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Weekend Reading for Financial Planners (Mar 18-19)

March 17, 2017 02:55 pm 6 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with a "surprising" Field Assistance Bulletin issued last week by the Department of Labor on its looming fiduciary rule, noting that there's a real possibility that the rule will not be delayed by the April 10th applicability date, but then stating that if the delay (or even a non-delay outcome) comes shortly thereafter, the DoL won't enforce the fiduciary rule during the gap period (though notably, any damaged clients in the gap period could conceivably just sue directly).

Also in the news this week was the announcement trhat Schwab has officially pivoted away from its robo-advisor to a new hybrid offering dubbed Schwab Intelligent Advisory, which will provide advice directly from CFP professionals (in addition to automated portfolios); at the same time, T. Rowe Price announced the launch of its own pure robo solution, ActivePlus Portfolios, though the offering will be limited to providing an asset allocation of T. Rowe Price's own mutual funds (at no additional cost, beyond the mutual fund expense ratios themselves). Also in the news this week was the revelation that Morningstar is actually preparing to launch its own mutual funds for its Morningstar Managed Portfolios advisor platform, which they suggests will reduce costs on the platform by as much as 20%, but in the process, puts the firm in the conflicted position of being both a rater of mutual funds and a manager of some.

From there, we have a number of technical articles, including: the news that the Tax Data Retrieval Tool from the IRS that is used to facilitate income verification for the FAFSA (and income-based repayment plans for student loans) has been taken offline for several weeks due to potential criminal activity (identity thieves trying to steal taxpayer information); an analysis from Ed Slott of the prohibited transaction rules for IRAs that can potentially disqualify the entire account if non-traditional assets are not handled properly; and new research that suggests a slightly different approach to retirement income planning, where consumers don't simply diversify their portfolio assets, but instead try to diversify amongst the available "Retirement Income Generators" (RIGs) - which might include systematic portfolio withdrawals as one component - to effectively "pensionize" retirement.

We also have several practice management articles this week, from the challenge of figuring out the "right" valuation of your advisory firm (recognizing that outsider buyers often offer higher valuations than internal succession plans, but if key employees leave the outside deal could end out paying less in the long run after all), to the question of whether advisory firms should offer more flextime to employees (and how to structure it), and a look at the rise of Interactive Brokers as a new low-cost niche custodian for independent RIAs (especially those who trade actively and globally).

We wrap up with three interesting articles on the dynamics of managing advisory firms: the first reviews a major new research study of the industry, finding that there appears to be a substantial gender bias in advisory firms when it comes disciplining misconduct, with male advisors being 3x more likely to commit serious misconduct, with a 20% larger average damages settlement for consumers, yet it's female advisors with misconduct who end up being 20% more likely to get fired and 30% less likely to find another advisory job (though notably, the difference largely vanishes once there are females amongst the ownership or executive suite!); the second is a look at an advisor who decided to establish her RIA as a B Corporation, a new voluntary certification that businesses can obtain to affirm that they will operate not just to maximize profits, but the interests of all stakeholders (which aligns especially well to independent RIAs that serve as fiduciaries to clients in the first place!); and the last is a look at how businesses need to be cautious not just to espouse certain "noble values" that all employees aspire to, but actually include those values in their interview/hiring process, firing employees who fail to live up to them, and promoting those who espouse them best in practice – because otherwise, it doesn't matter what the firm says, if what it rewards is different, eventually all employees will migrate their behaviors to fit the values that are being rewarded, not the ones written in a corporate Core Values statement.

Enjoy the "light" reading!

How Do You Know It’s Time To Leave Your Advisory Firm?

March 16, 2017 08:26 am 1 Comment CATEGORY: Personal/Career Development

Finding your first good job as a financial planner can be tough. Not only because it's challenging just to find a job at all, but because it's not always clear up front which firms really do financial planning or not, and which jobs will be real financial planning jobs versus just a sales job. In many cases, the only way to find out is to take the job that's available, make the best of it, and hope it turns into a good long-term career path. Except when it turns out it's really not a good match at all... and then suddenly the challenge is figuring out whether it's time to leave, and whether having a short-term job stint on your resume will hurt your future career chances even more! So what should you do?

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, I discuss how to know it's time to leave your advisory firm to find another opportunity - based on whether the firm was a bit fit philosophically, or just not a good long-term growth opportunity - and best way to handle the situation if you find yourself in it.

First and foremost, though, remember that the best way to fix a problematic situation is not to make a change at all, but try to change the firm from within, rather than just running away from the problem. If you are worried about the investment or planning philosophy, or want to know if there's a better long-term career opportunity, then ask - broach the conversation with the firm owner. But it's important to be tactful in how you do this. If you are critical of your boss or the firm owner, they will likely just defend themselves, because that's human nature. Instead, come up with an actual solution, and offer it by having a "what if" conversation rather than a confrontational "why" conversation. If you come to the table with a proactive solution, most firm owners will actually be happy to work with you, adopt a solution, and get the firm in a better position than it was before!

Similarly, when it comes to career opportunities, if you want a career path, you may need to ask for it! I'm always amazed at how often people complain about having a lack of a career track, when they've never raised the conversation themselves! And realize that for most smaller advisory firms (which is most firms), this may be the first time they've taken someone through a career track, so the reality is they literally don't know what their career path is. Don't just sit back and expect that a perfect career track is going to be waiting for you, but instead, initiate the conversation ask about your opportunities with the firm as it continues to grow! The emphasis on continued growth is important, because both you and the owner want to be in a position of sharing a growing pie, rather than fighting over bigger pieces of a pie that isn't growing. If you find yourself in the latter position - in a firm that just isn't growing at all - the odds of a career track emerging are almost nil.

However, after having the tough conversations, the reality is you may decide that it really is time to leave. Perhaps something unethical is going on and you need to get out immediately. Or maybe the pie just isn't growing and that isn't going to change, so there's simply going to be nothing to share in the future. If that's the case, then what you should do next depends on the situation you are in. If you're really uncomfortable with how the firm operates and they truly aren't doing right by its clients, then get out right away. Life's too short for not doing right by your clients. But if it is "just" a lack of future growth, then realize that you can take your time and make a smart transition. Get your CFP experience (or finish the coursework if necessary!), save up some money for the transition, and take your time to truly do your due diligence on the next firm you work for. If you're checking the job boards and networking through industry associations, you may have a better chance of finding a good fit.

But in either case, understand that ultimately you don't have to worry about being labeled a "job-hopper" – or at least if it only happens one or two times. Just be straightforward about your prior situation, and take ownership for not doing your proper due diligence the first time around. Most advisors will understand that this happens, and will appreciate the attention you are paying this time. But whatever you do, don't make the transition without learning from it! If you go through too many entry-level positions without figuring this out, then ultimately, you may have good reason to worry about being labeled a job-hopper!

Social Security Rules And Strategies For Divorcee Spousal Benefits

March 15, 2017 07:01 am 1 Comment CATEGORY: Retirement Planning

One of the key benefits of Social Security is the spousal benefit – a payment at retirement that goes not to the worker who paid into Social Security over time, but his/her spouse. The payment was originally designed to provide retirement support for what were typically (at the time) stay-at-home spouses in a single-income household, and still remains relevant today for many spouses who take at least some time off from work to raise a family.

However, the spousal benefit is not only available for currently married couples; single people who were previously married may also be entitled to a spousal benefit, based on the ex-spouse’s earnings record. This spousal benefit for divorcees becomes available as long as the couple was married for at least 10 years, and the divorcee has not remarried.

For some divorcees, the ex-spouse’s spousal benefit is a key pillar of retirement income, and choosing when to start the benefit – early at a reduced amount, or at full retirement age for the full amount – is a crucial decision. For others, the ex-spousal benefit will ultimately be trumped the divorcee’s own retirement benefit from years of working. But for those born in 1953 or earlier, who are eligible for retirement and (ex-)spouse benefits, there is still an opportunity to further leverage the spousal benefit by filing a Restricted Application for just the ex-spouse’s benefit at full retirement age, and switching to his/her own individual benefit at age 70 – increased by 32% Delayed Retirement Credits!

For some divorcees, though, the biggest opportunity of the ex-spouse’s spousal benefit is simply recognizing when it’s available, and claiming it properly, as if the ex-spouse’s benefit is larger, the divorcee can actually step up his/her benefit to the higher amount!

#FASuccess Ep 011: How Launching An Advisory Business Can Be Safer Than Working In One with Alan Moore

March 14, 2017 07:00 am 3 Comments CATEGORY: Financial Advisor Success Podcast

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

My guest this week is Alan Moore. Alan and I co-founded the XY Planning Network in 2014, but the reason I invited him to the podcast has little to do with XYPN itself, and everything to do with his own fascinating path as a financial advisor, business owner, and successful entrepreneur.

Because Alan started out his career as most of us are taught from the days we’re young – to go out and try to find a stable job with a steady income, and move up the ladder over time. Except Alan realized barely 6 months into his first job that it wasn’t going to be the right fit. Only to change to another job… from which he got fired in another 6 months. And so, realizing that perhaps being an employee just wasn’t the right fit, Alan decided to launch his own advisory firm. From scratch. At age 25.

These early experiences led Alan to the counter-intuitive conclusion that perhaps the traditional view of trying to find a job with a steady income is wrong, and that it can actually be more stable (at least in the long run) to build a business from scratch. Because as a business owner, even your best client firing you might only cost you a 2% to 5% of revenue… which is a lot “safer” than relying on a single boss who can take away 100% of your income in a heartbeat by firing you!

In this podcast episode, we talk about Alan’s journey from financial planning college student, to getting involved as a volunteer with NAPFA and its young-advisor group Genesis, to his path from employee to (young) entrepreneur of his own advisory firm, how he later launched a second business (XY Planning Network) as well, and how and why he ultimately made the decision that he couldn’t keep both a B2B and B2C business and would have to wind one down to fully focus on the other.

And be certain to listen to the end, where Alan talks about the rut he got into that almost led him to leave his rapidly-growing business entirely after a particularly bad month, and what it took to turn everything around and re-energize him in the business again.

So if you’re thinking about making the switch from employee to entrepreneur, or perhaps are an advisory firm business owner wondering how to better keep your young entrepreneurial employees, I hope you enjoy this latest episode of the Financial Advisor Success podcast!

12b-1 Fees: It Is Time To Bid Them Farewell?

March 13, 2017 07:01 am 0 Comments CATEGORY: Investments

From its start in 1980, the 12b-1 fee was controversial – a distribution charge assessed against current mutual fund investors, that the fund company can use to market the fund to new investors. In other words, the mutual fund got to use investor dollars (rather than its own money) to grow the fund’s assets under management (AUM).

In theory, this use of the mutual fund investor’s own money to market the fund company’s products was supposed to be good for the investor, because it would help grow and scale the fund and bring down its operating expense ratio. However, several decades later, subsequent analysis is finding that while mutual funds that charge 12b-1 fees are successful at incentivizing salespeople to bring in more assets under management, the 12b-1 fee isn’t living up to its promise of helping to scale up and bringing down the expense ratio as the mutual fund grows.

At the same time, the reality is that investor behaviors are shifting as well. A growing number of consumers are purchasing their investments directly, avoiding the 12b-1 fee altogether by eliminating the mutual fund salesperson middleman. And as more and more financial advisors become affiliated with an RIA firm and get paid an AUM fee on an advisory account, the 12b-1 fee is less and less of a driver to incentivize financial advisors anyway.

In fact, the entire shift of financial advisors from being mutual fund salespeople (compensated by upfront commissions and ongoing 12b-1 fees) to operating as actual financial advisors instead (compensated by fees directly from their clients) raises the question of whether the 12b-1 fee is still relevant at all. Especially given the 12b-1 fee’s controversial roots, and the misalignment it creates between who pays the marketing and distribution costs, and who actually benefits from it.

Of course, the reality is that financial advisors, custodians, broker-dealers, and product providers still need to get paid for what they do, which means eliminating the 12b-1 fee still won’t necessarily bring down costs for the end client. Instead, it would likely just shift where and how financial advisors and their platforms get paid. Nonetheless, given the 12b-1 fee’s implicit conflicts, and their declining relevance, arguably it’s time to create a more appropriate pricing structure for the realities of today’s investment marketplace!

Weekend Reading for Financial Planners (Mar 11-12)

March 10, 2017 02:56 pm 3 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with a reminder that while most regulatory attention has been focused on the Department of Labor's fiduciary rule, the Treasury's FinCEN group is actively working on a new set of anti-money-launching (AML) rules that could impose new compliance burdens on RIAs (akin to what broker-dealers and banks already have to deal with for AML compliance). And in the DoL fiduciary news itself, the buzz this week is that with a potential 60-day delay on the table, asset managers have been slowing their development efforts on the new T-share class, at least until the dust clears.

From there, we have a number of articles this week about marketing and business development for financial advisors, including: how to think differently about crafting a (more unique) value proposition for clients; a structured process for trying to create and articulate your value proposition; some new research on why clients leave advisors (and how to start conducting exit interviews to understand for yourself why your ex-clients left, and what you might need to change); and an interesting article about whether in the world of digital marketing, it's better to stop thinking of potential new clients as "prospects" to sell at all, and instead think of them as an "audience" to engage instead.

We also have several articles specifically on how to create better engagement with clients and prospects, from how to create a "client persona" in your marketing to further refine your messaging and improve engagement with prospects, to the latest research about how people have different engagement styles, and the importance of adapting your own communication to match the client's style, and why it's so crucial to not just answer a prospect's questions but ask them questions and get them talking in a prospect meeting (as it better engages them and leads to deeper rapport).

We wrap up with three interesting articles that challenge conventional thinking in the industry: the first is an analysis by Wade Pfau, building on a prior article from this blog, about how the DALBAR behavior gap study is actually fundamentally flawed in the way it compares investor to market returns over 20-year time periods (as DALBAR compares investors to the returns of the market invested with a lump-sum all at once, even though most people didn't have all their wealth to invest 20 years ago); the second raises the question of whether the whole "passive revolution" is overstated, and whether the phenomenon is simply that investors (and advisors) are no longer stock-pickers and instead are "asset pickers" (for which index funds and ETFs are simply convenient active building blocks); and the last raises the question of whether, as robo-advisors continue to evolve, if eventually financial planning will be given away for free by robo-advisors... or whether the ongoing lead generation, engagement, and self-onboarding tools of financial planning software means eventually it will automate itself to the point that it doesn't need a financial advisor anyway (or at least, that the advisor has to provide a value proposition above and beyond just the software analysis itself!).

Enjoy the "light" reading!