Nerd's Eye View blog

Are You Giving Clients What They Want? Or Just What You Think They Want?

January 10, 2011 03:50 pm 9 Comments CATEGORY: Practice Management

The growth of the financial planning profession over the past 40 years is a testament to the fundamental need that it serves; if financial planners weren’t delivering value, firms wouldn’t be growing the way that they are.

Yet for so many planning firms, there is no process to really evaluate what it is that clients want, and whether they’re receiving it. Instead, we craft an offering that we think clients will like, and then try to convince them to hire us to receive it.

But is that really the best way to build a business’ service offering?

Must Tactical Asset Allocation Lead to Inefficient "Risky" Portfolios? Not According to Markowitz!

January 6, 2011 04:15 pm 6 Comments CATEGORY: Investments

Under classic Modern Portfolio Theory, there is a single portfolio that is considered to have the most efficient risk/return balance for a given target return or target risk level; any portfolio which deviates from the "optimal" allocation must, by definition, either offer lower returns for a comparable level of risk, or result in higher risk for the same level of return. Accordingly, as the theory is extended, advisors should avoid making portfolio shifts that constitute tactical "bets" in particular stocks, sectors, asset classes, etc., as it must by definition result in a portfolio that is not on the efficient frontier; one that will be accepting a lower return for a given level of risk, or higher risk for a comparable return. Unfortunately, though, this perspective on MPT with respect to making tactical portfolio shifts is not accurate, for one simple reason: it is based on an invalid assumption that there is a single answer for the "right" return, volatility, and correlation assumptions that will never change over time, even though Markowitz himself didn't think that was a good way to apply his theory!

What IS The Difference Between "Being Tactical" And "Market Timing"?

January 5, 2011 03:03 pm 12 Comments CATEGORY: Investments

With the financial crisis of 2008-2009, some planners appear to be considering - if not adopting - a somewhat more active approach. Unfortunately, though, for many planners any investment strategy that is not purely passive and strategic must be equated to "market timing" - a pejorative term. Yet the planners who have implemented some form of tactical asset allocation generally do not call themselves market timers; they recoil at the term as much as passive, strategic investors do. So where do you draw the line... what IS the difference between being "tactical" and being a "market timer"? In truth, it seems that once you dig under the hood, the differences are nuanced, but they are many, and significant.

Does Setting Goals Lead To Success, Or Limit It?

January 4, 2011 02:42 pm 10 Comments CATEGORY: Personal/Career Development

It is viewed as almost common wisdom: the key to success is to set clear goals so that you can achieve them. After all, if you don't know what your goals are, you can't determine the path to reach them. Financial planning itself is rooted deeply in this philosophy, given its significant emphasis on goals (whether for retirement, college, legacy, or something else) as a foundational step in the financial planning process. Yet as I reflect on my own financial and business success over the past decade, I am struck by a startling realization: not only did I not set any goals for myself, but I'm quite certain that if I had, I would be less successful today. Because it's not about goals, really. It's about habits.

Just How Precisely Should You Try To Estimate The Inputs For A Financial Plan?

January 3, 2011 03:28 pm 6 Comments CATEGORY: General Planning

It is a common financial planning challenge: just how much time and effort should be spent trying to make the numbers in your financial planning projections as precise as possible? How much research should you put into refining the growth rate assumption for each asset in the portfolio? And its volatility? And its correlation? What about client spending? Should we build a detailed cash flow for retirement, year by year, or is it sufficient to just provide a rough guesstimate of how much money will go towards retirement outflows? Many planners have a strong tendency to fine-tune these numbers and make them as precise as possible, but that in turn begs the question... in a world where the future itself is so uncertain, are the results really more accurate, or is an effort for greater precision just an exercise in futility?

Charitable Contributions from IRAs are Back! And Overhyped! And Still an Inferior Gifting Strategy!

December 29, 2010 04:03 pm 7 Comments CATEGORY: Taxes

Under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (or the "Tax Relief Act" for short!) signed into law by President Obama on December 17th, taxpayers over age 70 1/2 may once again make up to $100,000 per year of so-called "qualified charitable distributions" out of their IRAs and directly to a charity, for the 2010 and 2011 tax years. Doing so allows the entire amount of the distribution to be excluded from income, effectively ensuring that those IRA dollars are never taxed, while also satisfying charitable goals.

Unfortunately, the problem is that this is actually a remarkably INefficient way to make significant charitable gifts, compared to other alternatives available under the tax law!

Is There A Double-Standard For Measuring the Effectiveness of Active Management?

December 27, 2010 02:52 pm 3 Comments CATEGORY: Investments

Determining whether an active manager is having a positive impact is a difficult thing to measure, without a doubt. Yet before one can even begin to determine if a manager is delivering value, you must first consider what it takes to constitute "value" in the first place. How much does an active manager need to outperform, in order to be delivering value to the client, to be worth the fee that is paid to the manager? Yet for some reason, we scale we use to measure the cost is very different than how we measure (out)performance. Is there a double-standard here?

If All "Market Timing" Is Bad, Maybe It’s Time For A New Definition

December 24, 2010 03:34 pm 8 Comments CATEGORY: Investments

Once again the charge of being a “market timer” is being hurled at active portfolio managers in a recent discussion thread initiated by Bob Veres on Financial-Planning.com. The term itself seems to get planners into such a tizzy, though, while the actual definition of what constitutes “market timing” is unclear at best; perhaps a new definition of market timing is in order. To say the least, the most common definition of market timing, the one that implies that market timers are similar to “retail” day-traders willing to take their portfolios to extreme asset allocations based on their very short-term predictions of future market behavior, is badly in need of an upgrade.

Is It Time To Bypass The Bypass Trust? Estate Planning in 2011…

December 21, 2010 04:24 pm 4 Comments CATEGORY: Estate Planning

Planning around estate taxes by using a Bypass Trust is a "basic" strategy that has been around for decades. In fact, for many clients, it was a major impetus to get their estate planning done in the first place - if your estate was above a certain threshold and you didn't get estate documents that would put a proper Bypass Trust in place, it could cost your beneficiaries hundreds of thousands of dollars.

Yet with the new provisions of the tax legislation signed into law last week by President Obama, Bypass Trusts will no longer be necessary for many clients to maximize the use of a couple's estate tax exemptions - which means it may be time to bypass the Bypass Trust planning strategy.

Setting a Price on the Value of Financial Planning… Compared to What?

December 20, 2010 06:33 pm 5 Comments CATEGORY: Practice Management

As with many labor-intensive professional services, financial planning is not inexpensive to provide for clients. There are overhead costs, potential staffing costs, regulatory and compliance costs, in addition to the costs for software and services to support how professionals deliver their value. Accordingly, all of this is wrapped into the price that financial planners must charge their clients to earn a reasonable living and an adequate business profit. Yet often clients balk at the cost of financial planning. Which begs the question - if your clients think financial planning is expensive... to what are they comparing that cost?