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Despite No More Delay, DoL Fiduciary Still Not A Done Deal Yet!

May 25, 2017 01:47 pm 5 Comments CATEGORY: Regulation & Compliance

The big news this week was an Op-Ed published by Labor Secretary Acosta in the Wall Street Journal that declared, in no uncertain terms, that there will not be any further delay in the Department of Labor's fiduciary rule beyond June 9th. Despite all the industry protests, that have continued for more than a year, and various attempts at (further) delays, financial advisors who provide investment advice to retirement investors will be required to adhere to the "Impartial Conduct Standards" after June 9th, requiring that they give Best Interests advice, for Reasonable Compensation, and make No Misleading Statements... as any fiduciary should. However, the permanence of the rule on June 9th still doesn't mean the fighting over DoL fiduciary is done yet!

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss the coming fiduciary obligation for advisors serving retirement investors after June 9th, why the implementation of the DoL fiduciary rule was not delayed again, and why the DoL fiduciary rule still isn't a done deal yet, despite (and in fact, because of) what Secretary Acosta announced this week.

As regular followers of this blog know, the fact that the DoL fiduciary rule will not be delayed further shouldn't be news. As has been discussed here repeatedly in the past, and now fully confirmed by Secretary Acosta, the requirements of the Administrative Procedures Act simply left "no principled legal basis" to further change or delay the June 9th applicability date. However, it's crucial to recognize that the full DoL fiduciary rule is still not going into effect come June 9th, because part of the prior delay also delayed enforcement for most of the rule until January 1st of 2018. As a result, there is no actual Best Interests Contract... annuity agents will not have to honor the Best Interests Contract Exemption between now and the end of the year (and can rely on the less stringent PTE 84-24 when selling annuities into an IRA instead)... new disclosure requirements won't apply... and firms can still sell proprietary products while brokers receive conflicted compensation!

What does apply, though, is the requirement to adhere to the Impartial Conducts Standards, which is the core of what it takes to be a fiduciary under the rule: providing best interests advice, for reasonable compensation, and make no misleading statements. However, there will be no requirement to actually sign a Best Interests Contract, which means there won't necessarily be a full fiduciary contract in place, and in turn means it's not really clear how enforceable the fiduciary rules will really be through the end of the year. Especially since the Department of Labor itself said, in a follow-up 11-page 15-question FAQ, that it will be focused on "compliance assistance" in the coming months (and not necessarily focusing on citing violations and doling out penalties).

But the real reason it matters that full DoL fiduciary enforcement won't be coming until the end of the year, is that it provides another 6 months for fiduciary opponents to lobby for modifying the rule. In other words, DoL fiduciary may not be getting repealed and the June 9th date is final, but that doesn't mean this is the final rule. President Trump's Executive Memorandum back in February, which directed the DoL to re-evaluate the rule and consider amending it, is still in effect, and a proposal may be coming. In fact, Secretary Acosta's Op-Ed emphasized that while the rule is final, the Department of Labor is still considering revisions to the fiduciary rule, but that "the process requires patience", and that there may even be another enforcement delay (further into 2018) while the DoL considers new exemptions or other potential revisions as it issues a new Request for Information and new Public Comment periods.

In the end, this means that while a new fiduciary rule may soon be the law of the land for all retirement accounts, what, exactly, will be required to comply with that fiduciary rule in the long run, is still wide open and uncertain. The Impartial Conduct Standards requiring best interests advice, for reasonable compensation, with no misleading statements, will take effect soon. But the true obligations of Financial Institutions to monitor and oversee that activity, and the nature of enforcement and accountability for the fiduciary duty, is still not yet fixed and permenant... so get ready for a whole lot more DoL fiduciary debate over the next 6 months!

Safe Savings Rates With Real-World Wage Increases Over Time

May 24, 2017 07:01 am 2 Comments CATEGORY: Retirement Planning

When financial planners run retirement projections for clients, the most common assumption is to assume some type of constant inflation adjusted earnings growth (i.e., annual cost-of-living adjustments [COLAs]). This may seem reasonable enough, as future earnings are highly variable, and many employers do try and offer cost-of-living adjustments to their employees. So why not just assume that will continue throughout one’s career, at least as a baseline?

However, as it turns out, income growth typically follows some predictable paths that don’t necessarily just align with steady (inflation-adjusted) earnings growth; instead, these paths vary significantly based on the general income profile of an individual. For most, income growth throughout their career will actually exceed mere cost-of-living adjustments, which can add up to a lot of additional income (and savings capabilities) over a multi-decade working career! Further, while real income growth is often experienced, real earnings typically peak at least a decade prior to retirement, which is then followed by a subsequent decline in real earnings for the last 10-20 years of one’s career. Which can actually have a substantial impact on the trajectory of retirement savings itself.

In this guest post, Derek Tharp – our new Research Associate at Kitces.com, and a Ph.D. candidate in the financial planning program at Kansas State University – analyzes safe savings rates assuming more realistic earnings growth throughout one’s career, finding that traditional assumptions tend to overstate safe savings rates for low earners and understate safe savings rates for higher earners.

For instance, once we account for more realistic “earnings curves” of workers, it becomes clear that the decline in real earnings over the last 10-20 years of one’s career may actually reduce the retirement need – at least if we assume individuals prefer a smooth transition from pre-retirement to post-retirement spending. As a result, conventional assumptions may actually overstate the required savings rates for all but the top 20% of income earners, while understating the need for top earners (who advisors are most likely to be working with!). Additionally, given that most real earnings growth happens in the first decade or two of one’s career, conventional methods may overstate savings need even further for clients in their 40s or 50s (whose lifestyles aren’t likely actually rising at that point).

Another interesting finding is that once Social Security is incorporated with respect to different earnings curves, it’s possible that low savings rates for many Americans may not be as irrational as is often assumed. In fact, for individuals at the 20^th percentile and below (i.e., 1-in-5 Americans), historical safe savings rates may have been as low as 0.3%! And even the median earner would actually “only” need a savings rate of about 6.1%, and earners as high as the 80^th percentile would still have a safe savings rate below 10%! Highlighting not only the importance of Social Security to many Americans, but challenging the notion that low savings rates are an indicator of impending retirement doom for many Americans. In other words, this safe savings rate analysis suggests that, when real-world earnings growth is considered, most retirees really will be on track with relatively “modest” savings rates of 10% or less, when supplementing Social Security benefits.

The bottom line is that it’s crucial to recognize that for most workers, simply assuming steady inflation-adjusted earnings growth throughout the working years is not an accurate reflection of reality for most. And earnings curves do matter, because it impacts both the ability to save, when people can afford to save, and the likely level of their pre-retirement lifestyle costs (which in turn will likely impact the cost of the retirement lifestyle they wish to maintain) Of course, there are a lot of contingencies and unknowns when trying to predict earnings curves for any individual, but the fact remains that assuming constant real inflation-adjusted earnings is actually a very problematic default assumption for accumulators saving towards retirement!

#FASuccess Ep 021: Pivoting An Existing Advisory Firm To A Niche Serving Women In Transition with Evelyn Zohlen

May 23, 2017 07:01 am 2 Comments CATEGORY: Financial Advisor Success Podcast

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

My guest on today’s podcast is Evelyn Zohlen. Evelyn is the founder of Inspired Financial, an independent RIA in southern California that provides holistic financial planning and asset management services for 110 families, and manages nearly $140M in assets under management.

What’s fascinating about Evelyn’s firm is that her business is focused entirely on a niche – working with “women in transition”, most commonly recent divorcees or widows. And by focusing in on a niche, she’s been successful in working with affluent women, charging an assets under management fee with a minimum retainer of at least $10,000 per year, and driving almost $1.2M of gross revenue with a team of 4 advisors – including herself – and 2 support staff.

In this episode, Evelyn shares not only the details of her niche advisory practice, but how she selected this niche in particular from the never-ending list of possibilities, and how she communicated to her existing clientele the transition to her niche – given that she didn’t adopt a niche focus until after she had run her advisory firm for 5 years, and had already acquired another practice! Evelyn also shares some of the training she sought out to improve both her technical and relational capabilities in her niche, and how she leverages her niche to drive 85% of her new business development as inbound referrals from centers of influence.

And be certain to listen to the end, where Evelyn also shares the multi-advisor staff structure of her firm, how she allocates clients amongst herself and the other advisors within the firm, and the weekly meeting process that she uses to keep her team on track and well coordinated while serving all the firm’s clientele as an ensemble practice.

So whether you’ve been wondering what it’s like to pivot an existing advisory firm into a niche, what it takes to pick a particular niche and really go after it, or simply how to run an effective multi-advisor team and coordinate amongst multiple team members who all interact with the clients, I hope you enjoy this latest episode of the Financial Advisor Success podcast!

Advisor’s Guide To The Best Online Meeting Scheduling Tools

May 22, 2017 07:01 am 25 Comments CATEGORY: Technology & Advisor FinTech

Playing phone tag and e-mailing back and forth to find the best meeting time for you and your existing or prospective clients eats into otherwise productive time, and can be frustrating for both parties. By implementing a meeting scheduling software solution in your practice, you can reduce some of the headache by automatically giving the client a list of available times drawn from your calendar, and allowing them to pick (and immediately book) a time that works best for both of you!

In this guest post, Dan Kellermeyer, President of New Heights Solutions, LLC, a practice management and technology consulting firm for financial advisors, provides an overview of the leading online scheduling tools for financial advisors, including Calendly, ScheduleOnce, Acuity Scheduling, TimeTrade, Bookafy, and YouCanBook.Me.

Along with highlighting the features of each of the tools, Dan shares his insight on the relevant factors to consider when looking for the right solution for your individual practice – from unique features and available integrations, to ease-of-use for the client, the company’s customer support, and of course, pricing.

And so, whether you’re looking to add a little more efficiency to your practice by cutting down on the hassle of back-and-forth meeting scheduling, improving your “digital experience” for clients, or are already using online scheduling software but looking to switch to an alternative, then hopefully you’ll find this guest post helpful!

Weekend Reading for Financial Planners (May 20-21)

May 19, 2017 03:05 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the big news that Focus Financial, the RIA roll-up aggregator that is fresh off having a majority stake acquired for nearly $2B, just acquired a pair of ultra-HNW independent RIAs with a whopping $18.5B of AUM, with rumors that the intention is not merely to keep growing and rolling up advisory firms, but aiming to cross-sell those ultra-HNW clients with estate tax problems potentially lucrative life insurance policies... and raising questions of the product-independent nature of getting advice from an RIA (and whether the existing Focus Financial RIAs will even be willing to support the sale of insurance products).

From there, we have a number of investment-related articles this week, from a look at what it really takes to run an ETF index (it's harder than it looks!), to a series of studies suggesting that SRI/ESG investing may adversely impact performance (ironically perhaps because eschewing vice and sin stocks appears to give them a relative bonus on performance that SRI/ESG funds then miss out!), a look at how risk tolerance questionnaires for investing might change in the world of big data (where at a click of the button, you might be able to see exactly how clients invested/behaved in prior bear markets), and a discussion of whether it's time to transition to "behavioral finance 2.0", which stops just looking at broad-based trends in how consumers behave sometimes irrationally, and instead boil it down to what's going on at an individual level, and what it actually takes to help them change their behavior for the better.

We also have several practice management articles, including: how to spot warning signs that a client may be thinking about leaving (and what to do about it); how to conduct surveys of your ideal clients to figure out what it really takes to get more of them (and differentiate your services and expertise for them); the problem with the "I Know Better" fallacy of trying to prescribe what your clients want, instead of just asking them (not everyone has the intuitive genius to just "figure it out" the way Henry Ford and Steve Jobs did!); and some great advice on how to reframe and "reset" your relationship with accumulator clients who are now preparing to retire, so they realize you can be just as relevant and valuable for them in the coming years of retirement as you were in the process of helping them to get there.

We wrap up with three interesting articles, all around the theme of behavioral finance and financial psychology: the first examines a new research study on why retirees tend to spend less as they age, suggesting that it may not just be a matter of slowing discretionary expenses, but a rising pessimism that makes us more concerned and less optimistic about the risks and return potential of markets; the second looks at various mental accounting mistakes we make when thinking about retirement spending (including the challenge that those who are frugal in accumulating for retirement often have trouble re-tooling their thinking to be able to enjoy their money in retirement); and the last looks at the way clients answer the question "would you prefer to have $1,000,000 in retirement, or a $5,000/month (guaranteed) income", and how some retirees appear to suffer from an "illusion of wealth" or an "illusion of poverty" that causes them to believe one is substantially more or less valuable than the other (even though, according to current annuity rates, they're approximately equal in value).

Enjoy the "light" reading!

What’s The Best Way To Raise Your Advisory Firm’s Fees?

May 18, 2017 10:23 am 5 Comments CATEGORY: Practice Management

The standard commentary about financial advisors is that, with the rise of robo-advisors, there will be fee compression as advisors cut their AUM fee schedules to keep up with the competition. Yet the reality is that industry benchmarking studies show the median advisory firm's fees haven't dropped, at all, in the past six years. In fact, advisory firms are more likely to be raising their fees than lowering them, both for some higher net worth clientele, and to ensure that all clients pay an economically viable minimum fee.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss how to go about raising advisory fees in your firm, and specifically how to break the news of a fee increase to clients.

It may be surprising to hear that advisory fees have actually going up for many, but the reality is with the rising competition in price, there has also been increasing competition in services. In other words, it is true that as financial advisors, we have to do more than ever to justify our fees. Yet by bolstering everything from our service levels to our deliverables and our expertise, many are finding that they're doing so much more, they can actually charge more than they have in the past. So, if you find yourself needing to have this conversation, what is the best way to have it?

First, recognize that there are better and worse times to have this conversation. Ideally you want to have this conversation when the market is up, because clients will feel better about handling a fee increase when the market, their incomes, and their net worths have already been trending higher. Next, be sure that you first reinforce your value. Sometimes clients genuinely need a reminder of all of the things we do for them, especially over time. And then, you can hit the key elements: start with a positive message, explain why you're going to raise fees, state that you are going to increase fees in the future, and be confident and transparent in communicating your new fee.

In fact, if you want to successfully raise your fees, the last point about confidence cannot be overstated. Successful fee increases are usually more about the advisor's confidence in their own value, than whether clients perceive the value. Because the reality is that if clients didn't perceive the value, they wouldn't likely have stuck around so long in the first place. But if you don't believe in yourself and your value proposition enough to believe in the fee you are asking for, then clients won't believe it either!