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Filling The Income Gap When Starting A New Financial Planning Firm

September 1, 2014 07:01 am 46 Comments CATEGORY: Practice Management

Launching a financial planning firm is difficult. Not merely because of the cost and complexities of founding the business, and the challenge of getting new clients, but the opportunity cost of foregone income when you’re trying to build a practice and don’t have enough clients to be sustainable yet. In fact, for most advisors the “income gap” from when a practice is launched until it pays a livable wage can be many times the pure startup costs alone!

In the past, financial planners often bridged the gap by selling financial services products and taking the significant upfront commissions to round out their income in the early years. Yet in today’s environment, and especially in an advice-centric business, selling products for large commissions simply isn’t feasible or desirable… yet the lack of commissions and rising focus on fee-only firms ironically makes it even harder to bridge the gap successfully!

Fortunately, there are solutions, from doing hourly planning and offering standalone financial plans, to actually providing a limited amount of commission-based insurance solutions that clients actually need (and would have to pay for anyway), to easing into a practice by getting a job as an associate planner first or even getting a “side gig” to help make ends meet in the meantime. While these income gap fillers won’t necessarily fully resolve the issue – especially since the greatest challenge may simply be finding and getting clients in the first place – they can go a long way to at least partially bridging the gap and making it easier to survive the launch of a new firm!

Weekend Reading for Financial Planners (August 30-31)

August 29, 2014 02:22 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with an interesting lawsuit that has been filed by "whistleblower" David Danon against Vanguard, suggesting that it is abusing its unique corporate structure to avoid any Federal and state income taxes that should be paid (to the tune of $1B of foregone Federal taxes in the past decade), in addition to implicitly giving it an unfair competitive advantage as a result.

From there, we have a few investment-related articles this week, including a discussion of whether the era of the stockpicker may be definitively coming to an end as Vanguard approaches $3 trillion of AUM and the expansive march of investment tools and technology makes "everyone" such a capable investor that there's not enough alpha left to go around, the emerging price war between established financial services companies (and financial advisors) and technology companies (e.g., robo-advisors) who are driving down the cost of a pure passive strategic portfolio that is regularly rebalanced, and a fascinating article finding that low-cost active managers really may be providing value (including Vanguard's own active funds) and that the real issue is not about active vs passive but simply high-cost versus low-cost.

We also have several technical financial planning pieces, from a great discussion by David Blanchett and Wade Pfau about how most of the criticisms of Monte Carlo are not actually faults of Monte Carlo but simply flaws in how our typical Monte Carlo tools are designed and used (and could be solved with better software tools and assumptions), to a look at the re-emergence of "jumbo" reverse mortgage loans after "smaller" HECM reverse mortgages have dominated the landscape for 5 years (though the new loans may still be too expensive to be competitive). There's also a good summary of the recent Social Security Trustees' Report, highlighting that Social Security is not as bad off as most suggest!

There are a couple of practice management articles as well, including how advisors can take advantage of the "small data" opportunities in their practices along with the "big data" solutions that are being built for them, some tips about processes/procedures to implement to avoid HR headaches as an advisory firm owner, and a nice guide on how to onboard a new employee in an advisory board.

We wrap up with three interesting articles: the first looks at whether the financial services industry needs to get better about communicating more visually and putting some "glamour" into solutions (without being abusive); the second is written by a so-called "0.01%er" about the problems with income inequality and making an interesting case for why a significant increase in the minimum wage could be good for both the middle class and capitalism; and the last paints a sad but disturbingly accurate picture of just how "strange" the financial services industry really is, in a country where doctors must attend medical school and lawyers must pass the bar - and even becoming a taxi driver in London requires passing a test that can take years of practice - but in financial services, "managing money requires little more than a desire to manage money" (and a very rudimentary licensing test)!

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including big changes for online data storage for users of Dropbox and a look at whether the latest Google Apps are making Microsoft Office less necessary than ever! Enjoy the reading!

Why Social Security Dependent Benefits For A Child Can Make It A Good Deal To Start Early And NOT Delay

August 27, 2014 07:01 am 65 Comments CATEGORY: Retirement Planning

For prospective and current retirees who are concerned that "unexpected" or extreme longevity may lead them to run out of money, there are few strategies more effective than the decision to delay Social Security benefits. The tradeoff - where payments are not received now, in exchange for higher payments in the future - is similar to buying an income annuity, or investing in a bond ladder that will begin liquidating in the future... except that the implicit "pricing" of the decision to delay Social Security is far better than any commercial annuity or bond yields available today.

The caveat to the approach, however, is that Social Security dependent benefits may also be available for those in their 60s who still have young children in the home - an increasingly common situation, between couples who start a family later and the rising divorce rate that has also led to a greater frequency of second marriages with young children. And the availability of dependent's benefits can significant diminish the benefit of delaying Social Security; while delaying does increase the individual's own benefits in the future, along with potential survivor benefits, waiting may also permanently forfeit children's benefits that won't be available down the road (as the children may be too old by the time the retiree reaches age 70).

In light of this situation, planning for Social Security benefits with "young" children in the home (those under age 18) needs to be done more carefully. In some situations, the children may be so close to 18 that it's still worthwhile to delay. In other scenarios, the opportunity to file-and-suspend at age 66 - starting both spousal benefits and activating dependent benefits as well - may be the best way to go. But in many situations, the potential dependent and spouse's benefits are so large - even with the "maximum family benefit" limitations - that the best strategy, even in the long run, is to start benefits as early as possible (especially if the Earnings Test will not apply!).

Why Spend Money On Marketing When You Can Get Paid To Market Your Advisory Firm?

August 25, 2014 07:01 am 4 Comments CATEGORY: Practice Management

Traditional marketing like advertising can be expensive – so expensive, that few advisors ever engage in such tactics, relying instead on less expensive marketing approaches like generating referrals from existing clients and centers of influence, or focusing on a niche where the advisor can build a brand and demonstrate expertise that attracts niche clients to them through an inbound marketing strategy.

Another alternative, though, is to deliberately craft a limited scope solution for clients, valuable enough that clients will pay for it, while giving the advisor the chance to demonstrate their expertise and begin to establish a relationship. For instance, offer clients the opportunity to get a customized, individualized Social Security analysis to help facilitate their Social Security timing decision for a flat $200… and then offer clients who find the meeting valuable the opportunity to work with the advisor on an ongoing, comprehensive basis, at the advisor’s usual “full solution” cost.

The end point of such an approach is that many “clients” will just pay for the lower tier service and stop before becoming top tier clients, only while a few will choose to pay for the advisor’s full comprehensive solution. However, in an environment where advisors already do “approach talks” and “introductory meetings” with prospective clients – for free, and while trying to avoid giving any “real value” for fear of giving away too much of what clients are supposed to pay for – arguably the tactic of simply trying to deliver value and real solutions from the start can be equally or more effective in demonstrating expertise and establishing a relationship… except now, the advisor is actually getting paid to market themselves!

Weekend Reading for Financial Planners (August 23-24)

August 22, 2014 02:55 pm 3 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the interesting announcement that TD Ameritrade has launched a program that will refund advisory fees for clients in their Amerivest managed account if their portfolio is down for two consecutive quarters, following on a similar "accountability guarantee" program launched by Schwab late last year, and raising the question of whether such fee rebates may be an emerging trend and/or competitive threat against advisors or just a lightweight marketing promise that few clients will actually ever exercise.

From there, we have several practice management articles this week, including: tips and techniques for better growing referrals from Centers of Influence (hint: make it about just serving current clients better first, and referrals second); why the industry needs to back off its urgent pleas to advisors about succession planning and recognize that it's simply not what most want to do; a look at the consequences of "dithering" about engaging in continuity planning as an advisor; and a review of two new designation programs recently launched to help advisors bone up on their Social Security planning techniques.

We also have several investment articles, from a Rob Arnott discussion about what "smart beta" should mean (and how to better distinguish the legitimate smart beta strategies), to a discussion from Robert Shiller about the sustained elevation of cyclically-adjusted P/E ratios over the past 20 years and whether it's a permanent or temporary phenomenon, to the recent announcement that Vanguard is now closing in on a whopping $3 trillion of AUM (and its Total Stock Market Index recently become the world's largest mutual fund as well). There's also an article about how "expensive" it actually is to pay insurance premiums on a monthly or quarterly basis rather than annually, with markups equivalent to APRs in the (sometimes high) double digits!

We wrap up with three interesting articles: the first looks at how many financial planners fail to engage prospective clients by appealing too much to their rational side alone and not recognizing that many buying decisions - including the selection of a financial advisor - has a significant emotional component; the second explores how a simple "client service calendar" can become a tool to help communicate an advisor's ongoing value to current (and even prospective) clients; and the last provides a nice reminder about all the ways that financial planners can add "alpha" to a client's life beyond just adding to portfolio returns.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including the explosive growth of Laser App which now has 115,000 advisors using 32,000 "paperless" online forms! Enjoy the reading!

Why A Roth Conversion May Be A Bad Idea Even If Taxes Are Higher In The Future

August 20, 2014 07:01 am 30 Comments CATEGORY: Taxes

With years of ongoing Federal budget deficits and a large and growing national debt, there is a common perception that "at some point" tax burdens must rise to address the issue. While the timing is not certain, the belief that higher tax rates may be inevitable has become a strong driver for many advisors and clients to do whatever they can to manage that future tax exposure. And one of the most popular strategies: take the tax exposure off the table altogether, by contributing to Roth accounts and doing Roth conversions, with the goal of paying taxes now when rates are lower and not in the future when they may be higher.

A closer look at paths to tax reform that can address Federal deficits though, reveal that while tax burdens in the aggregate may be higher in the future, marginal tax rates will not necessarily be higher. In fact, most tax reform proposals, from the bipartisan Simpson-Bowles to the recent proposals from Representative Camp, actually pair together a widening of the tax base and an elimination of many deductions with a lowering of the tax brackets! In addition, proposals to shore up Social Security and Medicare often involve simply raising the associated payroll taxes that currently fund them... tax increases that would result in a higher tax burden on workers, but no increase in the taxation of future IRA withdrawals. And the US remains one of the only countries that does not have a Value-Added Tax (VAT), which could also increase the national tax burden without raising marginal tax rates.

In the end, the simple reality is that there are many paths to higher tax burdens in the future that don't necessarily involve higher marginal tax rates on IRA withdrawals. Which means ultimately, advisors should be very cautious about doing Roth conversions - especially conversions at rates that are 33% or higher - and the best possible thing to do with a pre-tax IRA may simply be to continue to hold it, and wait for tax burdens to increase... because when paired with a compression of tax brackets that leads to lower marginal tax rates, not converting to a Roth could actually be one of the best long-run tax savings strategies around!