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Emerging Software Solutions To Illustrate Safe Withdrawal Rates To Pre-Retirees

May 17, 2017 07:01 am 8 Comments CATEGORY: Retirement Planning

The so-called “4% rule” safe withdrawal rate is one of the most popular ways to talk about the sustainability of retirement income, yet ironically no financial planning software solution has ever been created to illustrate the safe withdrawal rate approach. In part, that’s simply because most financial planners jump straight to the stage of collecting detailed client spending goals, and illustrating their actual financial plan’s probability of success in retirement. And in part, it’s because the original safe withdrawal rate research used very simple assumptions – from a two-asset-class portfolio, to ignoring the impact of fees, and a fixed 30-year time horizon – which just doesn’t hold for a wide swath of retirees.

To fill the void, though, two new software solutions have recently emerged for financial advisors, specifically to illustrate the safe withdrawal rate approach, and be able to model the impact of varying assumptions, from a wider range of asset classes, to the impact of investment expense ratios and advisory fees, and time horizons that may be longer or shorter than 30 years.

The first, dubbed the “Big Picture App”, draws on available historical investment returns from the Center for Research in Security Prices (CRSP) and Global Financial Data (GFD), to show how ongoing withdrawals would have sustained (or not) for any time horizon (and any ongoing expense ratio) the advisor wishes to assume. The second solution, called “Timeline”, goes further, and can even illustrate the impact of various dynamic spending strategies, from Guyton’s “Guardrails” approach, to the Kitces “Ratcheting” rule for retirement spending, and show how much wealth is often left over at the end of the 4% rule time horizon.

Ultimately, software like Timeline and Big Picture won’t realistically replace full-blown financial planning software to analyze the details of an individual client’s situation, but can be a powerful solution to facilitate client conversations around what is a “sustainable” withdrawal rate (or not), the consequences of sequence of return risk, and the impact that diversification and managing investment costs can have on retirement outcomes. The software may be especially for beginning to educate prospective retirees, or outright prospects who haven’t yet engaged the advisor for a full financial plan in the first place.

But the bottom line is simply to recognize that the safe withdrawal rates approach can actually be adapted to far more client-specific circumstances than just assuming a 2-asset class portfolio and a 30-year time horizon (with no investment costs) for every client. And now the software exists to actually illustrate it, and have productive conversations with prospects and clients about sustainable retirement income!

#FASuccess Ep 020: Building A Successful Business By Giving Away 99% Of What You Do For Free with Michael Kitces

May 16, 2017 07:01 am 9 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the twentieth episode of the Financial Advisor Success podcast!

This week’s guest is… me! In celebration of our twentieth episode of the podcast, I decided to fulfill what has been, by far, the most popular request from our podcast listeners… to hear my own story. And so Alan Moore, my co-host on the XYPN Radio podcast, serves as our guest host for the week as I talk about my own journey through the world of financial planning and how I got to where I am today.

In this episode, I go all the way back to my start in the industry, and share why it was the job my grandmother took, almost 50 years ago after my grandfather unexpectedly passed away, that ultimately got me into the financial services industry straight out of college at the peak of the tech bubble as a pre-med Psychology major and Theater minor. And how my first job – as a life insurance agent – turned out to be a colossal failure, to the point that I couldn’t even get a position as a paraplanner for $24,000/year, and the path I eventually found that turned it all around.

In addition, we talk about how I made the transition from working full-time in an advisory firm to my current path as a blogger, speaker, and serial entrepreneur, why I think digital marketing is so much more effective at building a business than traditional marketing (especially for an introvert like me!), and the highly strategic philosophy that I’ve used to build my entire business model: by trying to give away 99% of what I do entirely for free.

And be certain to listen to the end, where I talk about my “big rocks” approach to time management, and how I handle allocating my time across what are now half a dozen different businesses, from XY Planning Network, to New Planner Recruiting, our advisory firm and outsourced investment management services for other RIAs… on top of speaking at more than 60 industry conferences, podcasting, and publishing this Nerd’s Eye View blog!

So if you’ve ever been curious to hear my own path through the advisory world, why I do what I do, how I manage my time, and the “secret” to my business model that allows me to give away so much of what I do for free (and still ultimately make the money I need to raise a family and put my kids through college)… I hope you enjoy this latest episode of the Financial Advisor Success podcast!

Why Most Financial Advisor #FinTech Companies Can’t Be Platforms (And Will Fail If They Try)

May 15, 2017 07:01 am 18 Comments CATEGORY: Technology & Advisor FinTech

The ongoing commoditization of investment products is driving a fundamental shift in today’s financial advisor platforms, as broker-dealers and custodians transition from being primarily about financial services products, to instead trying to operate as the technology hubs around which financial advisors build their businesses.

The transition is appealing because ultimately broker-dealers and custodians are a form of platform business model, which takes a small slice of all the assets and transactions that flow across the platform. Which means in the end, the more successful the financial advisors on the platform are, the more successful the platform itself will be.

The challenge, however, is that the rising demand from financial advisors for better technology is driving a number of advisor FinTech software providers to build increasingly comprehensive solutions, aiming to compete directly with the often-proprietary platforms of today’s broker-dealers and custodians. From the growing portal platforms of Orion Advisor Services and eMoney (before it was acquired by Fidelity), to the launch of Salesforce Financial Services Cloud and Black Diamond’s acquisition of Salentica, it’s “game on” for independent FinTech providers to build comprehensive solutions for financial advisors.

Unfortunately, though, this transition has set financial advisor software companies on a collision course with broker-dealer and custodian platforms themselves, and it’s a collision that many of the independent FinTech companies cannot survive. Because the reality is that in the end, financial advisors will only pay “so much” for a software solution, and independent software proivders simply cannot compete with the size and scale of a true platform business – as companies like Garmin navigation quickly learned when Google Maps showed up, or the entire CD music business learned when iTunes showed up.

Notably, this doesn’t mean that all financial advisor technology will inevitably consolidate around broker-dealer and custodian platforms. Because those platforms really only need to “control” the technology that is integral to their platform itself. But it does mean that the most successful advisor tech companies in the future may not be the ones that are the most comprehensive - unless they can truly pivot to not just platform software, but a platform business model - and instead will be the ones that stay focused in their core competency, and are most effective at building flexible APIs to integrate most easily with other real platforms (and their often-legacy existing technology infrastructure).

Or viewed another way, the future of independent financial advisor FinTech software companies is to become the best “Apps” in the App Store of custodian and broker-dealer platforms. Not to try to become App Stores themselves… a transition that most will inevitably lose, because they cannot outcompete and replace the true platforms that advisors still need to invest their clients' actual portfolio dollars.

Weekend Reading for Financial Planners (May 13-14)

May 12, 2017 02:57 pm 4 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the article generating the most "buzz" in the world of financial advisors this week: a takedown of the DALBAR behavior gap study by Morningstar's David Blanchett, who, similar to Wade Pfau in recent months, and this blog several years ago, finds that the DALBAR methodology does not accurately measure (amnd substantially overstates) the actual size of the investor behavior gap caused by bad-market-timing investment decisions. (Though Blanchett still affirms that the behavior gap exists, albeit at a far small magnitude than the nearly-600-basis-points that DALBAR suggests). Also in the news this week was a recent social media guidance update from FINRA, in Regulatory Notice 17-18, which should dramatically expand the adoption of social media for registered representatives working under broker-dealer firms.

From there, we have a number of articles about industry trends this week, from a major announcement that Merrill Lynch is stepping back from the "recruiting wars" amongst broker-dealers and instead is going to focus on hiring advisors with 3-8 years of experience and their CFP certification and pay them a stable salary for three years, to the latest M&A activity for RIAs (which hit an all-time high in the first quarter of 2017, but appears to be rotating to "smaller" firms with $100M to $1B being sold), a substantial increase from advisors and their clients in socially responsible investing (with a desire for SRI up from barely 20% to over 40% in just one year!), and a look at the accelerating growth of Vanguard and Schwab's tech-augmented-human advisor services, which at their current pace could siphon off as much as 2% of the aggregate growth of the entire RIA community in 2017.

Other articles on industry trends this week include: an in-depth Barron's profile on Morningstar, its new CEO Kunal Kapoor, and its controversial decision to begin offering nine mutual funds in its Managed Portfolios solution for advisors, despite its history as an independent rater of mutual funds; Bogle's "dire" forecast for the mutual fund industry, that funds shouldn't even bother trying to compete on price (because they won't win), and that at best they should just focus on their core competencies and try to win where they can, or simply enjoy the profits while they can get them until their funds wind down; the parallels between what Vanguard did to mutual funds, and what robo-advisors might do to human advisors, and where the silver lining may be; and a look at how, as more and more advisors become "fiduciaries", there will be a growing awareness that not all fiduciaries are the same, and some simply don't have the competency to execute as fiduciaries... which could even lead to a backlash against the term.

We wrap up with three interesting articles, all around the theme of consumer financial stress and financial advice behaviors: the first looks at how financial literacy programs are not only failing to make a lasting impact when actual outcomes are measured, but could actually cause harm by making people overconfident in their actual financial capabilities, and fail to recognize the impact their circumstances may have on their financial situation; the second looks at the growing base of research on how financial stress of employees impacts the workplace, which appears to be spurring a growing interest in employers to support financial planning and financial wellness programs; and the last is a fascinating look at the latest FINRA financial capability study to try to identify who is more likely to seek out financial advice (or not), and finds that one of the greatest inhibitors to hiring a financial advisor may be the consumer's fear about whether they're hiring a good one (or not)!

Enjoy the "light" reading!

Do Financial Advisors Work With Customers Or Clients?

May 11, 2017 12:30 pm 2 Comments CATEGORY: Practice Management

Historically, "success" as a financial advisor was all about building a book of business, to generate ongoing revenue, and perhaps even the possibility of selling that book of business at the end. Yet the caveat the value of a book of business - and what you provide them, and where the value really lies - depends on whether the people you work with in the end are really your "clients", or simply your "customers".

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss what the difference is between a customer and a client, and why the terminology advisors use really does matter in the value of a book of business, and the value that's provided to the people we work with.

For many, the idea of differentiation between customers and clients will probably seem like minor semantics, but the reality is that the words we use truly do matter. Just consider for a moment what comes to mind when you think of a "customer", and then a "client". For most, the images are not going to be the same.

A customer buys a product from an order-taker or salesperson. A client buys advice from a professional. The key distinction is that when engaging with customers, the value isn't actually the advisor (or the salesperson in general); the value is in the product. Good customer service may create repeat customers, but if you eliminated the product from the equation, the business would vanish. By contrast, when a client buys advice from a professional, it's not reliant on the product implemented at the end. The value is the advice itself, and the advisor is a core part of the value proposition.

And the difference is reflected not only in the value proposition provided to clients, but the value of the book of business itself. After all, the origin of a "book of business" in the first place was a book of customer names - people who could be contacted, who had been sold a prior product, and could perhaps be sold a(nother) product in the future. Which is still a tenuous relationship at best... and is why a book of customers rarely sells for more than one times trailing revenue (if that). By contrast, clients have an ongoing relationship with the business - and typically pay ongoing revenue - and it's that distinction, between a customer who buys a product, and a client who is engaged with the business and its professionals themselves, that helps a client-oriented advice business get twice the valuation of a customer-oriented book.

So when you're working with people in your advisory business, consider carefully whether you call them "customers" or "clients". Because the terms we use to refer to the people we work with truly matter. Whether we call them "clients" or "customers" is not just a matter of semantics, but an important indication of the services we provide and where the value truly lies. If you work with customers, the value is in the product you sell. If you work with clients, it is in the advice you provide. So, as you build your business, consider what you really want to build. Is the name you use really reflective of the relationship you have... or want to have?

Calculating Accurate Regulatory AUM Vs Reporting Assets Under Advisement (AUA)

May 10, 2017 07:01 am 7 Comments CATEGORY: Investments

In today’s increasingly competitive landscape for advisory firms, financial advisors are looking for any way they can to differentiate. Whether it’s their experience and credentials, specialization or depth of services, or simply the sheer size of the firm, based on its assets under management. After all, the reality is that – justified or not – a sizable reported AUM does imply a certain level of credibility and represents a form of social proof (the firm “must” be good, or it wouldn’t have gotten so much AUM, right!?).

As a result of this trend, though, advisory firms are increasingly pushing the line in counting – or potentially, over-counting – their stated assets under management. Which is important, because not only is overstating AUM a potential form of fraudulent advertising, but the SEC has very explicit rules to determine what should be counted as AUM (or not) for regulatory purposes.

Specifically, the SEC states in its directions for Form ADV Part 1 that regulatory AUM should only include securities portfolios for which the advisor provides continuous and regular supervisory or management services. And while most financial advisors today are regularly working with clients regarding their investment securities, not all advisors are necessarily providing “continuous and regular” services on their client accounts. In fact, if the advisor doesn’t have direct authority to implement client trades (either with discretion or after the client accepts the advisor’s recommendation), it’s virtually impossible to include the account as part of regulatory AUM.

The greater challenge, though, is that the increasingly common offering of comprehensive financial planning services – where advisors provide holistic financial planning advice on all of a client’s net worth – does not mean the advisor can claim all of those assets as regulatory AUM. In fact, most of the time the advisor should not include outside 401(k) plans and other non-managed assets that were advised upon as part of the financial plan, nor the value of brokerage accounts holding mutual funds and various types of annuities (unless the advisor truly provide ongoing management services), nor TAMP or SMA assets (unless the advisor retains the discretionary right to hire/fire the manager and reallocate to another one). In fact, even having discretion over an account doesn’t automatically ensure it being counted as regulatory AUM, particularly if it’s a passive buy-and-hold account, unless the advisor can actually substantiate that monitoring and due diligence is occurring outside of any ad-hoc or periodic client review meetings!

Fortunately, for advisors who want to report some number representing the total scope of their advice – including the amount of assets that don’t count as regulatory AUM – it is permissible to report on Assets Under Advisement (AUA) in the advisor’s marketing and in Part 2 of Form ADV, as long as the advisor can document and substantiate the calculation process. But the fact that it’s permissible to report both AUM and also a (typically large) AUA amount doesn’t change the fact that, when reporting regulatory AUM itself, it’s crucial to report the right number!