Kitces.com - Advancing Knowledge in Financial Planning

The Importance Of Creating Small Financial Planning Goals

April 6, 2016 07:01 am 4 Comments CATEGORY: General Planning

Financial planning is focused heavily on establishing and working towards very big long-term goals, from saving for a child’s education to accumulating the assets to fund a multi-decade retirement.

Yet the fundamental problem of “big” goals – financial planning or otherwise – is that they can seem so big and overwhelming that it’s actually demotivating. In the extreme, the goal may feel so distant and unachievable that it simply leads the person to give up on pursuing the goal at all!

Accordingly, the reality is that to really make long-term financial planning goals achievable, the key is to break them down into smaller pieces first. As the saying goes, the way to eat an elephant is one bite at a time. And the research of behavior change and motivation is increasingly finding that the “small wins” of successfully achieving small goals may actually be the key to helping us rewire our brains to stick with the new behavior in the long-run!

Unfortunately, though, financial planning education provides little in the way of training on how to break down big goals into small ones, and most financial planning software does a poor job of helping clients to track short-term goals!

Nonetheless, in the world where the actual implementation of goals – i.e., into saving and investment accounts – is becoming increasingly commoditized, arguably it will be the process of helping clients break down big financial planning goals into smaller SMART goals that are Specific, Measurable, Achievable, Relevant, and Time-bound, and then providing them the tools to track progress and serving as an accountability partner to ensure follow-through, that may be the greatest financial planning value-add of all!
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How Financial Planning Retainer Fees Are Going Beyond AUM Fees Rather Than Replacing Them

April 4, 2016 07:01 am 27 Comments CATEGORY: Practice Management

With the ongoing rise of technology commoditizing pure investment management, a growing chorus of critics are raising the question of whether the AUM model is “toast”, or at the least that financial planning fees may soon need to be unbundled from AUM fees.

Yet a look at the most recent Investment News and FA Insight benchmarking studies reveals the exact opposite trend: the most profitable and highest growth firms continue to be those that embrace the AUM fee, and are not adopting financial planning fees en masse. And in fact, the larger the advisory firm, the more likely the top performers are to focus solely on the AUM model!

In fact, the benchmarking data reveals that the only firms successfully implementing standalone financial planning fees are the smallest “solo” advisor firms who tend to serve the least affluent clientele – for whom planning fees may be effective simply because their clients don’t have the assets to fit an AUM model in the first place (and also because they don't have the overhead demands of large firms).

More broadly, what this data suggests is that to the extent there is any rise in the use of standalone planning fees by advisory firms, it is primarily being done by firms serving clients who can’t even be reached as effectively by the AUM model anyway (i.e., they don’t have a large amount of assets available to be managed), rather than competing head-to-head with the largest AUM firms that continue to be more profitable and capable of reinvesting more to outgrow their non-AUM competitors!

Weekend Reading for Financial Planners (Apr 2-3)

April 1, 2016 01:01 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a slew of notable "robo-advisor" news, including Betterment raising a whopping new $100M round of venture capital as the company positions itself as the 'leading' robo-advisor, the announcement that Wealthfront is launched the "3.0" version of its platform with an increasing focus on using artificial intelligence to power advice, and the news that Fidelity is expanding its new robo-advisor "Fidelity Go" to a wider group of beta users with the plan to roll out to the broader public later this year.

Also in the advisor technology news this week was the 'surprise' announcement that Schwab would be discontinuing its own custom version of Salesforce that was bundled into its OpenView Integrated Office platform (in what is being dubbed a failure of bundled proprietary software over open architecture solutions), and the rollout of LinkedIn's new "ProFinder" service where financial advisors can list themselves (amongst other types of freelancers) for other LinkedIn users to find.

From there, we have several technical articles, including: a look at whether we've gone "too far" in using Monte Carlo analysis for retirement planning (from an early Monte Carlo analysis champion, Moshe Milevsky); a discussion from Wade Pfau about his 'guiding principles' in his own retirement planning research; an analysis of whether deferred income annuities (DIAs) are actually better than single premium immediate annuities for retirement planning (or not); the rise of a "no-gift" loan strategy for funding an Irrevocable Life Insurance Trust (ILIT) to avoid dealing with Crummey powers; and an analysis of whether actively managed small-cap funds really add long-term alpha or not.

We wrap up with three interesting articles: the first is a look at how the Exchange-Traded Fund (ETF) came into being, a solution indirectly proposed by the SEC in its post-mortem analysis of how the crash of 1987 could have been avoided (an ironic origin, given that the SEC is now concerned about the mini-ETF-crash from last August!); the second is a great overview of the leading research on the links between money and happiness, which finds that money really does have a role in increasing our life satisfaction, but with less and less impact as income rises, and with less benefit than other non-money changes we can make in our lives (e.g., improving our health and relationships); and the last is a powerful reminder of how self-improvement is not something that happens all at once (even if we want it to and try to mentally commit to it), but instead is a process of gradual improvement, where getting just 5% better every year, compounded, can make us 400% wiser and better over the next 30 years!

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, which this week includes a discussion of Betterment raising $100M of venture capital at a $700M valuation, Fidelity's testing of Fidelity Go, and the Schwab Advisor Services decision to discontinue its OpenView Integrated Office custom version of Salesforce.

Enjoy the "light" reading!

Improving Your Financial Advisor Business IQ (Implementation Quotient)

March 31, 2016 10:01 am 0 Comments CATEGORY: Personal/Career Development

Successfully growing a business - as a financial advisor or in any other industry - requires a delicate balance between having the right vision of what you want to do that serves your clients and provides value, and actually being able to implement it. A vision without implementation doesn't succeed, and a business that blindly implements without a cohesive vision eventually collapses in on itself.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at the concept of your business IQ - your Implementation Quotient - as set forth in the recent new book "The Sustainable Edge" for financial advisors by Ron Carson and Scott Ford. The Implementation Quotient is simply a measure of how many of your ideas you actually implement... and The Sustainable Edge aims to provide guidance about how to improve that business IQ, for those advisors who have hit the growth wall.

Ultimately, the key to moving forward is actually quite simple: it's all about focus, and recognizing that we all have the same limited time every day and every week, so it's essential to properly focus where you spend your time to maximize your success and the success of your business. Of course, that's easier said than done... because gaining focus requires saying "no" to a lot of opportunities, and even if it's done in order to say "yes" to the things that matter most, it's a challenge for us financial advisors who often chose this profession because we want to help people and not say no to them!

Nonetheless, the reality remains that time is an unforgiving and inflexible constraint. So decided what you will say "no" to, and figuring out what the filter is that you will use to determine what to say "no" to, becomes essential. And in fact, it's also possible to use the constraints of time to your advantage - because once you've decided what you're going to say "yes" to, there's nothing like having a time deadline to impose the necessary accountability on yourself to be certain it actually gets implemented!

IRS Will Now Require Executors To Report Cost Basis To Beneficiaries For Inherited Assets

March 30, 2016 07:01 am 3 Comments CATEGORY: Estate Planning

When a beneficiary inherits property from a decedent, the asset receives a step-up in basis to its value on the date of death – which is both a tax perk for inheritors, and a form of tax simplification (as beneficiaries otherwise may not know what the decedent’s original cost basis was anyway).

However, with hard-to-value assets, there may be a disagreement between the valuation for estate tax purposes, and the value used by the beneficiary for cost basis reporting. After all, the estate prefers a small value (to minimize estate taxes) while the beneficiary ideally wants the highest possible value reported (to get a higher basis step up). And in the past, it was even possible for the executor and beneficiary to report different amounts, each to their own benefit (and the detriment of the IRS!).

To close this perceived “loophole”, in 2015 Congress created the new IRC Section 1014(f) that requires beneficiaries to use a date-of-death valuation for cost basis purposes that is no larger than the amount reported on the estate tax return, curbing the abuse. In addition, Congress also established the new IRC Section 6035, which requires executors to file a new Form 8971 to notify the IRS who the beneficiaries are, along with a Schedule A that informs both the IRS and the beneficiaries what their inherited cost basis will be.

The good news of the new reporting form is that it should actually ease the burden for beneficiaries who need to determine cost basis for their inherited assets. However, the requirement is a new burden for executors, who may struggle to follow the 30-days-after-Form-706 deadline for filing the new Form 8971 and supporting Schedule A, especially in situations where it takes a long time to identify all the beneficiaries and determine which property will be distributed to them. In fact, ironically the rules have been so complex to roll out, that the IRS has had to repeatedly delay its implementation as well, though the new Form 8971 reporting requirements are now scheduled to take effect by June 30 of 2016, and will apply retroactively back to any estate tax returns filed since last July 31 of 2015!

Nerd’s Eye View 2016 Reader Survey – Your Input Is Requested!

March 29, 2016 07:01 am 1 Comment CATEGORY: Nerd's Eye View

At Nerd’s Eye View, the goal is always to make this an ever-more-valuable resource for all of you, the readers. And over the years, reader feedback has shaped everything from the visual design of the blog (right down to the default font size!) and the comment system we use, to the expansion of our Members section to offer CFP CE credit (and more recently, also IMCA CE credit) for Nerd's Eye View blog posts, and more.

And while I'm happy with the progress we've made, I'm sure there's still more than we could do differently to serve you better. Accordingly, every year I try to survey all of you who read this blog, to get your thoughts and feedback about the features we're offering, some ideas we're considering, and whatever other input you're willing to share about what we could do to make this a more valuable site and a better user experience for you.

So regardless of whether you're an advisor, an individual consumer who reads this blog for your own benefit, a related professional that works with financial advisors, or you're associated with a vendor who serves advisors, I hope you'll take a few minutes to answer this year's survey. It's only 10 questions, should take no more than a few minutes, and will remain open until the end of next week (April 8th).

Thanks in advance for clicking through to today's blog post to share your feedback! 🙂
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