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Designing The Financial Planning Software Of The Future – Calculator, Collaboration Tool, And Client PFM

June 29, 2015 07:01 am 19 Comments CATEGORY: Technology & Advisor FinTech

As the world of financial planning evolves, so too does the technology that supports it. And in the coming years, nothing may evolve in the world of advisor technology as much as financial planning software, as it continues its transition from simply being a ‘calculator’ to project the impact of financial planning strategies and recommendations, into an entire platform for ongoing collaborative financial planning for clients.

Yet the evolution of planning software is creating distinct new challenges from a software design perspective, as the tools are increasingly used in three distinct contexts: an interactive collaborative planning tool between advisors and clients in meetings, an ongoing monitoring and personal financial management (PFM) tool for clients, and an advisor support tool for everything from complex analyses to tracking and alerting which clients need assistance. Not to mention the increasing amount of ‘meta data’ available about the advisory business and its clients as well.

In fact, going forward financial planning software designers may need to increasingly view the use of the software through each of these distinct lenses – advisor, client, and advisor-client interaction, as well as business meta-data – to advance the efficacy of planning software, as each use case for planning software is creating its own unique needs and challenges for advisors to work with clients and enhance client outcomes!

Weekend Reading for Financial Planners (Jun 27-28)

June 26, 2015 02:01 pm 19 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the announcement of Schwab's new "Institutional Intelligent Portfolios" solution for RIAs, which will allow advisors on the Schwab platform to provide "robo"-style services for their own clients alongside with Schwab's direct-to-consumer robo offering.

From there, we have several articles on marketing and practice management issues, from a look at the marketing best practices of the "standout" growth firms in the latest FA Insight benchmarking study, to a review of an interesting flat-fee investment model being offered by advisor James Osborne of Bason Asset Management (allowing him to grow $100M of AUM in under 2 years!), a look at the best way that advisors can differentiate themselves (hint: by doing whatever best fits your own personality style and passions!), a discussion of whether adivsory firms should hire a "Director of Client Success" to really aim to improve client retention rates and referrals, and a look at the so-called "pratfall effect" and whether advisors can actually build more credibility by not being perfect and instead committing - and admitting to - making small mistakes with clients.

We also have a few investment articles this week, including: a critique of the validity of smart beta and whether factors can really be anticipated in advance or are nothing more than data-mining; a discussion of the ongoing "buyback extravanganza" and why it may not actually be as problematic as some critics suggest (at least, not right now); and a study of whether the benefits of risk parity strategies have been understated by viewing them as an alternative to a traditional investment portfolio, when instead their greatest benefit may be as a complement to a traditional portfolio for a small slice of the total allocation.

We wrap up with three interesting articles: the first is a review of the recent book "Misbehaving" by economist Richard Thaler, a combination of personal memoir of Thaler's own career and also an interesting historical look at the rise of behavioral economics; the second is an article from the Wall Street Journal suggesting that the time may be coming for the value of financial planning to become separated from the 'traditional' AUM business model; and the last is a fascinating look from the Harvard Business Review as how the doctor-patient relationship is being disrupted by technology, in a manner that may be a harbinger of both the risks and opportunities that could play out in the coming years as technology impacts the advisor-client relationship as well.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including the rollout of Schwab's new Institutional Intelligent Portfolios, the latest advisor updates for Advent's Black Diamond portfolio performance reporting tools, and highlights of the TD Ameritrade Institutional technology summit!

Enjoy the reading!

Understanding The IRD Deduction That Inherited IRA Beneficiaries Often Miss

June 24, 2015 07:01 am 21 Comments CATEGORY: Taxes

Pre-tax assets like IRAs can face a significant income tax burden as their value grows, a challenge that is only made worse for those who are subject to estate taxes on those assets as well. In the extreme, the combination of the two can consume the majority of the value of an inherited IRA bequeathed to a beneficiary.

To help mitigate the combined income-and-estate-tax effect, the Internal Revenue Code allows for an “Income in Respect of a Decedent” (IRD) deduction under Section 691(c). Claimed by the beneficiary of an inherited IRA to the extent of any estate taxes that were caused by the account, the deduction can be material – as much as 40% of the value of the account!

Yet despite its size, beneficiaries in practice often “miss” the IRD deduction, not realizing it was there to claim, or perhaps “losing track” of it when changing accountants or tax preparation software. Fortunately, an amended tax return can be filed to claim a missed IRD deduction from recent years – but only the past 3 years. Which means going forward, anytime an inherited IRA appears with a new client, a good best practice for all advisors is to ask: “did the decedent who left you this account pay any estate taxes?” and if so, be certain the IRD deduction is claimed properly!

And notably, in the end the IRD deduction applies not only to inherited IRA accounts, but also other employer retirement plans, inherited non-qualified annuities, employer non-qualified stock options, deferred compensation, employer NUA stock, and more!

The Ongoing Evolution Of Financial Planning Software – From Calculator To Collaboration To Client Portal

June 22, 2015 07:01 am 17 Comments CATEGORY: Technology & Advisor FinTech

For much of its history, financial planning software was basically just an elaborate calculator. Advisors could gather client data, feed it as input to the calculator tool, and the software would spit out the projected results… which were then used to facilitate the sale of a product.

As financial planning has evolved to be primarily about the delivery of advice itself – not just for the sake of a product sale – so too has the software evolved, from a calculator to illustrate the outcome of a product or strategy recommendation, to a collaborative tool that can be used to formulate the client’s plan itself. After all, given the complexity of an uncertain future, it’s hard to really understand what path to pursue, until the client first analyzes a range of scenarios to understand the opportunities. Accordingly, financial planning software has increasingly become a tool for real-time collaborative scenario planning.

In the future, though, financial planning software can and will progress further, from a tool that supports collaboration at a single point in time, to one that truly supports continuous planning for the reality of continuous change we face in our lives. Imagine a holistic personal financial management (PFM) solution for clients, that simultaneously operates as financial planning software for the advisor, all continuously updated from external data flows, making it feasible for the advisor and client to see the milestones and recommendations that have already been accomplished, and whether the client is on track in progressing towards goals of the future.

Weekend Reading for Financial Planners (Jun 20-21)

June 19, 2015 02:39 pm 20 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with an interesting article from Investment News, highlighting that while there's a growing discussion of how advisors can use "big data" to improve their businesses, asset managers may already be using "big data" insights by tracking every metric they can about us as advisors, to figure out which might be interested in using their company's investment products!

From there, we have several technology-related articles this week, including: a new "platform" bundled-technology partnership between portfolio reporting software Black Diamond and financial planning provider MoneyGuidePro; a review of one advisor's good (and some challenging) experiences using the eMoney Advisor account aggregation portal with clients; issues for advisors to consider as Windows 10 rolls out later this summer; a review of an emerging new financial planning software provider called WealthMinder; and a first look at a coming "Financial Health/Wellness" app coming out soon from FinanceLogix.

We also have a few more technical-competency articles this week, from a discussion of key issues to consider when clients become eligible for Medicare (e.g., when it is, and is not, ok to delay enrolling in Medicare!), to the issues that must be raised with clients who are thinking about retiring abroad, to a first look at how estate planning strategies may change if recent White House proposals are enacted that would eliminate the stretch IRA.

We wrap up with three interesting articles: the first looks at how financial planning services should be offered to younger clients, who actually experience a high volume of major life transitions that necessitate planning advice (from job changes to starting businesses to starting families) but may have little need for "traditional" planning software and its retirement-centric Monte Carlo projections; the second looks at a new open-source "robo" platform called Wealthbot.io, which would allow any advisory firm to hire a developer and adapt the platform for the needs of their particular practice and clientele (think "Wordpress for robo-advisors"); and the last is a call-to-action from FPA National board president Ed Gjertsen that financial planners need to step up and get more involved with the Financial Planning Coalition's advocacy efforts, especially as the Department of Labor fiduciary proposals loom large, and FPA prepares for its National Advocacy Day on Capitol Hill this coming Wednesday, June 24th.

Enjoy the reading!

Strategies And Tactics When Using Donor-Advised Funds For Charitable Giving

June 17, 2015 07:01 am 32 Comments CATEGORY: Taxes

The primary benefit of a donor-advised fund (DAF) is that it allows someone to donate assets for charity today – and receive a tax deduction now – even though the actual funds may not be granted to the final charity until some point in the future. In other words, the donor-advised fund essentially functions as a conduit, where the donor receives a tax deduction when the money goes into the DAF, but has discretion about when the assets will finally leave the DAF and actually go to the charity… and in the meantime, assets inside a donor-advised fund grow tax-free.

Given the potential of a donor-advised fund to separate the timing of the contribution and tax deduction, from the final donation to the charity itself, the most common strategy for using a donor-advised fund is to “front load” charitable contributions in a high income year – when the tax-deduction threshold for charitable contributions will be higher – and then use the DAF to make subsequent distributions to the charities themselves in the future. By using the strategy, the donor can maximize the value of the tax deduction in a high-income year, but retain the flexibility to decide in the future to which charities the funds will actually go.

Notably, though, the donor-advised fund as a vehicle provides a mechanism for other charitable giving tactics as well. For instance, the donor-advised fund can facilitate giving anonymously, or creating an “In Memoriam” fund. The DAF can also help facilitate donating appreciated securities to a smaller charity that doesn’t have the means of handling the donation directly. And for some families, the donor-advised fund can function as a less expensive alternative to a private (non-operating) foundation, providing a means for the whole family to engage in the process of charitable giving, while allowing the tax-free growth of a family’s charitable legacy.