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Weekend Reading for Financial Planners (Apr 26-27)

April 25, 2014 04:14 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the latest news in the CFP Board's lawsuit with the Camardas... which is that there is no news, the CFP Board is "still working on" going through more than 60,000(!) documents to prepare for discovery, and that the CFP Board may have already racked up 2,000 hours' worth of legal fees at an estimated cost of $600,000, preparing for a case that hasn't even gotten underway in court yet. Given that both the CFP Board and the Camardas are asking that the opposing party pay all the legal fees, the case may potentially be spectacularly expensive for the losing party, in addition to any other ramifications from the outcome.

Beyond that news, this week's readings include several articles related to retirement research, including a look at whether "dynamic" asset allocation strategies based on market valuation may lead to more sustainable retirement income than just rebalancing to the same static portfolio each year, a discussion of the current landscape of retirement preparedness for baby boomers (which suggests that while the average baby boomer is in danger, in practice there is an increasing gap between the retirement "haves" and "have-nots"), an overview of the "2 schools of thought" on retirement income planning (probability-based versus safety-first) and the differences between the two retirement planning approaches, a study of whether small-cap value stocks are as good for retirement income portfolios as they are for accumulation portfolios, and a study on the best time to annuitize a managed portfolio for retirement income that finds at best retirees should be waiting until their 70s if not later (or never).

We also have a few investment-related articles this week, from a look at whether the commonly discussed long-term benefits from rebalancing may actually be overstated, to an examination of whether it really makes sense to own commodities futures as a diversifier or return enhancer in a world where commodities themselves theoretically just rise on average at the pace of inflation (generating no real return). There's also an article that provides some good basic due diligence questions to consider whenever you're evaluating one of the increasingly popular "tactical" managed-ETF portfolio strategies.

We wrap up with three interesting articles: the first examines some recent research from Cerulli Associates which finds, contrary to common wisdom, that being referred is only a key factor for 1-in-9 affluent investors choosing an advisor, and that (by a small margin) "reputation" is actually the most common driver of the advisor selection decision; the second is a profile in the NY Times of an investment adviser who started out 8 years ago as a stock-picker but, despite some reasonable success, ultimately decided that using ETFs and index funds and managing holistically was what clients really needed; and the last by industry pioneer Roy Diliberto on how the world would be different if he could be "King for a Day" and set things right for the financial planning profession... with a lot of changes that will resonate with today's financial planners. Enjoy the reading!

Active, Passive, Strategic, Tactical – What’s Your Investment Management Style?

April 23, 2014 07:01 am 15 Comments CATEGORY: Investments

Historically, the active vs passive divide has been primarily a question of how to invest within an asset class. Is it better to utilize an active manager who will try to outperform an index (at the risk of underperforming it), or simply buy the index itself in the form of a fund that at worst should simply “underperform” by the margin of a very small fee. Either way, most investment managers will still implement a remarkably similar asset allocation – regardless of the active vs passive divide – based on the principles of Modern Portfolio Theory.

Yet a deeper look at MPT reveals that in reality, it may have never been intended as a model for strategic asset allocation in the first place. Markowitz himself advocated in his original research that MPT should not be implemented simply by looking at long-term historical averages, but instead by adjusting the statistical analysis of risk and return based on nuances not taken into account by formal computations alone.

The end point of this dynamic is that the active vs passive divide of investment management is actually split on two different dimensions: to be active or passive within asset classes, and whether to be strategic or tactical amongst them, leading to four quadrants of investment management styles depending on which combination(s) the advisor chooses.

Ultimately, this means that going forward investment managers must be more cognizant to frame their approach based on both dimensions, and recognize clearly where they can – or cannot – add value for clients. So what’s your investment management style? Tactical active, Strategic active, Tactical passive, or Strategic passive?

Vanguard Personal Advisor Services (VPAS): The First Low-Cost “Indexing” Solution For Financial Planning Services?

April 21, 2014 07:01 am 13 Comments CATEGORY: Planning Profession

As financial planning continues its rise, more and more advisors are getting the CFP certification, and an increasing number of firms – from insurance companies to wirehouses to RIAs and everything in between – have been incorporating financial planning into their offering to varying degrees. And now it looks like a new player is entering the space, likely to make a big splash: Vanguard.

In fact, the new “Vanguard Personal Advisor Services (VPAS) offering may have the potential to do to financial planning what their launch of the index fund has done to investment management: create a core, low-cost, basic "indexing" solution to everyone, above which any advisor must rise to deliver value and justify their cost. And priced at a 0.3% AUM fee with a $100,000 minimum (that may soon drop to $50,000), the “Vanguard Financial Planning Indexing” solution may be very disruptive to both “robo-advisors” and today’s traditional advisors as well.

Ultimately, this won’t be the end of individual financial planners – in fact, Vanguard’s move, including the decision to use real human advisors who are CFP certificants and not be a "robo-advisor" – validates the importance of financial planning and the value of getting it from a real human being. Yet at the same time, the sheer size that Vanguard already has creates the potential for it to instantaneously reach the requisite volume of clients to achieve both operational and marketing scale. For individual advisors to survive and thrive, it will become more necessary than ever to gain further expertise, specialize, establish niches, and create ways to differentiate themselves from the new low-cost financial planning “indexing” Vanguard solution.

Weekend Reading for Financial Planners (Apr 19-20) – Practice Management Edition!

April 18, 2014 03:01 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - Practice Management Edition! This week's edition kicks off with the results of the FPA's latest practice management study on time management, which finds that if you feel like you're not in full command of your time and schedule as a financial advisor, you're not alone; as the results show, only about 1/3rd of advisors are feeling in control of their time these days! The FPA study provides some suggestions of "what's working" for advisors who do feel in control of their schedules, and is part of their broader rollout of practice management guidance under the new Research and Practice Institution.

From there, we have a long list of practice management articles this week, including: how to protect your practice against thieves trying to commit wire fraud against your clients (and what you must do to avoid liability for a mistaken transfer!); how to craft a social media policy for your firm and roll out social media across your employees; the "right" way to attend a conference to get value (hint: meet as many people as you can); how the key to improving your firm is about trying to improve things one step at a time, rather than delaying until there are lots of problems and trying to fix them at once (which is overwhelming and rarely works); how to manage the coming "crunch" in advisor compensation as competition heats up (key takeaway: go big or go niche); ideas in better implementing common practice management tips; some wisdom in how to ensure your prospective merger with another advisory firm goes smoothly in the long run; and recent survey of CFP certificants suggesting that at least some advisors believe the recent CFP Board "scandals" have been taking a toll on its credibility.

We wrap up with three interesting articles: the first suggests that perhaps we should back away from trying to set financial goals for/with clients, and instead try to focus on the systems and habits that will make them financially successful in the long run; the second looks at the psychology of tax refunds and some research suggesting that for clients who have difficulty saving, getting a big tax refund might not be such a bad thing after all (and in fact, bigger may be better); and the last explores how being a successful leader means at some point, leaning to say "no" and limiting how people can access your time and attention, or you will struggle to achieve your own goals and priorities. Enjoy the reading!

Is There A “Robo-Advisor” Bubble? Wealthfront, Betterment, & LearnVest Raise $95M In Capital In Two Weeks!

April 16, 2014 07:01 am 19 Comments CATEGORY: Technology & Advisor FinTech

As the buzz around the "robo-advisors" continues, this week marks another two big announcements: Betterment has raised another $32M in a fresh round of venture funding, with another $28M for Learnvest, following on the heels of $35M from Wealthfront just two weeks ago. Collectively, the three platforms have raised a whopping $95M in just the past two weeks, with the total collective funding for the robo-advisor space approaching a quarter of a billion dollars.

Yet despite all this focus, the actual business and revenue growth results for robo-advisors has been fairly meager, at least so far. The latest fundraising for these three platforms brings their total venture capital funding up to more than $150M, despite the fact that after 3-5 years the companies have been around with "exponential" growth, they cumulatively have less than $5M of revenue. Collective across all the robo-advisor-labeled platforms, actual assets under management (not just fuzzy "advisements") is no more than a few billion dollars, which at the fee schedule for these platforms likely amounts to little more than $10M of revenue for platforms that have cumulative venture capital funding in excess of a quarter of a billion dollars. Which implies, to say the least, that at least a few of these VC investments probably won't work out so well.

Nonetheless, this doesn't mean the robo-advisor trend should be ignored, despite the fact that they have little more than roughly a 1/1000th market share of household investable assets. While there's still little evidence to suggest that robo-advisors are drawing any volume of clients from human advisors, they are demonstrating how the core of constructing and implementing a passive, strategic portfolio can be commoditized for an extremely low cost. In the end, we may look back on this 2009-2014 era as one that transformed technology-driven portfolio construction the way the introduction of the index fund transformed the world of stockpickers 40 years ago. Notably, the introduction of the index fund did not eliminate the need for or value of human advisors, but it did force advisors to continue to evolve their value proposition to keep up, as today's evolving robo-advisors will likely do as well. In fact, in the end, the primary players that get "disrupted" by robo-advisors may not actually be human advisors at all, but the custodians, broker-dealers, asset management, and technology firms that support them!

Sage Scholars Tuition Rewards – A “Loyalty Points” System For Providing Wealth Management Services?

April 14, 2014 07:01 am 6 Comments CATEGORY: Practice Management

As financial planning and wealth management become increasingly popular, advisors are increasingly experiencing a "crisis of differentiation" where it's difficult to distinguish themselves from the competition. This has not only slowed the organic growth rates of many advisory firms as it gets harder to generate referrals, but made client retention all the more crucial to maintain the revenue of an advisory firm.

A new offering for financial advisors called SAGE Scholars offers a unique new way for advisors to offer a "client perk" that can help to support retention and potentially generate referrals: Tuition Rewards, which are "rewards points" clients can accrue based on the assets under management (or potentially, the retainer fees) being paid to the advisor, as a rate of 5%/year of the AUM. Which means a client with $1,000,000 of assets with an advisor can potentially accrue a whopping 50,000 points per year, which can be used as a dollar-for-dollar discount for tuition amongst a list of 323 eligible colleges and universities (up to 1 year's worth of free tuition) for any family member (including children, grandchildren, nieces, nephews, etc.).

Ultimately, the reality is that many students can already potentially earn merit-based aid and discounts from many schools, but there is little certainty about whether the discounts will really be there when the time comes. From the advisor's perspective, then, offering Tuition Rewards as a form of "loyalty points" for clients can have a high perceived value for clients who wish to stay with the advisor, and be something that potentially generates "buzz" amongst clients to drive additional referrals as well. In an environment where it's difficult to find unique "client perks" that are relevant to clients in the first place, the SAGE Scholars program represents an intriguing new opportunity!