Kitces.com - Advancing Knowledge in Financial Planning

How The Way Financial Planning Fees Are Presented Impacts Their Perceived Value

January 13, 2015 07:01 am 15 Comments CATEGORY: Marketing

At the most basic level, consumers will buy a product or service when the (perceived and expected) value exceeds the cost. Whether it's to purchase a toaster, a new car, or services from a financial planner, convincing someone to part with their money in the transaction requires instilling in them a belief that the benefits in the end will be worth the pain of parting with the cost... a difficult hurdle to overcome, given that the cost is immediate and known while the benefits are only anticipated come later.

Yet as Dutch financial planner Ronald Sier points out in this guest blog post, the reality is that persuading someone to pay you for your services isn't just about making compelling points about the perceived benefits to be received. How the cost itself is perceived also matters. And since you control how your costs and expenses are presented to a prospective client, you actually have significant control regarding what your financial planning fees are compared to (which can matter a lot!), and how they're perceived.

So whether you're setting up your website for the first time and considering how to display your financial planning fees, updating your marketing materials about how your costs are communicated, or simply brainstorming how to better explain to prospective clients that the value you provide exceeds the cost, hopefully this will be helpful for you in considering not only how to discuss your value, but the importance of thinking about how you discuss your costs.

Is The SEC Failing To Enforce The “Solely Incidental” Advice Exemption For Broker-Dealers Under The Investment Advisers Act of 1940?

January 12, 2015 07:01 am 13 Comments CATEGORY: Planning Profession

When it originated, the Investment Advisers Act of 1940 sought to create a clearer line between stockbrokers who were primarily in the business of selling securities (for commission), and investment advisers who provided ongoing advice (for a fee). In fact, the ’40 Act declares that anyone who is in the business of providing investment advice for compensation must register as such. Registered representatives of broker-dealers could be exempt, but only if they received no special compensation for advice and any advice they did provide was “solely incidental” to their brokerage services.

Yet as the financial services industry has evolved over the nearly-75-years since the ’40 Act was passed, the lines between brokers and investment advisers have blurred, culminating in the SEC’s proposal in 1999 that “Certain Broker-Dealers [Could Be] Deemed Not To Be Investment Advisers” and not be treated as receiving special compensation even though they were offering fee-based wrap accounts. Ultimately, though, the FPA sued the SEC on the basis that this exemption was broader than what Congress intended with the ’40 Act, and the courts agreed, vacating the rule in 2007.

Yet ironically, when the Broker-Dealer exemption was vacated, so too was an expansion of the definition of “solely incidental” advice, including the recognition by the SEC that providing financial planning services, or holding out to the public as a financial planner, would mean the advice being provided was no longer solely incidental. Although these were merely clarifications of what constituted “solely incidental” advice, the end result is that the SEC has since allowed more and more brokers to hold out as financial planners and offer such services, without requiring them to register as investment advisers. In turn, this raises the question: with all of the fiduciary debate today, do we really need a new/different fiduciary standard for advice, or is the reality simply that the Financial Planning Coalition needs to lobby the SEC to finally step up and enforce the “solely incidental” rules as Congress originally wrote yet?

Weekend Reading for Financial Planners (Jan 10-11)

January 9, 2015 03:45 pm 11 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a look at the top "watch list" priorities from FINRA in the coming year, including new scrutiny on floating-rate bank loans, alternative mutual funds, and the dramatic increase in recent years of "securities-based lending" where affluent investors are using their portfolios to get access to faster, "cheaper" money to buy everything from real estate to luxury items (and raising concerns of what happens if there is some market volatility and the loans must be repaid quickly!).

We also have a number of investment-related articles this week, from an interesting defense of the benefits of the "maximize shareholder value" philosophy from AQR's Cliff Asness, to some thoughts from Howard Marks about the lessons we can draw about the recent volatility in oil prices, a look at the use of municipal bonds in portfolios, an overview of the coming money market reforms (and how some clients may end out in money markets with floating NAV if they're not paying attention!), and a look at where the next market meltdown and advisor debacle may come from (think non-traded REITs and risky bond funds).

From there, we have a few technical planning articles, including: a review of the FAFSA (Free Application for Federal Student Aid) and some planning opportunities and issues for those sending children to college; a look at the emerging rise of "deferred income annuities" and their potential role in a retirement portfolio; and a nice in-depth explanation of the Social Security earnings test, how it works, and how it can impact the decision about the optimal time to begin Social Security benefits.

We wrap up with three interesting articles: the first looks at how spectacularly bad the 2014 economic predictions were about everything from interest rates to the price of oil, yet notes that people will continue to seek out such predictions anyway... not because they want the accuracy of the prediction, but because they're seeking the reassurance that it implies; the second gives an interesting look at how "time perspective" (one's orientation/focus about events in time) can impact financial planning decisions, and raises the question of whether planners should do more to understand their clients' time perspectives when providing advice; and the last gives an interesting overview of the regulatory advocacy efforts of the FPA of Florida state coalition as a template for how financial planners can and are having some success in lobbying and advocacy.

Enjoy the reading!

Reader Survey: Want CE Credit For Nerd’s Eye View Blog Posts You’re Already Reading?

January 8, 2015 07:01 am 6 Comments CATEGORY: Nerd's Eye View

At Nerd’s Eye View, the goal is always to make this an ever-more-valuable resources for our readers. And over the years, your feedback has shaped everything to the look and feel of the blog (including the default font size!), the comment system we use, and availability of webinars for CFP CE credit, and more.

Due to ongoing requests from many of you, the latest feature we are considering is whether to offer the opportunity to earn CFP CE for some of the (more technical) articles you’re already reading here on the blog. I know that many of you already are getting more than enough CE, but if this would be beneficial for enough of you, we’ll see what we can do to offer it! We are exploring some additional "member" benefits for a premium members section as well.

Accordingly, I’m hoping you’ll take just a few minutes to answer this simple 5-question survey, about whether:

1) You would be interested in receiving CE credit for reading the blog;

2) What types of CE credit you want (for CFP certificants? For CIMA and CPWA certificants? For CPAs who need CPE? For attorneys? Something else?); and

3) Whether/what amount you’d be willing to pay as a processing fee (since we don’t have advertisers on Nerd’s Eye View and this does have some cost to make available!).

4 & 5) What types of other "member" benefits you might be interested in?

Thanks in advance for your feedback!

Can Increasing The Long-Term Care Insurance Elimination Period Make Coverage Appealing Again?

January 7, 2015 07:01 am 56 Comments CATEGORY: Insurance

Insurance functions best when it is used to cover high-cost low-probability risks – the kind that aren’t likely to occur, but would be devastating if they did. Technically, paying insurance premiums on an ongoing basis has a slightly greater expected loss than just retaining the risk, but an appealing trade-off if it means converting a potential financial disaster into a manageable ongoing premium.

Yet when it comes to long-term care needs in today’s environment, what was perhaps once a higher-cost lower-probability event has now turned into a very high-probability event with an increasingly large volume of “lower-cost” claims. As a result, long-term care insurance has begun to morph from effective insurance, into something that looks more like just prepaying long-term care expenses in advance at a high premium rate and with little insurance leverage.

As a result, perhaps it’s time to reform long-term care insurance policies so they once again focus on covering (only) high-impact low-probability events. For instance, what if elimination periods for long-term care insurance were increased to allow for a 2 or 3 year deductible, instead of today’s common 3-month period, and individuals could then take the significant premium savings and use it to cover their care during that time period? Could such an increase in deductibles reduce the cost of long-term care insurance coverage enough to make it affordable once again to most of the general public?

Personal Capital Crosses $1B AUM As Tech-Augmented-Human Advisor Revenue Outpaces All Other Robo-Advisors Combined

January 6, 2015 02:56 pm 8 Comments CATEGORY: Industry News

The big news today is that Personal Capital, the financial advisory firm that offers human advisors available to interact virtually with clients utilizing the company’s proprietary Personal Financial Management tools, has crossed the $1B AUM mark.

While often dubbed a “robo-advisor”, the reality as noted above is that Personal Capital does not really belong in the category, as the company actually offers one-to-one relationships between clients and a personal financial advisor (an actual human being) who simply happens to engage with the clients using digital communication tools, making the solution closer to a part-technology part-human "cyborg" advisor than a true "robo" solution.

What’s most notable about Personal Capital, though, is that not only does it function as a technology-augmented human advice platform, but that because it also charges more “traditional” AUM fees (with a starting cost of 0.89% for the first $1M under management), it actually generates significantly more revenue than its pure robo competitors. In fact, while Personal Capital may not be larger than the other “robo-advisor” platforms as measured by AUM, it has in the span of only 3 years actually grown more revenue than all other robo-advisors combined!