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Why A Mortgage Is Not Actually An Inflation Hedge Itself, But Can Provide Access To Investments That Are

March 11, 2015 07:01 am 25 Comments CATEGORY: Debt & Liabilities

Having a mortgage is often framed as a way for an inflation hedge. As the conventional wisdom goes, with a mortgage your monthly payment is locked in (assuming it’s not an Adjustable-Rate Mortgage [ARM]), even if inflation goes up and interest rates rise. In fact, rising inflation would just devalue the mortgage in nominal (future) dollars.

Yet the reality is that ultimately, a mortgage may be paid off with inflation-adjusted wages, free up funds to be invested into inflation-hedging vehicles (from TIPS to equities), used to create a reserve for investing in bonds at higher rates in the future (a form of call option on interest rates), or be deployed to purchase a residence that provides a hedge against rising rents. In all of these scenarios, though, it is actually how the mortgage-related funds are deployed, or the income sources used to fund it, that are the actual inflation hedges… not the mortgage itself!

Ultimately, this doesn’t mean that a mortgage can’t indirect lead to beneficial outcomes if inflation (and interest rates) rise. But in the end, the benefits will not actually come from the use of the mortgage itself as an inflation hedge, but the other inflation-adjusted assets and income an individual has to support the mortgage instead! Of course, the caveat is that the use of leverage to hedge inflation can cut both ways, and magnify the unfavorable outcomes in non-inflation scenarios as well!

What Robo-Advisors Truly Threaten To Disrupt: Index ETFs and Mutual Funds, Smart Beta And Algorithmic Investing, Custodians and Their Advisor FinTech Ecosystem

March 9, 2015 07:01 am 30 Comments CATEGORY: Technology & Advisor FinTech

While the debate rages on about whether robo-advisors will ultimately be a threat to human advisors, or whether the solutions that combined technology and humans will be the ultimate victors, the reality is that to view the battle as one of “technology vs human advisors” may be missing the real “threat” of robo-advisors. As technology platforms, their disruptive potential goes far beyond just impacting financial advisors.

For instance, the ability of software tools to re-create index funds – but without the mutual fund or ETF wrapper – creates the potential for today’s robo-advisors to disintermediate much of the existing index fund industry, aided by the tailwind of a benefit under tax code that uniquely favors these new “Indexing 2.0” robo-platforms over current fund-based solutions. Similarly, robo-advisors as “trading” software creates the potential to eliminate many active management middlemen, allowing a wide range of smart beta and rules-based trading algorithms to be implemented and automated directly.

And as the robo-technology trends shift from a direct-to-consumer focus to offer new robo-advisors-for-advisors solutions instead, the new platforms present the threat to today’s existing RIA custodians, who face the potential of a generational shift as new less-investment-centric financial planners adopt simplified robo-advisor investment platforms, and build a business there for the long run… which means in the end, the greatest threat of robo-advisors may not be their competition with human advisors, but the way that human advisors adopt them to disrupt much of the existing FinTech ecosystem!

Weekend Reading for Financial Planners (Mar 7-8)

March 6, 2015 02:01 pm 15 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with coverage of the recent SEC and FINRA cybersecurity "sweeps" of advisor best practices, which finds that RIAs have been more lax in their cybersecurity policies and managing than broker-dealers, although notably a higher percentage of broker-dealers have actually suffered fraudulent loss events (though the reasons are unclear). Also in the news this week was a warning that Genworth anticipates yet another bad quarter of financial results due to continued losses on its long-term care insurance, which has now driven the company's stock price down by more than 50% over the past year and led to its debt rating being downgraded to "junk" status.

From there, we have several marketing-related articles this week, from a discussion of the various types of tools/platforms available for advisors who want to blog, to tips in building a "virtual" client webinar event to gather prospects, to a look at how advisors should focus on building "social capital" to grow their firms, and a study of "elite" advisors suggesting that the best advisors spend upwards of 4% of revenues on marketing (compared to only 1%-2% for "typical" advisory firms).

We also have a few retirement-related articles, including one that raises the question of whether more advisors should recommend retirement income solutions with "guarantees" because the cost is a worthwhile trade-off to the client for peace-of-mind (even if it results in less expected wealth and isn't justified "mathematically"), a second that looks at the trade-offs to consider in lump sum versus pension decisions, and a third looking at how variable withdrawal rate strategies may "dominate" fixed withdrawal rate strategies... although it depends on how you define "success" in the first place.

We wrap up with three interesting articles: the first is an open letter from Bob Veres to SEC Chairwoman Mary Jo White, questioning why the SEC really needs to increase RIA exams at all, whether the process is outdated, and why the SEC's staff is allowed to be so inefficient with each examiner averaging of only 2.2 RIA audits per year; the second is an interesting look at how the culture is changing in wirehouse firms since the financial crisis, and whether their outflows of breakaway advisors have less to do with shifting commission-versus-fee business models and more to do with current management undermining the entrepreneurial partnership culture that built those firms in the first place; and the last provides a look at the emerging rise of the Financial Therapy Association and a new body of research that looks at our physiological and psychological responses to money issues and how to better help clients work through them.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including the announcements that robo-advisor Wealthfront has crossed $2B of AUM, ByAllAccounts has crossed $1T of account aggregation, and a review of Morningstar's new iPad app!

Will Section 529A ABLE Accounts Replace The Need For Disabled Beneficiary Special Needs Trusts?

March 4, 2015 07:01 am 21 Comments CATEGORY: General Planning

Planning for special needs beneficiaries is highly complex, a mixture of making challenging care decisions and managing limited resources. Many families will try to save assets on behalf of a special needs beneficiary to provide further support, but if not coordinated properly, can actually disqualify the beneficiary from Federal and state aid programs, including SSI and Medicaid.

The primary solution – establishing a (third-party) supplemental special needs trust – can help preserve the beneficiary’s eligibility for aid programs, but itself has a non-trivial cost to create and maintain, in terms of both legal fees, administrative expenses, and potentially unfavorable tax treatment.

To help ease the challenge for families with special needs children, the recently passed “tax extenders” legislation at the end of 2014 created a new type of account for the supplemental needs of special needs (disabled) beneficiaries. Under the new IRC Section 529A, Qualified ABLE programs will allow families to accumulate funds for such beneficiaries, enjoy tax-free growth, and allow the assets to (mostly) avoid disqualifying the beneficiary from any state or Federal aid, but without the cost and hassle of creating a special needs trust.

Given the limitations of these new 529 ABLE accounts – from restrictions on the size of contributions, to a rather “unfavorable” Medicaid payback provision after the death of the disabled beneficiary – the new Section 529A plans will not likely replace all special needs trusts, but could be used effectively as a supplement to them, and may be an especially appealing alternative to trusts for “smaller” account balances under $100,000.

How I Finally Learned To Delegate By Creating Video Tutorials With Screencasting Software

March 2, 2015 07:01 am 43 Comments CATEGORY: Personal/Career Development

As any advisory business grows, eventually the work that was “always” done by the founder has to be delegated, as there’s just not enough time in the day to do everything. Yet speaking from personal experience, delegating can be difficult, as it often feels like it takes even more time to show someone how to do a task and oversee it, than it takes to just do it oneself!

For me, the “breakthrough” in how to delegate effectively came from using screencasting software – tools that record what’s happening on your computer screen, paired with the audio of you talking while you’re sitting in front of it. The end result – in the time it takes me to actually do the task, I can create an entire “how-to” video tutorial for whoever I wish to delegate the task to in the future… and by recording it, I’ve acted once created a guide that can be referenced again and again as necessary for whoever will be doing the task in the future!

In fact, creating videos of the tasks you delegate can be done so quickly and easily that you may ultimately find yourself forming an entire video library of the key “processes and procedures” of your business… where all you have to do is just do the task you’ve long done already, but record it and then delegate it for good! So if you have trouble delegating, you might want to check out screencasting as a very practical solution!

Weekend Reading for Financial Planners (Feb 28 – Mar 1)

February 27, 2015 03:02 pm 23 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with several big news announcements, including President Obama's public endorsement of the Department of Labor's looming fiduciary proposal, Envestnet's acquisition of robo-advisor-for-advisors platform Upside Advisor barely more than a year into its existence, and the decision of Fidelity to merge its broker-dealer and RIA custodian clearing units into one while also creating a new Fidelity Wealth Technologies division to push forward the company's increasing focus on next generation technology.

From there, we have several investment-related articles this week, from the emerging "existential" crisis for indexing (and whether non-cap-weighting indices like fundamental indexing represent true "indexing" at all), to whether rebalancing really does increase returns or not, to the opportunities of "local investing". There are also discussion of the surging popularity of cash balance pension plans for high-income professionals and small business owners, a nice "lessons learned" article about the world of investment management, and an interesting look at whether owning long-term Treasury bonds might still make sense even at today's low rates (think: defending against deflation risk that could take rates even lower from here).

We wrap up with three interesting articles: the first is a look at the life of 109-year-old Irving Kahn, an investment adviser who started in the business in 1928, profited by shorting stocks in the crash of 1929, and ultimately went on to become a deep value investor after working as a research assistant directly under investing legend Benjamin Graham; the second article is a discussion of how parents should properly set allowances for children, suggesting that most parents do not give children nearly enough responsibility with money early on when it can be best used to teach important lessons about values; and the last is a look at how the "Uberization" of work could lead to an entirely new era of how we find employment and earn money, that may allow for more flexible work than ever, but also lead to a significant decline in the stability and security of employment, with profound ramifications for how we give career, earnings, and saving advice to young people today.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including the Envestnet acquisition of Upside Advisor, the "Superfish" vulnerability on Lenovo laptops, and a new integration from mobile dictation service Mobile Assistant!