Kitces.com - Advancing Knowledge in Financial Planning

A Hierarchy Of The Value A Financial Advisor Provides

March 8, 2016 07:01 am 7 Comments CATEGORY: Practice Management

With the ongoing commoditization of investment management services, and ever-increasing pressure on active investment managers to demonstrate their value, many have raised the question of whether financial advisors will eventually succumb to the pricing pressures of low-cost robo-advisors.

In today's guest post, Bob Seawright from Above The Market makes a compelling case for the long-term value of a financial advisor beyond just security selection and portfolio management, and highlights a "hierarchy of financial advisor value" that starts with the areas where financial advisors have the most impact - on savings and investment behavior, and providing financial planning advice - beyond which the actual implementation of an investment portfolio is just a small slice.

So whether you're a financial advisor who finds it difficult to articulate your value beyond just portfolio management services, or are simply looking for a new take and some fresh inspiration on how to describe your value to current and prospective clients, I hope that you find this hierarchy of financial advisor value to be beneficial in your practice!

Broker Misconduct Study Highlights Importance Of FINRA BrokerCheck Due Diligence

March 7, 2016 07:01 am 6 Comments CATEGORY: Planning Profession

Given the intangible nature of financial advice, the reality is that financial advisors and their advisory firms rely heavily on perceived trust and their reputation in order to get clients. As a result, both advisors and their firms have a strong incentive to distance themselves from the “bad apples” of the industry.

Yet a newly released study entitled “The Market For Financial Adviser Misconduct” finds that market forces and the industry’s self-regulatory mechanisms are failing to cleanse the bad apples. As a result, 73% of "financial advisors" (though the study actually analyzed FINRA-registered brokers, not fiduciary financial advisors!) who disclose a material misconduct event on FINRA BrokerCheck are still employed a year later, despite the fact that such brokers are a whopping 5x more likely to engage in misconduct again in the future.

On the one hand, the results of the research emphasize the importance of consumers doing effective due diligence using tools like FINRA BrokerCheck or seeking out services that “vet” advisors on their behalf (i.e., find advisors and brokers with clean regulatory records), and cast a positive light on FINRA’s recent efforts (including overhauling the FINRA BrokerCheck interface, and soon requiring all brokers to include a hyperlink back to their BrokerCheck record on their professional pages/profiles).

At the same time, though, the fact that bad brokers have been able to persist so long, and find safe haven in a subset of brokerage firms that appear to have cultures that are ‘unusually’ permissive of broker misconduct - combined with the fact that the SEC improperly allows those brokers to hold out as "financial advisors" in the first place - raises the question of whether the industry’s self-regulatory mechanisms are failing altogether. To the point that, similar to another "advisor sting" study from NBER several years ago, even researchers studying financial advisors and brokers can't tell them apart. As a result, is it any surprise that the President and the Department of Labor are pushing for fiduciary regulatory change?

Weekend Reading for Financial Planners (Mar 5-6)

March 4, 2016 02:29 pm 4 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a controversial new industry study finding that not only do 7% of all "financial advisors" (those registered in FINRA BrokerCheck) have a serious misconduct event in their records, but the overwhelming majority of them remain in the industry even after committing their infractions, with some firms reported to have as many as 1-in-5 advisors with a misconduct disclosure. Also in the news this week is the launch of Morningstar's new ESG sustainability ratings for 20,000+ mutual funds and ETFs, as the rise of impact and socially responsible investing continues.

From there, we have a slew of articles related to business development and growing an advisory firm, including: a discussion from Mark Tibergien about whether advisors are paying too much in using solicitor agreements to get referrals; how some advisors have had great success hosting a radio show to build their clientele (but that many advisors have found radio to be an expensive failure, too); what surveys of clients who refer tells us about why they refer and how to increase referrals (hint: asking them for referrals is not the way to do it!); how to develop strategic alliances to try to generate more high-quality high-net-worth referrals; the importance of letting your own personality and "style" shine through in your marketing and business development; and how one 26-year-old woman succeeded in getting ultra-high-net-worth clients after joining Goldman Sachs by embracing a business development attitude across both her professional and personal life.

We wrap up with three interesting articles: the first is a look at how people who feel powerful and confidence are more creative, process information better, and focus more effectively... until they're put in a group with other powerful people, where the results get worse as the leaders jockey for leadership status and lose focus on the purpose of the group; the second is a Journal of Financial Planning study showing how some people have a naturally high propensity to plan, while others will struggle to engage with a financial planner until/unless they are better trained on how to plan for themselves; and the last is the review of a survey study of financial advisors and their own tendencies towards financial planning, which finds that fewer than half of all financial advisors even have a financial plan of their own, and a mere 4% engage an outside financial planning professional to assist them, suggesting at the best that advisors are like the proverbial "cobbler's children with no shoes" neglecting their personal situation (and at worst may be hypocrites about the value of financial planning itself?).

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 about the rise of "ransomware" cyberattacks on financial advisors, LPL Financial's coming robo-advisor tool, and the new Morningstar ESG sustainability ratings tool!

Enjoy the "light" reading!

Google’s Nascent #FinTech Robo-Advisor – Google Compare – Bites The Dust

March 3, 2016 09:18 am 6 Comments CATEGORY: Technology & Advisor FinTech

Periscope Office Hours Cover Image March 1 Google Compare

While there have been a number of small robo-advisor start-ups in since the financial crisis, and a few traditional financial services firms have thrown their hats into the ring, the looming question of the robo-advisor space is whether, someday, a "mega" web business like Google would want to someday get in on the action. Which, given the sheer scope of the company, could cause some real disruption of financial advisors.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at the recent announcement that Google has decided to shut down its Google Compare service, which provided consumers an opportunity to compare and then purchase a wide range of financial services products, from CDs and savings accounts to mortgages and car insurance. Some had speculated that it was only a matter of time before Google used the service - which was once actually named Google Advisor - as the launch platform for their own robo-advisor service.

Ultimately, Google declared that its decision to shut down Google Compare was driven by the simple fact that while people might be gathering information online to evaluate financial services products, they weren't necessarily buying online. In other words, at the end of the day, it takes more than just a website to buy a complex financial services product. A challenge that Google learned from its Google Compare experiment, and that the direct-to-consumer robo-advisor platforms and their slowing growth rates are revealing as well.

Of course, none of this is meant to say that technology isn't important and won't change the way that financial advisors do business. But just as online brokerage platforms of the 1990s and the rise of the internet didn't replace financial advisors, it appears less and less likely that robo-advisors will, either. Still, just as the leading advisory firms ultimately adopted the internet technology of the 1990s to run successful advisory firms today, the cycle is playing out again with Blackrock buying FutureAdvisor and Invesco buying Jemstep. Which means in the end once again it won't be the technology firms that replace advisors, but the technology-augmented advisors who beat out the rest that lag behind!

The Age-100 Tax Problem With Outliving The End Of Life Insurance Mortality Tables

March 2, 2016 07:01 am 17 Comments CATEGORY: Insurance

The conventional view of “whole life” and other forms of “permanent” insurance coverage is that the policies are designed to last for your entire life, however long you may live. As long as you keep paying the premiums, you can keep your coverage, until it pays out as a tax-free death benefit.

However, the reality is that the underlying structure of permanent insurance, and the key characteristic that makes it affordable to have coverage – even in the later years of life – is that a “permanent” insurance policy actually has an ultimate maturity date, such as age 100. Which means if you live beyond that point, the policy “matures” and pays out its face value!

And the problem with outliving life insurance is not merely that the policy matures and pays out its benefit, but the fact that it was paid while alive – and not as an actual death benefit – meaning the payout is a taxable gain to the policyowner! In other words, outliving the life insurance maturity date not only marks the end of life insurance coverage itself, but a taxable event!

Fortunately, policies issued in the past 10 years or so primarily use the newest 2001 CSO mortality tables, which were extended to a maximum life span of age 121, to reduce the risk of the insured outliving the end of life insurance mortality tables. However, most existing permanent life insurance was issued under “old” mortality tables with a maximum age of 100 (or even age 96), which means most permanent life insurance owners still have to contend with the possibility that they can actually outlive their life insurance… and face the tax consequences that come with it!

Announcing IMCA CE Credits For CPWA, CIMA, and CIMC On The Nerd’s Eye View Blog!

March 1, 2016 07:01 am 0 Comments CATEGORY: Nerd's Eye View

At Kitces.com, we’re always listening to your feedback about how to make this blog and our Members Section a more valuable resource for you. Over the years, reader feedback has shaped everything from our visual design, to the frequency of the articles, suggested topics, and even the size of the reading font!

And with your continued feedback, we’re excited to announce today the launch of a new feature: the ability to earn IMCA CE credits for reading Nerd’s Eye View blog posts, as well as receiving additional IMCA continuing education credit for The Kitces Report newsletter and the exclusive webinars in our Members Section.

In the coming weeks, you’ll also see our upcoming 2016 Reader Survey, in which we’ll be asking you more questions about ways we can continue to make this site more useful (including other types of CE credit you may want to receive for our content!).

Thanks for your continued feedback, and for all of you who have your CIMC, CIMA, or CPWA certifications, I hope you enjoy the new opportunity to earn IMCA CE credits!