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Weekend Reading for Financial Planners (Sep 19-20)

September 18, 2015 02:09 pm 14 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week’s edition kicks off with the recent news that robo-advisor Betterment is now expanding into the world of 401(k) plans, an environment that some argue is especially ripe for technology disruption but due to deeply entrenched players may be especially challenging for Betterment to penetrate at all.

From there, we have a couple of practice management articles, including: a discussion of how advisors can build client loyalty; why asking for referrals is a poor strategy to actually get more referrals; how some advisors are working to build proactive relationships with attorneys to generate referrals; and the importance of hiring people with complementary skillsets to really build a successful advisory firm.

There are also a number of more technical financial planning and investment articles this week, from a look at the rise of DFA funds (now the #10 mutual fund family with almost $300B of AUM!), to a look at some of the recent research on active management suggesting that the search for good active managers may not be as impossible as critics suggest, to a discussion of how some advisors are beginning to do more planning around cash flow for clients, and a research article on how to cut through the wide range of various retirement research studies to figure out which approach is most appropriate for a particular client.

We wrap up with three interesting articles: the first looks at how curiosity is becoming one of the key traits for successful leadership (as it drives leaders to always be seeking new opportunities in today’s ever-changing world); the second raises the question of whether the brokerage industry’s objections to the DoL fiduciary rule are really because they can’t serve small investors, or whether they may be struggling to do so simply because they are operating outdated business models using outdated technology and have failed to stay current; and the last makes the good point that if financial planners really believe that the value of financial planning is more than just delivering technical information and involves providing clients with an outside and objective perspective to reach their goals, that perhaps more advisors should be hiring advisors for themselves, too.

Enjoy the reading!

New Change To FAFSA Rules Will Allow Prior-Prior Year (PPY) Income Data When Qualifying For Financial Aid

September 16, 2015 07:01 am 26 Comments CATEGORY: General Planning

Qualifying for Federal financial aid requires filling out and submitting the Free Application for Federal Student Aid (FAFSA), based on your income from the preceding year. Except historically, this FAFSA process has been challenging, because schools are already issuing acceptance letters about attendance before most families have even finished filing their tax return to know what income to report on the FAFSA!

To make the process easier, this week President Obama signed an executive order that will change the FAFSA rules beginning with the 2017-2018 school year, allowing students to complete the FAFSA based on the “prior-prior year” (PPY) income, and shifting the entire application process back to October of the preceding year (a full 11 months before the student will matriculate!).

The new rules should make it much easier for students to file the FAFSA to determine eligibility for financial aid (especially since it will now be feasible to use the IRS’ automated Data Retrieval Tool). But notably, it means that the current 2015 tax year will now count twice for financial aid purposes (2016-2017 under the current prior-year rules, and again in 2017-2018 under the new PPY rules!). And in the future, the new prior-prior year rules mean the “key” years of income for college financial aid now start as early as the student’s rising sophomore year of high school… but notable end mid-way through the student’s sophomore year of college!

One Young Breakaway Broker’s Story Of Navigating The Broker Protocol And Choosing An RIA Custodian And Technology

September 15, 2015 07:02 am 21 Comments CATEGORY: Practice Management

The reality of starting out as a financial advisor is that it's hard to know what type of advisory firm structure will be best in advance; often, the best strategy is just to dive in, get a job at any reasonable firm that will allow you to launch your career, and after you get some experience, decide whether it's really the right fit for the future. Of course, the caveat to this approach is that if it turns out you do need to make a change later, that change can be scary - so frightening, in fact, that many advisors never make the subsequent changes they should, fearing the unknown and finding comfort in an (admittedly not ideal) current firm or environment.

In this guest post, financial advisor Noah Morgan shares his own transition process in making the leap, first from his original advisory firm to an independent broker-dealer, and then subsequently to an independent RIA. Accordingly, Noah gained a wide range of experience and perspective about what it's like to make these transitions, from vetting RIA custodian platforms to navigating the Broker Protocol and compliance concerns, to selecting the entire suite of technology necessary to sustain the new advisory firm.

So if you're an advisor who's currently unhappy at your current firm, and considering the process of transitioning to something new, hopefully this will be helpful to you in gaining an awareness of the issues that you need to consider if you're really going to make a switch in the future!

Best Practices For Internal Succession Planning Of Financial Advisory Firms

September 14, 2015 07:02 am 14 Comments CATEGORY: Practice Management

The process of executing an internal succession plan within an advisory firm is a challenge, even in the best of circumstances. And the stakes are high. When an advisory firm is created, the founder takes the “risk” of foregone income for a period of years while trying to get the business off the ground… yet when a successor takes over, in many ways the risk is even more severe, as it's no longer just the danger that the business doesn’t succeed, but the more substantial financial risk that the successor won’t be able to repay his/her lenders for the significant capital that was borrowed to execute the deal!

Yet unfortunately, while there have been some books written about how founders should aim to execute a succession plan, remarkably little has been written from the perspective of internal successors, and the steps they should take to maximize the odds of completing a successful succession of the founder’s firm.

Until now. In the new ‘must-read’ book for advisory firm successors, “Success and Succession” (just released this week!) explores how internal successors can best navigate the challenges of completing a succession plan. Written from the perspective of two successful advisory firm internal successors, Eric Hehman and Jay Hummel, along with industry veteran (and successfully-exited founder) Tim Kochis, the book provides guidance on not only the key operational and financial issues faced in executing an internal succession plan and how to manage them, but the emotional challenges that will inevitably arise – for both the successor and the founder – which must be navigated to successfully complete a succession transition!

Weekend Reading for Financial Planners (Sep 12-13)

September 11, 2015 02:22 pm 19 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the latest industry data showing that mergers and acquisitions of financial advisory firms is running at a record pace for 2015, both in terms of the number and the size of advisory firms. Also in the news this week was an interesting new study showing that the bulk of current ETF growth is being driven by independent RIAs, especially firms with over $500M of AUM, that have collectively added half a trillion dollars to ETFs in just the last 12 months!

From there, we have a few practice management articles, particularly focused around the 'necessary' topic of compliance, from a look at the kinds of 'boilerplate' provisions that really are important to include in an advisory agreement with clients, to a discussion of the recent Notice of Proposed Rulemaking from the Treasury's FinCEN division that may require SEC-registered investment advisers to adopt Anti-Money Laundering (AML) compliance rules, to a look at a large RIA that recently received a huge fine from the SEC not because it had significant compliance breaches that harmed clients but because the firm failed to engage in their internal compliance oversight processes necessary to know that employees were acting properly (in other words, it's not enough to be compliant, you need a process to demonstrate that you've confirmed you're being compliant!).

We also have a couple of technical planning articles this week, including: a look at Qualified Longevity Annuity Contracts (QLACs) that were heralded last year as a savior for retirees but thus far have seen very little adoption; recent new research from Wade Pfau, finding that given the impact of investment costs and overpriced stock and bond markets the "safe" withdrawal rate might be under 2%(!); a good article about the key differences between Designated Roth Accounts (the Roth version of an employer retirement plan) and a Roth IRA; and a discussion of the research of Dr. Brigitte Madrian, whose research 15 years ago on the power of automatic enrollment of employer retirement plans indirectly spawned the explosion of the target-date fund industry.

We wrap up with three interesting articles: the first raises the question of whether it even makes sense for financial advisors to retire at all, given how rewarding financial planning is both emotionally (given the deep client relationships) and financially (where it often pays more to keep an advisory firm for several years rather than sell it); the second article looks at the rollout of a new post-CFP designation, called the "Certified Financial Transitionist", originally designed to help train advisors to work with clients who experience "Sudden Money" events, but arguably relevant for virtually any/all advisors (after all, doesn't virtually every client come to us because they need help with some kind of transition!?); and the last raises the question of whether it's finally time for financial planning to shift from an industry where "best practices" are often based on little more than a combined of tradition, intuition, and the school of hard knocks, to a profession where true best practices are established via thorough research and the application of the scientific method to cultivate an "evidence-based" approach to effective financial planning.

And be certain to check out the latest Bill Winterberg video at the end - the latest segment of his FPPad Tech Tour video series for 2015, featuring an interview with yours-truly where Bill reveals, for the first time ever on video, how many blue shirts are actually hanging in my closet!

Enjoy the reading!

The ETF Problem With Stop Loss Market Orders

September 9, 2015 07:01 am 24 Comments CATEGORY: Investments

Now with more than $2 trillion in assets, the exchange-traded fund (ETF) has exploded onto the investment scene in the past 20 years, with the bulk of the growth occurring even more recently, built on the base of popular ETF features from their tax efficiency to relatively low cost to their ability to trade intra-day like a stock (and unlike a traditional mutual fund).

Yet ironically, in recent weeks the popular feature of being able to trade intra-day has turned into a liability instead, as market volatility has triggered a number of extreme (but short-term) situations where ETFs have traded at a significant discount to their intrinsic net asset value, in some cases as much as 30% below intraday NAV for an hour or few at a time.

For those advisors and investors who trade infrequently anyway, this kind of intra-day volatility may be a “non-issue” that was literally not even noticed by those who owned the ETF securities. Except those who panicked and sold at the market’s open based on overnight news. Or, unfortunately, those who were using Good ‘Til Cancelled (GTC) stop loss market orders.

In fact, the recent volatility of ETFs highlights that when it comes to using stop loss orders in particular, advisors and investors must be especially careful about how those trades are structured, in a world where ETFs with ‘temporary’ bouts of illiquidity can trade at dramatic discounts. At a minimum, those who wish to continue to use stop loss orders as a form of risk management may seriously want to consider using stop loss limit orders instead, with a gap between the stop loss and limit thresholds that is wide enough to still trigger a sale when the underlying NAV is falling, but reducing the risk of triggering a market sell order at the nadir of an ETF’s short-term “flash crash” price!