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Weekend Reading for Financial Planners (Jan 9-10)

January 8, 2016 01:41 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the latest release of FINRA's regulatory and exam priorities in 2016, where the organization has indicated its leading target is "broker-dealer culture" around compliance and the way that conflicts of interest are handled.

From there, we have several practice management articles this week, including: the ongoing rise of social media adoption by advisors (and that the highest adoption is amongst the most financially successful advisors); how despite the rise of social media, "old-fashioned" email remains a remarkably effective marketing strategy; tips on how to manage advisory firm staff members, particularly regarding setting and then monitoring/managing employee goals; a round-up review by advisor tech guru Joel Bruckenstein of leading RIA custodian technology platforms including Fidelity, TD Ameritrade, and LPL; and an article providing a great reminder that the real key to time management is not getting more efficient about what you do but getting better about deciding what not to do in the first place.

We also have a couple of technical articles this week, from a look at how "stress testing" portfolios with tools like HiddenLevers is becoming a popular alternative to analyzing traditional portfolio risk metrics like standard deviation or value-at-risk (VaR), to a discussion of how the structuring of irrevocable trusts has changed in recent years (from the separation of administrative and investment trustees to the rise of distribution committees and trust protectors), and a review of the data on what the true odds really are that a 65-year-old will need long-term care.

We wrap up with three interesting articles: the first is a discussion of the rising battle between banks and other financial institutions, and the account aggregation and personal financial management tools that draw upon and use that data (and potentially overload bank servers in the process); the second is a look at how economics research has been undergoing a significant shift in the past 30 years, from research being dominated by pure theory to increasingly focusing on real-world empirical data (supported by the availability of the personal computer and the rise of the internet and its data accessibility); and the last is a great reminder of the perspective that can be gained when a financial planner actually becomes a financial planning client, and sees the financial planning experience (and how it can be improved) from the other side of the table.

Enjoy the "light" reading!

Why Monte Carlo Analysis Still Matters And The Risk Of A Retiree Black Swan Is [Probably] Overrated

January 7, 2016 12:01 pm 17 Comments CATEGORY: Retirement Planning

Michael Kitces Black Swan Office Hours Periscope Thumbnail

Over the past 15 years, we’ve seen the rapid rise of Monte Carlo analysis as a tool for analyzing retirement. Yet at the same time, the use of conventional statistics to project potential market scenarios has been under attack, for failing to capture the so-called “Black Swan” phenomenon.

In this week’s #OfficeHours with @MichaelKitces – a new video series we’ve launched where I will take reader questions, both emailed and live, every Tuesday at 1PM EST via the Periscope social media platform – we look at the phenomenon of Black Swans, what a black swan event really is, and how the “risk” of a black swan is quite different for a long-term retiree who takes annual withdrawals versus a leveraged hedge fund who faces the risk of having their debt called in.

In fact, we ultimately find that while Monte Carlo analysis for retirees is commonly criticized for failing to capture extreme market events, it turns out that the biggest problem with Monte Carlo is not that it fails to model the downside risks but that it actually understates the possibility for upside surprises!

You can see me discuss all of this and more in our #OfficeHours video posted in today’s article, along with details on how to sign up to watch the next broadcast live, and participate for yourself!

How Continuing To Work, Even In Retirement, Can Increase Social Security Benefits

January 6, 2016 07:02 am 76 Comments CATEGORY: Retirement Planning

The conventional view of delaying Social Security is that doing so is an opportunity to earn delayed retirement credits, an 8%/year increase in benefits that can be highly appealing in today’s low-yield environment.

However, the reality is that delaying Social Security benefits doesn't just increase benefits by earning delayed retirement credits. Additional years of working while collecting Social Security benefits can also increase the worker’s Average Indexed Monthly Earnings used to calculate those Social Security benefits in the first place, just as ending work early can reduce AIME below what is projected as benefits on the Social Security statement.

And depending on how much additional income will be earned – and how low his/her historical earnings really are – the reality is that continuing to work while getting Social Security benefits can produce a material increase in future payments for some workers, simply because of how benefits are recalculated. In other words, for those past full retirement age (and no longer subject to the Earnings Test), it’s possible to be receiving Social Security benefits while working and have those years added to the Social Security work history to generate higher future benefits as well!

In the end, working while on Social Security won’t always produce a significant increase in Social Security benefits. For those whose prior working years produced more income – at least on an inflation-adjusted basis – it’s possible that continuing to work will generate no additional benefits at all. Nonetheless, for those who haven’t fully capped out Social Security benefits based on 35 years of maximal earnings already, it is possible to be working and getting Social Security benefits at the same time, and have that work increase the benefits (at least after reaching full retirement age). And the potential for a benefits increase can be material in some cases, and thus should definitely be considered in the timing and impact of when to stop working!

Top Financial Advisor Issue For 2016 – The Department Of Labor Fiduciary Rule And The Best Interests Contract Exemption (BICE)

January 4, 2016 07:01 am 9 Comments CATEGORY: Planning Profession

The turning of the New Year brings a fresh set of both opportunities and challenges, and 2016 looks to be no exception to the rule.

Last year the dominant themes included the pivot of "robo" technology from being a direct-to-consumer solution to instead becoming robo-advisor-for-advisors platforms (which spurred an explosion of FinTech acquisitions), the ongoing crisis of differentiation for advisors leading to more and more discussions of whether it's time to reinvent the advisor business model (or perhaps just finally get more focused into niches and specialization), and the growing pressure of regulatory reform as President Obama threw his full support behind the Department of Labor's proposed fiduciary rule and the anti-fiduciary lobbyists spent all year trying (and failing) to stop it.

In fact, with a final failed effort to stop the DoL proposal by trying attach a rider to the recent omnibus spending legislation last month, it now appears that the pending release of the Department of Labor's fiduciary rule will be the hot issue for financial advisors in 2016. The rule has the potential to completely reshape the landscape of financial advice, force broker-dealers to reinvent themselves (into turnkey financial planning platform [TFPP] solutions instead?), and force financial services product manufacturers for the first time ever to compete solely on the merits of their products rather than the size of the commissions they can pay.

While in the long run I would still maintain that a fiduciary rule for financial advisors is absolutely critical as a protection for consumers, there seems little doubt that 2016 will be a seminal transition year that sets the stage for how financial advice will be delivered in the coming decades - a tremendous opportunity for advisors (and the companies serving them) who are prepared for the change, and the beginning of the end for those companies who have not positioned themselves for an advice-centric future.

Weekend Reading for Financial Planners (Jan 2-3)

January 1, 2016 02:01 pm 5 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a scathing investigative report from Ann Marsh at Financial Planning magazine, highlighting how brokers guilty of consumer harm are obtaining settlements in FINRA arbitration and then getting their records expunged on the basis of not being found guilty (due to pre-empting a guilty finding with the settlement!). Also in the news this week was an SEC report reviewing the ETF "flash crash" from August 24th, which disturbingly finds the problem was so widespread that it's still not clear why it happened, nor is it clear what needs be done to prevent it from occurring again in the future.

From there, we have a few practice management articles this week, including: a Bob Veres discussion of whether the typical advisory firm's efforts to impress prospective clients are actually just intimidating them; the first of what will likely be many stories looking at how the Department of Labor fiduciary rule may change the industry; a controversial suggestion from practice management guru Mark Tibergien that perhaps the industry's "talent shortage" problem is actually a shortage of skilled advisory firm management capable of attracting, developing, and retaining Millennial talent; and a profile of Live Oak Bank, which has burst onto the scene in recent years to become one of the primary lenders financing advisory firm succession plans, with more than $250M of loans funded since 2013.

We also have a couple of technical articles this week, from a look at how the recent spending legislation's extension of the solar investment tax credit may spur an explosive boom in solar energy, a discussion of how traditional portfolio metrics fail to capture the benefits of downside portfolio protection (and an alternative way to better measure the impact), and an analysis of why most people should actually consider funding an HSA first for retirement (in some cases even before a 401(k) plan with a match) given that virtually all retirees will have at least some medical expenses in retirement which can be funded tax-free from the HSA.

We wrap up with three interesting articles: the first is an interview with John Thiel, the head of wealth management at Merrill Lynch, who discusses how the firm is preparing itself for the looming Department of Labor fiduciary rule (and that it would rather comply with a fiduciary obligation to clients than walk away from $2 trillion of AUM); the second is a nice turn-of-the-new-year reminder that it's a good time to de-clutter (whether it's your desk, your business, or your clients); and the last is a Wall Street Journal highlighting recent research into consumer spending behaviors, and why the traditional advice to just budget and monitor spending is so often ineffective in practice.

Enjoy the reading, and Happy New Year!

Using A NING Domestic Asset Protection Trust To Reduce State Income Tax Liabilities

December 30, 2015 07:01 am 7 Comments CATEGORY: Estate Planning

While most income tax planning is focused on minimizing Federal tax liabilities, the reality is that with state income tax rates as high as 13.3%, strategies that reduce state income tax liabilities are increasingly popular as well.

A recently popular strategy is the so-called “NING” trust, an extension of the DING trust where portfolio assets that may generate significant income are contributed into a Nevada trust to shift the tax exposure to Nevada’s 0% state tax rates, rather than the settlor’s high-tax-rate home state. The end result can be a significant state income tax savings, while avoiding any unfavorable gift tax ramifications (and for higher income individuals already pegged to top Federal tax brackets, no adverse Federal tax consequences). And as an added benefit, the trust itself qualifies as a Nevada asset protection trust (indirectly necessary for the favorable tax treatment!).

Unfortunately, the non-trivial costs to create and manage a NING trust, along with the potentially unfavorable Federal income tax treatment (for those not already at top tax rates) limit the appeal of the strategy for most. Nonetheless, for those who do have significant assets and income, and investments with significant tax exposure, a Nevada trust structured as a NING can generate substantial state income tax savings… at least, until the remaining high-tax-rate states follow the recent actions of New York and crack down on the strategy altogether!