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Weekend Reading for Financial Planners (Feb 1-2)

January 31, 2014 03:37 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a summary of the key details of President Obama's newly proposed "MyRA" accounts, a new form of "starter IRA" account for those who may only be able to save small dollar amounts. In addition, there's also some coverage of the latest AALTCI survey on long-term care insurance showing that premiums are up by 12% for females in 2014 but actually down almost 10% for males as gender-based LTC insurance pricing has taken effect. And an interesting survey of advisors in the UK after the first year of their RDR reforms - which banned commissions for advisors - finding that in fact the transition to a commission-free world has gone more smoothly than many first feared.

From there, we have a few practice management articles, including a look at how advisory firms are onboarding and training new advisors, new research on what generates referrals finding that the greatest predictor of whether clients refer may simply be that some are more "hard-wired" to do so that others, and the last a summary of advisor tech guru Bill Winterberg's keynote session at this week's TD Ameritrade conference on how advisors need to focus more on their digital presence and the first impression it may be making on prospective clients.

We also have a number of more technically-oriented articles this week. There's one that looks at how the world of estate planning is changing now that no more than 3,000 - 4,000 Americans each year are actually passing away subject to Federal estate taxes, a second that provides an interesting rebuttal to the recent criticisms about the Shiller CAPE ratio and suggesting it may still be more valid than many give it credit for, and the last is the latest for investment guru James Montier of GMO that seeks to critically debunk several recent new investment trends, from "smart beta" to "risk parity" strategies to investing in real assets.

We wrap up with three interesting articles: the first is an insightful article about blogging itself by advisor and blogger Josh Brown, who makes the important point that advisors shouldn't worry about being the first to cover breaking news and that instead trying to be last - giving the ultimate and final word on an issue - may actually be the better (and less pressured) way to go; the second is a predictive look from industry commentator Bob Veres at the advisory profession in 20 years, noting that the changes we witness may be far more dramatic than what anyone has been predicting so far (remember, 20 years ago the "internet" was little more than dialing up to America Online or CompuServe!); and the last explores whether the financial planning profession - and the regulators who oversee it - still has too much "marketing myopia" with a nearsighted focus on products and not enough on recognizing that advice itself is our primary value proposition. Enjoy the reading!

Can We Really Measure Risk Tolerance Or Does It Swing Too Wildly With Market Volatility?

January 29, 2014 07:01 am 27 Comments CATEGORY: General Planning

It is a staple of financial advising to measure a client's risk tolerance; whether out of a mere regulatory requirement to do so, or out of a best practices desire to better understand a client's comfort level with the investments (and other financial planning advice) being recommended, so process to measure risk tolerance is essential in today's world.

Yet many financial advisors severely question the value of doing so; as the saying goes, "Clients are risk tolerant in bull markets, and intolerant of risk in bear markets, so is there really that much value to going through the exercise at all?" And a recent academic presentation at the FPA Experience conference added fuel to the fire, showing a remarkably high correlation between the monthly average risk tolerance scores of a well respected measurement tool, and the monthly level of the S&P 500.

Yet a deeper look reveals that while even the best risk tolerance measuring process is not totally immune to the vicissitudes of the market, a client's true risk tolerance appears to be remarkably stable and doesn't change much at all in the midst of volatile markets. Instead, what appears to be unstable is not the client's tolerance for risk, but their perceptions of risk in the first place; in other words, clients may be loading up on stocks in bull markets not because they're more tolerant of risk, but because they don't think there is any risk in the first place. In turn, this suggests that ultimately, it may be time for financial planners to more widely adopt quality tools to measure risk tolerance, but simultaneously recognize that managing client (mis-)perceptions of risk is the real challenge that we face.

News Highlight: Judge Rules Against CFP Board On All Recent Motions And Accepts Amended Camarda Complaint

January 28, 2014 07:01 am 27 Comments CATEGORY: Industry News

On Sunday, January 26th, a decision was issued in the latest round of legal motions between the CFP Board and the plaintiffs Jeffrey and Kimberly Camarda regarding their looming public disciplinary action from the CFP Board for what it claims were violations of the compensation disclosure rules.

In a blow to the CFP Board, the judge fully accepted an amended complaint from the Camardas, which is now seeking monetary damages in addition to "just" blocking the CFP Board's public disciplining of the Camardas. In addition, the judge denied all of the CFP Board's various motions to limit the scope of the case, including requests to quash subpoenas of various individuals for deposition. As a result, the breadth of discovery for the Camardas will be fairly wide, as they attempt to substantiate their claims that the CFP Board is in breach of contract, engaging in unfair competition, has violated due process, and may even be responsible for antitrust violations and having engaged in "false advertising" by misleading the public about its standards.

Of course, the fact that the judge has ruled that the full scope of the Camarda complaint will be considered and that the full breadth of their discovery requests will be honored does not actually mean that the CFP Board has been found guilty of anything at this point. Nonetheless, given the coming depositions that must now move forward, and the information requested by the Camardas on various other CFP Board disciplinary cases, a whole lot of additional detail about the inner workings of the CFP Board is about to come to light. To say the least, this case is no longer "just" about the definition of fee-only; it's now about the legitimacy of the organization's enforcement process and the standards for all CFP certificants, and raises the question of whether the CFP Board may have made a serious strategic mistake by trying to make Camarda vs CFP Board of Standards its defining case.

How To Be More Decisive In Your Own (Investment) Decision-Making Process

January 27, 2014 07:01 am 1 Comment CATEGORY: Personal/Career Development

Making decisions is a fundamental part of life; in fact, it's almost daunting to consider how many decisions we actually make just to navigate our day-to-day lives, not to mention the weightier decisions that have to be made from time to time. Yet despite the crucial nature of making good decisions, most people have little if any framework or process around how decisions are made, except perhaps for creating basic lists of "pros" and "cons" that in practice often do little more than confirm the decision we already intended to make.

In the book "Decisive" noted authors Chip and Dan Heath take a deep dive into the research around decision-making, including both the shortcuts our brains typically take to make decisions (so that we are not rendered paralyzed by the volume of decisions to be made on a day-to-day basis) to the best practices in how to actually craft and effective decision-making process and when necessary avoid the shortcuts that may be helpful for routine decisions but can be destructive when misapplied in more important situations.

From the ideas of multitracking potential solutions to adopting a devil's advocate (or at least a culture that encourages them), what results is an excellent and inspirational book about how to change your own approach to making decisions, along with some ideas about how you might apply the concepts in your business and with your clients. As the authors clearly illustrate, even for those of us who pride ourselves on the depth of our analytical skills, the reality is that good process trumps good analysis - and notably, good process may lead to better analysis as well!

Weekend Reading for Financial Planners (Jan 25-26)

January 24, 2014 12:30 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a discussion of an interesting new trend: financial "wellness" programs, which are employer workplace financial programs oriented primarily around education (and not necessarily advice), that are on the rise and may create new demand for young planners, potentially facilitating a new career track for the profession.

There are several industry and practice management articles this week, from a study by Spectrem Group affirming the trend that consumers - especially higher net worth - are increasingly seeking out independent advisors over full-service brokers, to a profile of Schwab's increasing push into financial planning as they delivered 101 thousand financial plans last year (albeit with varying levels of complexity, and often provided for free). There's also an article on social media tips wittily titled "Why Social Media Won't Work For You" (providing guidance on those mistakes to avoid), a nice basic guide from the Journal of Financial Planning on the importance of connecting your website to Google Analytics and what to look at/for, and a good article looking at how to fix your investment committee's decision-making process by "Investment Committee Doctor" Tom Brakke.

We also have a number of more technically-oriented articles this week, including: new research from the Journal of Financial Planning co-authored by Wade Pfau and yours-truly, finding that the optimal asset allocation in retirement may actually be to start more conservatively for clients and slowly increase equity exposure throughout retirement; a look at the trends in cash value life insurance, finding that use of the product actually has declined precipitously in the past 20 years, though the ones still using it today tend to be those who are older, wealthier, and most sophisticated; and a discussion of how to use bond ladders for retirement portfolios (with the caveat that at today's low rates, there's a significant trade-off to doing so).

We wrap up with three interesting articles: the first is a list of the 3 "big issues" that advisors need to examine more carefully when planning for clients (including our spending assumptions, our expectations about the stability of careers and income of our clients, and just how disruptive technology could be); the second takes a look at how the world of financial advice may be different in 2034, when there has been an entire generational turnover of financial advisors; and the last, which I highly recommend, by famed venture capitalist Marc Andreesen, on why Bitcoin is a much much bigger deal than most (advisors) realize, and its importance goes far beyond just being a speculative crypto-currency. Enjoy the reading, and be sure to check out Bill Winterberg's weekly advisor technology "Bits & Bytes" video at the end!

AdvisorHUB Reveals Wirehouse Recruiting Deals Actually Unlock More Value Than Selling An Independent RIA?

January 22, 2014 07:01 am 2 Comments CATEGORY: Practice Management

While limited industry data has made it clear that the pace of wirehouse recruiting, and the size of typical deals, has increased in recent years, there has been remarkably little information about the terms and details of the 'typical' deal. For the most part, this is because broker-dealers have not been very public about the deals that they're offering, likely because too much knowledge limits their ability to negotiate on an advisor-specific basis for a more favorable deal. At the same time, brokers themselves are usually not very open about the deals they complete. In part, this is because many broker-dealers require them to sign non-disclosure deals to keep the terms secret, but in some cases the reality is simply that the broker doesn't want other advisors or his/her clients to know what was paid to entice a change in firms (an area that FINRA is now scrutinizing).

The end result of this environment is a highly inefficient marketplace for advisors looking to transition from one wirehouse to another. Notwithstanding all this confusion, a new firm is looking to bring an end to the opacity of brokerage firm recruiting deals. Called "AdvisorHUB", for $9.99 advisors will be able to download a current report detailing the recruiting deal terms of dozens of broker-dealers, private banks, and wirehouses in today's marketplace via an Apple or Android app, based on the intelligence that the AdvisorHUB team is able to gather from its available connections and networks.

And an early glimpse at the data reveals a startling reality - it turns out that in a world where the 'typical' RIA deal is approximately 2X revenue, the typical wirehouse recruiting package is as much as 350% (3.5X) trailing revenue. In turn, this suggests that the reality the breakaway broker trend has been more of a trickle than a flood may have less to do with the captive confines of the broker-dealer world, and more to do with the simple reality that notwithstanding the lack of "equity", a broker can actually monetize their practice for as much or more than many RIAs. On the other hand, the reality is that the amounts that wirehouses are paying may well be unsustainable, especially if AdvisorHUB brings so much transparency to deal terms that every broker demands such treatment. Nonetheless, it seems that for the time being, having built a practice in a wirehouse - and staying there - may have been far more lucrative than the independent community ever realized, and that the decision to breakaway is far more nuanced than just the concept of "having equity [to someday sell] in the advisory practice."