Nerd's Eye View blog

Do Financial Planners Have Something To Learn From Suze Orman and Dave Ramsey?

February 22, 2011 02:00 pm 16 Comments CATEGORY: Planning Profession

Within the financial planning world, there is often little love for popular consumer "personal finance gurus" like Suze Orman, David Bach, and Dave Ramsey. Whether it's because of their entertainment-style deliver of financial advice (in the case of the former), their bombastic platitudes of overgeneralized advice with little client-specific information (in the case of both), or their controversial views about how to address common problems like debt (in the case of the latter), most financial planners don't seem to think highly of their consumer-popular counterparts.

Yet the success of those like Orman, Bach, and Ramsey - who, in the end, touch the lives of hundreds of thousands if not millions, while the "average" financial planner's impact may only be measured by a mere few dozen or hundred clients - makes me wonder: Maybe there is something we as financial planners could - and should - learn from the success of those like Orman and Ramsey?

IRS Re-Affirms Paying IRA Wrap Fees With Outside Dollars

February 17, 2011 02:59 pm 18 Comments CATEGORY: Taxes

Although we often think of the IRA as simply another account, the tax law generally regards it as a quasi-entity that is separate from the individual who owns it. Both the individual and the IRA have their own separate tax rules that apply; intermingling money is not allowed (due to contribution limits), and even paying each others' costs can get a client into some hot water. Accordingly, clients must be very careful when they use their own "outside" dollars to pay any form of expenses that are associated with the IRA itself. Fortunately, in a recent private letter ruling, the IRS did (re-)affirm that an IRA's wrap fee expenses are an acceptable cost to pay on behalf of an IRA with outside dollars, while not running afoul of the IRA rules and limitations.

What Does It Take To Be Called A Tactical Investor?

February 16, 2011 04:39 pm 3 Comments CATEGORY: Investments

As the terms "being tactical" or "tactical asset allocation" become increasingly popular, more and more advisors now must decide whether they, too, are "tactical" or not when describing their investment process and philosophy to current and prospective clients. Traditionally, the dividing line was simply whether one was active or passive, a determination that could be made pretty clearly by looking at the portfolio: were there a bunch of actively traded stocks and bonds, or a series of actively managed mutual funds that did the same thing? With tactical, though, it's no longer sufficient to simply look at whether there are stocks and bonds in the portfolio, or actively managed mutual funds; instead, some tactical investors implement their strategies by selecting only passive index funds, but still utilize them in an active, tactical process. Which begs the question: where exactly do you draw the line on being tactical?Read More...

How Do You Stop Offering A Service Clients Didn’t Need Originally But Now Expect?

February 15, 2011 03:20 pm 2 Comments CATEGORY: Practice Management

Most planning firms pride themselves on providing great service to their clients, which often involves going to great lengths to satisfy client requests. Yet in reality, it seems that a lot of our intensive service efforts are less a function of what our clients asked for, and more about what we thought we should offer them. Perhaps a common example is something like quarterly performance statements; most firms say their clients "want" them, yet in truth most firms started sending them to clients on a quarterly basis before ever asking and surveying their clients about whether it was what they really wanted and needed. Now, of course, clients have an expectation of receiving them regularly, and weening them off of a currently provided service can be difficult. But in the end, did clients really need that service, or do clients only expect because we created that expectation for them, but now will feel like we're taking something away to change it?

Is Rebalancing Supposed To Enhance Returns, Or Reduce Them?

February 5, 2011 06:43 pm 18 Comments CATEGORY: Investments

Rebalancing is a investing staple of the financial planning world. The execution of a rebalancing strategy helps to ensure that the client's asset allocation does not drift too far out of whack, as without such a process a portfolio holding multiple investments with different returns would eventually lead to a portfolio that increasingly favors the highest return investments due to compounding. Yet in practice, most financial planners often discuss rebalancing not only as a risk-reduction strategy (by ensuring that higher-return higher-volatility assets do not drift to excessive allocations), but also as a return-enhancing strategy. However, in reality, there is nothing inherent about rebalancing that would be anticipated to generate higher returns... unless you get the market timing right.

Dealing with the Generation “Why” Staff In Your Financial Planning Firm

February 3, 2011 05:33 pm 1 Comment CATEGORY: Practice Management

Undoubtedly you have, at some point, been exposed to someone from Generation Y (born 1978-2000). It could be in the form of a colleague, an employee, restaurant server or even one of your kids. Gen Y, sometimes referred to as Millienals, Gen Text, and Gen Why have a unique set of characteristics. These characteristics often leave others from other generations, mainly baby boomers, scratching their heads. Since most financial planning firms tend to be owned by baby boomers, and most new financial planners tend to be Gen Y's, conflict and misunderstandings because of generational differences are common. Fortunately, many can be solved with a little intergenerational coaching!

If Immediate Annuities Are Such A Great Solution, Why Doesn’t Anyone Want To Buy One?

February 2, 2011 04:16 pm 17 Comments CATEGORY: Annuities

In theory, it seems like such a great idea. The greatest fear of a retiree is living longer than expected and/or outliving his/her money. Only slightly less worrisome is the similar risk that the retiree lives so long that inflation erodes wealth and income to the point that the retiree can't maintain his/her standard of living. Yet there is a single financial services product that tackles these two fears head-on, with rock-solid guarantees (at least as long as you buy from a strong company): the inflation-adjusted immediate annuity. Or for those who are a little older with a shorter time horizon (where inflation is less of an issue), the even-more-widely-available traditional immediate annuity. But despite the apparent "perfection" of the solution to address the problem, immediate annuities are just a tiny fraction of overall annuity sales, and most clients are completely unwilling to put any money into them. So what's the deal? If immediate annuities are such a great solution, why doesn't anyone want to buy one?

Is Passive Rebalancing A Form Of Active Management?

February 1, 2011 03:59 pm 11 Comments CATEGORY: Investments

For many planners, passive and strategic investment management is the way to go. As such planners often point out, the evidence is mixed at best that any money manager can ever consistently generate alpha by outperforming their appropriate benchmark. Accordingly, as those planners advocate, the best path is to minimize investment costs as much as possible (since we know expenses we don't pay is more money we keep in our pockets), and investment allocation changes should only occur via a regular rebalancing process. Yet rebalancing does not always improve your returns; sometimes, it actually reduces future wealth. So if you try to come up with a "passive" rebalancing strategy that only enhances returns and doesn't ever reduce them... does that mean you're actually being active after all?

Why Do Financial Planners Keep Delivering Written Plans If No One Reads Them?

January 28, 2011 05:23 pm 12 Comments CATEGORY: General Planning

A core aspect of the financial planning process for many planners is not just the analysis and development of recommendations for clients, but the embodiment of that work into a written financial plan document. In the plan presentation meeting itself, some planners use this written document as a guide to walk the client through the analysis and recommendations, although many simply focus on key recommendations and points for the client to understand, and let the clients simply take the written document with them.

Yet once the clients leave the office, written financial plan in hand, how many of them ever crack the spine open and take a look at it sitting at home? Anecdotally, it seems to me that most planners agree on the answer to that question: virtually no one ever opens up their financial plan document at any point after they walk out of the planner's office.

Which begs the question: if "no one" ever reads the written comprehensive financial plan that's being delivered, why do we keep producing them?

Are Your College Planning Strategies Too Accumulation Based?

January 27, 2011 05:49 pm 1 Comment CATEGORY: General Planning

For most financial planners, the focus of college planning advice is accumulation based. After all, it seems that almost by definition, "planning" for college means acting in advance by saving up money ahead of time so that the costs can be funded when the child is ready to matriculate. If you just pay as you go when the tuition bills show up, you may be funding college, but that doesn't really constitute "planning" does it? Yet the reality is that many actions can be taken in the final high school years leading up to college beyond just long-term accumulation planning; however, most planners seem to skip these client conversations about so-called "late stage college funding planning" opportunities, despite the potential for a high impact on the actual client costs to fund college. For the most part, it seems this is by no means willful negligence, but simply a lack of awareness about the strategies that really do exist. We've just never had much opportunity for training about how to do this effectively. Until now.