Kitces.com - Advancing Knowledge in Financial Planning

Why I Do Not Believe The SEC Should Create A Uniform Fiduciary Standard For All Brokers And Investment Advisers

March 30, 2015 07:01 am 47 Comments CATEGORY: Planning Profession

With 2015 shaping up to be a potentially significant year for fiduciary regulation, recent comments by SEC chairwoman Mary Jo White suggests the SEC will soon begin to consider how to draft rules that could subject broker-dealers to a similar fiduciary standard as the one that applies to investment advisers. Most likely, this would occur by creating a “uniform fiduciary standard” that would apply equally to both groups, given that the lines between the two types of “financial advisors” have blurred to the point that consumers no longer understand the differences.

Yet the reality is that when advisors and salespeople are clearly labeled as such, consumers actually can understand the difference. We intuitively understand that the advice of a doctor or lawyer is different than the fashion “advice” of the salesperson in a clothing store or the nutritional "advice" of the person behind the counter in a butcher shop. And in fact, subjecting salespeople to an advice standard can create more problems than it solves, whether it’s making butchers become Registered Dieticians, or turning brokers into fiduciaries while they are supposed to still fulfill their actual role as brokers.

Accordingly, perhaps the better solution to the blurring of the distinction between investment advisers and brokers is not to subject them all to a single uniform fiduciary standard as "financial advisors", but instead to simply re-assert the dividing line between them. Let advisors be [investment] advisers (subject to the fiduciary rule that already exists), brokers be the salespeople they legally are, and rather than mixing the two let each hold out as such to the public - where brokerage salespeople are called brokers and investment advisers are called financial advisers - so consumers understand the true choice being presented to them. In other words, consumers don't deserve a choice between fiduciary and suitability; they deserve a choice between advisers and salespeople.

And notably, the rules already exist to create such a separation, under the Investment Advisers Act of 1940. Which means if the SEC merely enforced the existing rules as written, where any advice that is beyond being “solely incidental” to brokerage services would require investment adviser registration anyway, we could resolve today’s consumer confusion about financial advisors… without writing any new laws at all!

Weekend Reading for Financial Planners (Mar 28-29)

March 27, 2015 02:45 pm 22 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the big announcement that traditional insurer Northwestern Mutual has bought out "robo-advisor" LearnVest for a sum reported to be more than $250M in cash, though it's not entirely clear whether Northwestern is looking to grow and adapt LearnVest's fee-only financial planning business model, or simply adopt LearnVest's unique technology, including a consumer Personal Financial Management (PFM) app and financial planning software, internally for Northwestern's own agents and brokers. Also in the news this week were new details about Schwab's Institutional Intelligent Portfolios, its "robo-advisor-for-advisors" offering that appears to have more flexibility than the direct-to-consumer solution, but will still entail some indirect and possibly direct costs for advisors and their clients.

From there, we have a number of additional technology-related articles this week, from a discussion of why it's important to "own" and not "lease" your website from a packaged template provider, to a review of the latest "3.0" edition of the FinaMetrica risk tolerance software, to a review of the latest in rebalancing software tools, and also a discussion of some important caveats and exclusions to be aware of when considering cybersecurity insurance for your advisory firm.

We also have several more technical articles this week, including: recent new research into how retirees spend on health care as they age, showing that medical expenses are actually far more stable than most believe (but long-term care remains a big wildcard); a discussion of sequence of return risk and what it really means; and a look at how, even in times of volatility, only a portion of a diversified portfolio is really at risk for retirees, which has implications for both how funds should be invested in retirement, and how to manage that risk with dynamic spending policies.

We wrap up with three interesting articles: the first looks at the rising trend of RIA custodial platforms moving into more and more direct competitor with the independent RIAs they serve (from growing their own wealth management offerings to giving consumers money-back guarantees that independent RIAs can't match); the second is a review of the ways that broker-dealers make money off their own advisors, in both transparent and not-so-transparent ways; and the last is a discussion of how the nature of client review meetings is evolving, as information that once had to be discussed in a meeting can now be easily accessed from a smartphone, raising interesting questions of just how often it's really necessary to meet with clients in person and what role shorter virtual meetings could play in the process.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including his own discussion of the new Schwab Institutional Intelligent Portfolios for advisors, and the Northwestern Mutual acquisition of LearnVest.

Enjoy the reading!

LearnVest Sells (Out?) To Northwestern Mutual – Successful Robo Sale Or Just Another FinTech PFM Software Deal?

March 26, 2015 10:50 am 20 Comments CATEGORY: Industry News

The first quarter of 2015 has been a record-breaking flurry of merger and acquisition activity in the world of financial advisors, not just amongst advisory firms buying each other, but with acquisitions of the technology companies that serve advisors. In fact, 2015 continues to shape up as a breakout year for advisor FinTech.

The latest news is this week’s announcement that “robo-advisor” LearnVest is being acquired by traditional insurance company Northwestern Mutual for an undisclosed sum. Yet for all the buzz about the robo-advisor movement, the reality is that LearnVest’s business model was actually built around human advisors – it was not a true robo-advisor – and the Northwestern Mutual purchase may have actually been focused more on the software tools that LearnVest built for itself, in particular its integrated Personal Financial Management (PFM) and financial planning software, not the core LearnVest Planning business model.

In fact, with details emerging that LearnVest may have only had a few million dollars of revenue and been far from profitability (or even scaling to profitability) after 6 years of growth, its free PFM app for consumers and supporting integrated planning software for its advisors had a whopping 1.5 million users, giving Northwestern Mutual both a powerful technology tool to leverage across its existing advisor base, and a treasure trove of data on 1.5 million prospective clients to which it can cross-sell financial services products in the future. Which means in the end, LearnVest may simply finish as an example of a company that started out to disrupt the financial services with a unique business model, raised too much capital and created expectations that couldn't be fulfilled, and ended up being sold (out?) as a technology solution pivoted to serve the financial services establishment and its traditional manufacturing and distribution of financial products instead. And now the only questions are: how long will Northwestern keep LearnVest planners in place, and which advisor FinTech solution – PFM or otherwise – will be bought out next?

Qualified Charitable Distributions From IRAs Have Lapsed Again For 2015 But May Be Reinstated Again – Defend By Doing Them Anyway!

March 25, 2015 07:01 am 21 Comments CATEGORY: Taxes

While the Internal Revenue Code does allow those who donate funds to charity to receive an income tax deduction to offset a portion of their income, in practice the two rarely offset perfectly. Income is counted “above the line”, increasing Adjusted Gross Income and impacting a wide range of tax credits and deductions, while charitable contributions only apply for those who itemized deductions in the first place (and face further charitable contribution deduction limits as well). As a result, there is often some “tax slippage” between the two.

In recent years, retirees who have “more than they need” in their IRA have been able to utilize the “Qualified Charitable Distribution” (QCD) rules to donate directly from an IRA to a charity, achieving a “perfect” pre-tax contribution and avoiding any tax slippage. Unfortunately, though, the QCD rules have come and gone several times since they were created in 2006, and after being briefly reinstated at the end of last 2014, the rules for QCDs have lapsed once again for 2015, raising doubt for those who want to do QCDs this year about how to proceed.

However, as it turns out, the best strategy to handle the uncertainty of whether QCDs will be extended or not is just to do them anyway! At worst, if the rules are not reinstated, the outcome will be no worse than just being forced to take an RMD and making a charitable contribution anyway (with the not-perfectly-offsetting tax deduction). However, if the rules are brought back once again, those who make direct charitable distributions from their IRAs will enjoy all the benefits of QCDs… even if the rules are only “fixed” after the fact!

Crafting An Annual Client Service Calendar To Illustrate A Financial Planner’s Value To Prospective Clients

March 23, 2015 07:01 am 17 Comments CATEGORY: Practice Management

In a relationship-based service business like financial planning, a lot of work goes on behind the scenes to provide value to clients. On the one hand, this is the whole point of hiring a financial advisor – to delegate at least some of that work to a professional – yet at the same time, when much of the service work becomes invisible “shadow work”, clients may not fully appreciate how much is really done on their behalf.

For existing clients, bringing the shadow work out of the shadows can be as simple as tracking and documenting all the service work done throughout the year, and providing a year-end summary that clearly illustrates just how much the firm has done for them. Yet for prospective new clients, this doesn’t work – it’s not possible to show clients what’s been done when nothing actually has been done yet!

A potential solution to this dilemma is for advisory firms to create what practice management consultant Angie Herbers calls an “annual client service calendar” – a physical document that illustrates all the different financial planning and investment work being done on their behalf, as well as the reports that will be delivered, and the various events the firm makes available to its clients. While the exact details of an annual financial planning service calendar will vary by the advisory firm and the services it provides – and may be highly unique for firms with a focused niche clientele – ultimately the goal is simply to turn the “intangible” service work of financial planning into something tangible the client can feel and touch and see, to really understand the value they’ll be getting for the advisor’s cost!

Weekend Reading for Financial Planners (Mar 21-22)

March 20, 2015 03:45 pm 14 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the big announcement from SEC chairwoman Mary Jo White that she intends to have the SEC push forward on a uniform fiduciary standard for brokers and investment advisers, nearly 5 years after Dodd-Frank legislation originally authorized the SEC to do so. Of course, the devil remains in the details of what will or will not come forth as the SEC begins its own prospective rulemaking process in the coming months and years.

From there, we have a number of practice management articles this week, including a look from Investment News at how some of the largest ($1B+ AUM) advisory firms seem to be getting more profitable and successful (and growing even faster) as they get larger, a discussion of how increasingly advisory firm owners are attending conferences not for educational content but as an opportunity to network for advisor recruiting, and the issues to consider when deciding whether or not to adopt account aggregation software in your practice.

We also have several more technical articles this week, from an interview with economics professor Laurence Kotlikoff on his new Social Security planning book "Get What's Yours", to a discussion of how long-term care insurance may change as premiums continue to rise and emerging studies find that consumers are more likely to need long-term care than previously thought but the typical duration of claims is actually far shorter than once believed (averaging less than 1 year for men and under 1.5 years for women), and what clients should consider if they're not going to buy long-term care insurance and need to come up with their own plan. There are also two investment articles this week - the first is an look from Bob Veres at how advisors are preparing for the potential "bondmageddon" in the coming years, and the second is a research paper from GMO about how pension funds should manage "valuation risk" by dynamically adjusting equity exposure over time (a strategy that can help individual retirement planning as well!).

We wrap up with three interesting articles: the first is a profile of Luke Landes, who built the Consumerism Commentary personal finance blog into a seven-figure business over the span of a decade; the second is a look at how most people who feel they aren't productive enough are really just struggling with the fact that they're so overcommitted they couldn't possibly do everything they've set forth for themselves (there just aren't enough hours in the day!); and the last is a series of "lifehacks" and tips to manage your own personal efficiency, from how to better handle the never-ending flow of email, to maximizing your productivity by focusing on one task at a time for 25 minutes each.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including a review of this week's Nerd's Eye View article on how to choose technology and start a new RIA on a budget, to the newest "second opinion" tool for consumers from SigFig, and more!

Enjoy the reading!