rather than ongoing pension payments, and to determine when it’s preferable to wait for (higher) Social Security payments, rather than starting early… both of which are trade-offs that entail payments over a span of years or even decades, and can be difficult to compare without a common framework. By calculating the "net present value" of the various alternatives, adjusted by an appropriate discount rate of interest, it's feasible to make better apples-to-apples comparisons.

The caveat, however, is that conducting such analyses still requires an appropriate choice for a discount rate of interest in the first place. In the context of financial planning strategies, the proper discount rate to use is literally the “time value of the money” for that individual – in other words, what return could be generated over time by the money, if it were in fact available today to be invested. Or stated more simply: the discount rate for financial planning strategies should be the long-term rate of return being assumed in the financial plan itself. Because it’s the portfolio to which the money could be added if taken earlier, and/or it’s the portfolio that will have to be liquidated to provide for spending needs if the payments are delayed until later.

Notably, the fact that the proper discount rate is the investor’s expected rate of return, means that the “right” discount rate will vary from one person to the next, based on their investment approach and risk tolerance. For those who are more inclined towards aggressive investments, a higher discount rate may be used, while those who are conservative will use a lower discount rate of interest (and those who hold all assets in cash might well use a discount rate near 0%!). Of course, the caveat is that investors must still be cautious to pick a discount rate that is actually realistic to the portfolio in the first place – otherwise, an unrealistically high discount rate will lead to decisions that turn out to be less-than-optimal after the fact, when the money-in-hand doesn’t actually produce the expected results!

#FASuccess Ep 029: Attracting Baby Boomers Digitally To A True Retirement Decumulation Specialty with Dana Anspach

July 18, 2017 07:01 am 14 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the twenty-ninth episode of the Financial Advisor Success podcast!

My guest on today's podcast is Dana Anspach. Dana is a financial advisor and the founder of Sensible Money, an advisory firm based in Scottsdale, Arizona, that oversees more than $130 million of investment assets for retired - or nearly-retired - Baby Boomer clients.

What's unique about Dana's advisory business, though, is that while the industry has been focused on the idea that younger Gen X and Gen Y clients will want to work with financial advisors virtually, Dana has built a firm where all of her 110 virtual clients – from as far away as Hawaii and Alaska – are Baby Boomers, not Millennials. And Dana attracts those virtual Baby Boomer clients to her specialized retirement planning solutions through her online writing on platforms like About.com's Money Over 55 section, Marketwatch's RetireMentors, and her own book "Control Your Retirement Destiny", which collectively are generating over 100 online prospects every year. And those virtual Baby Boomer prospects start by filling out a 40-question pre-meeting data gathering form, just to have the opportunity to talk to someone on Dana’s team about potentially working with the firm!

In this episode, Dana talks in depth about how she attracts prospects, screens them, presents her services to them, and onboards them, all without ever meeting them in person. She also shares the exact 3-meeting financial planning process she uses to generate a nearly-$7,000 average financial planning fee (without needing a separate data-gathering meeting), and why she chose to use a TAMP – a third-party asset management platform – to implement her client portfolios, while charging an overall 1.25% AUM fee for ongoing investment and retirement planning services.

We also talk about what technology tools Dana uses to deliver her services to her fully virtual clients, how she has systematized large portions of her practice – to the point that she's been able to hand off most her prospects and clients to employee advisors she's hired into the firm – and why she compensates the advisors in her firm with a base salary plus bonuses instead of the more "traditional" payment of a percentage of client revenue.

And be certain to listen to the end, where Dana talks about how she's leveraged the value of outside coaches to work through the inevitable challenges that have arisen in her practice, and how she structures her week to allow for the time she needs for client meetings, staff management, and still being able to do all the writing that continues to bring in new virtual Baby Boomer clients to the firm.

So whether you’re trying to have more success getting new clients through online and digital marketing, or simply want some perspective on how a retirement planning niche advisor has built her business, I hope you enjoy this latest episode of the Financial Advisor Success podcast!

Finology And Finding The Higher Purpose Of The Financial Planning Profession

July 17, 2017 07:01 am 7 Comments CATEGORY: Planning Profession

In the modern era, “money” is essential for survival, a means of converting our productive labor into a common unit of exchange that can be used to buy whatever we need. Yet at the same time, money is complex, and the incentives and motivations it stirs exerts powerful forces on us… such that, even though money is necessary for survival, many lack the basic “money competency” skills necessary to harness its power effectively.

Yet despite the essential nature of money, there is remarkably little research and understanding in how we relate to it. While economics studies how humans allocate scarce resources, and psychology studies the human mind and behavior, there is a gap at the intersection between the two – an emerging new body of knowledge, that financial planning pioneer Dick Wagner dubbed “Finology”.

The key to understanding Finology is to recognize that there are both interior and exterior aspects to our relationship with money. On the one hand, we can’t make financial recommendations without understanding what someone owns and owes, and how that fits within the current economic environment and existing tax laws. Yet that information alone isn’t enough, without also understanding someone’s personal goals and desires, their relationships with family and cultural beliefs, and their vision of what it takes to live “the good life”.

Unfortunately, though, the history of financial planning and its existing body of knowledge have focused almost entirely on the “exterior” factors of money and how it works, and relatively little regarding the individual and their relationship with money itself. Yet in a world where our ability to have a healthy relationship with money is increasingly essential to survive and thrive – or else, we succumb to a never-ending series of self-destructive money behaviors – Wagner suggests that financial planning itself is likely to emerge as a bona fide profession in the 21^st century… as financial planners themselves become Finologists in the future!