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News Highlight: Continued Lawmaker Concern On How Fiduciary Would Impact Middle Class

January 21, 2014 07:01 am 6 Comments CATEGORY: Industry News

As the debate around the fiduciary standard continues, lawmakers have once again expressed concern about whether the application of a fiduciary standard may raise the cost of advice for consumers, cutting off access to investment advice for the middle class.

Yet even as this anti-fiduciary argument persists, a closer look reveals just how ridiculous it is. The RIA marketplace is not less profitable than the brokerage world due to its fiduciary compliance costs; in fact, brokers are finding the fiduciary RIA world so much more appealing that the breakaway broker trend has persisted for years.

Instead, the real challenge is that the market for advice is so complex, consumers have trouble choosing at all, and as research has shown, such environments of "information asymmetry" can lead to a "market for lemons" where the quality declines as dishonest businesses drive the honest ones away. In turn, this suggests that in the end, applying a consistent fiduciary standard for those who offer advice may actually be the single best way to drive down the cost of advice for consumers!

How Technology Is Reshaping And Commoditizing The World Of Investment Advice

January 20, 2014 07:01 am 9 Comments CATEGORY: Investments

The ongoing march of technology and explosion of the internet over the past 20 years is slowly but steadily reshaping the world of investing advice. As more and more tools become accessible directly to consumers, many of the services once provided by financial advisors to analyze, review, and construct client portfolios can now be done at a dramatically lower cost, and without the advisor being involved at all.

In reality, this simply represents the next step in technology continuing to commoditize many of the core services that financial advisors provide their clients, from the days of implementing trades (i.e., actually being a "stockbroker") that's been demolished by online discount brokerage, to helping with the investment search-and-selection process (being replaced by online tools and analytics), to the construction of passive strategic diversified portfolios that can now be accomplished for 25 basis points or less by a number of "robo-advisor" solutions.

Ultimately, this doesn't mean that financial advisors will disappear altogether, as ultimately technology can augment the relationship but not replace it; nonetheless, it will force advisors to continue to evolve their client solutions to stay ahead of the technology commoditization curve, as clients will only pay "so much" for the relationship alone. Some advisors may choose to become more active and (attempt to) deliver a greater value-add with respect to the portfolio itself in the form of alpha, while others may choose to offer financial planning services as a value-add (as many have already begun), and still others may decide to abandon investment management as an offering altogether and focus solely on providing personal financial planning advice itself. Whatever the outcome, though, it seems those advisory firms who hang their hat today on providing little more than the construction of passive strategic diversified investment portfolio for a 1% AUM fee may be in serious trouble, as technology continues to commoditize their core business offering.

Weekend Reading for Financial Planners (Jan 18-19) – Practice Management & Tech Edition!

January 17, 2014 01:01 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" with a special focus on practice management and technology topics! This week's reading kicks off, though, with news from the CFP Board's ongoing saga in the Camarda lawsuit; the latest development is that the CFP Board declined to answer a large number of questions in a deposition with its staff counsel, in turn prompting the Camardas to ask a Federal judge to sanction the CFP Board for failure to comply with the deposition and the CFP Board maintaining that the questions from the Camarda attorneys are just a "fishing expedition" beyond the scope of their actual case.

From there, we also have an article on the recently announced SEC regulatory priorities for 2014, which includes a deeper look at "reverse churning" inactivity in fee-based AUM accounts, the activities of dual-registered advisors, how advisors handle IRA rollovers (dovetailing on the DOL's anticipated new fiduciary rules), and a big push for more investment adviser examinations. There's also a discussion of whether robo-advisors may finally start to become a threat to advisors - or not - as Wealthfront announced this week that it has crossed the $500M AUM mark, after being at little more than $100M a year ago.

We also have a number of additional practice management and technology articles this week, including: two interesting industry studies released this week, where the first shows that wealthy clientele are increasingly adopting a multi-advisor approach and not consolidating advice and assets with just one person, and the second study finding that while advisor client retention is consistently high, there is a noticeable dip in retention for advisors 2-4 years after a client relationship begins (suggesting a clear area for focus for advisors who want to boost retention); an article looking at how best to build relationships with centers of influence (based on a live panel where attorneys and accountants were asked to rate advisors' "pitches" to them); some very practical tips about how to dramatically increase how many meetings you're conducting and the amount of face time you're getting with your clients; and two technology articles by Bill Winterberg, the first looking at some helpful productivity apps, and the second a review of how to use the free Google Forms service to conduct based survey and client data gathering activity.

We wrap up with three interesting articles: the first is a remarkably good list of all the conventional practice management wisdom that is often repeatedly but rarely implemented in full, presented as a series of potential "mistakes" that advisors should avoid; the second is an article about the latest research on persuasion and how to (ethically) influence clients to act; and the last is a fascinating interview with popular personal finance blogger "Mr. Money Mustache" who retired at the age of 30 and now writes about how to retire early with a modest lifestyle, built around a message not of Scrooge-like frugality but a simple focus on enjoying the things that matter the most in life and letting go of the rest of our spending excesses (and some light chastisement towards financial planners that perhaps we focus too much on saving for old-age affluence and not enough on managing spending). Enjoy the reading!

The Untenable State Of State Estate Taxes – Recouple, Repeal, Or Enact Gift Taxes

January 15, 2014 07:01 am 6 Comments CATEGORY: Estate Planning

The past decade has been a tumultuous one for the world of state estate taxes. What had been a rather stable structure for decades, with the Federal credit for state estate taxes paid that allowed states to create a "sponge tax" to absorb the maximum Federal credit, was brought to an end with the Economic Growth and Tax Relief Reconciliation Act of 2001, and in the years that followed the system was phased out and replaced with a state estate tax deduction instead. As a result, states faced the possibility that their estate tax revenue would drop to zero, which is in fact what happened for all states by 2005 that did not "decouple" from the Federal system to create their own state estate tax, often with their own exemptions.

Yet the reality is that for the remainder of that decade, states had continued to rely upon the Federal $1,000,000 gift tax exemption threshold to effectively "backstop" their state estate tax systems; after all, without any gift tax system, the estate tax doesn't really work, as people simply gift the money away before they die to avoid paying the tax at death. In turn, a new wave of state estate tax "disruption" occurred at the end of 2010 when the fiscal cliff legislation "reunified" the Federal gift and estate tax systems, bringing up the Federal gift tax exemption from $1,000,000 to an inflation-indexed $5M+ level, removing in the process the Federal gift tax support structure for the states that still had a gift tax.

As a result, in today's environment the states remaining with a state estate tax find themselves in an untenable position; most have an estate tax but no gift tax, which just invites citizens to either give away the money before they pass away, or relocate and change their residency to another state to another the tax (which causes the state loses income, property, and other tax revenue as well!). To fix the problem, states are increasingly compelled to come up with a solution: either enact gift taxes themselves to backstop the system (and then hire auditors to oversee and enforce the system); repeal the estate tax; or "recouple" the state back to the Federal system, to once again rely on the Federal tax structure and the IRS to backstop the states. Ultimately, it remains to be seen which path the states will pursue, but the likelihood for legislation is increasing - some states are considering proposals already - which means the time window is quickly closing for anyone who actually wishes to take advantage of the state estate tax "loophole" that still exists today!

News Highlight: CFP Board Reduces Length Of CFP Exam From 10 Hours To A 6-Hour Single-Day Test

January 14, 2014 07:01 am 28 Comments CATEGORY: Planning Profession

Last week, the CFP Board issued a press release announcing that it was transitioning from a paper-based test to a computer-based testing process, in an effort to improve the ease and efficiency of the test-taking experience for CFP certification candidates. The move to computer-based testing will allow the CFP Board to issue preliminary results immediately, offer official results in just 1-2 weeks (down from 5 weeks with the paper-based exam), and dramatically expand the breadth of available testing locations.

Yet in a surprising and dramatic change that was explained as little more than a side "benefit" to the computer-based exam process, the CFP Board also announced that the length of the CFP exam going forward would be chopped by a whopping 40%, from 285 exam questions down to only 170, while the duration of the exam itself is reduced from a 10-hour day-and-a-half exam into a 6-hour single-day exam.

While the CFP Board maintains that this is not a change in how hard the CFP exam really is - i.e., the difficulty of the exam isn't meant to be increased nor decreased by the change, because the (fewer) questions themselves will still be targeted for similar difficulty - the question arises nonetheless why the CFP Board would implement such a change, if the goal wasn't to at least create the perception that the exam will be easier and therefore more appealing to take? Which in turn raises the question - did the CFP Board just lower the standards of the CFP exam and try to make it easier to grow the ranks of CFP certificants?

Why Most Financial Planners Will Soon Be Forced To Lower Their Minimums

January 13, 2014 07:01 am 16 Comments CATEGORY: Practice Management

The growth of financial planning has been an incredible success story of the past 40 years, as the broader financial services industry slowly but steadily continues its shift away from the pure sale of products and towards the direction of personalized financial advice. Over the 25 years since the first CFP certificant was minted in 1973, nearly 10% of financial advisors obtained the designation, and the pace has accelerated as the CFP certification has continued to grow while the total number of advisors has been stagnant, now reaching what may be the “tipping point” of nearly 25% of all financial advisors.

Yet at the same time, the growth of CFP certificants – especially in the past decade – has not only outstripped the growth of all financial advisors; it has also dramatically outpaced the growth in the number of affluent households that financial planners typically serve. The end result: we are rapidly approaching the point where there are so many CFP certificants that there aren’t enough available half-million, millionaire, or wealthier clients available for them to serve.

As a result, financial planning may soon undergo a shift towards serving a wider base of clientele. The change will be driven not merely out of a desire to become a recognized profession that serves a wider base of the public, but instead out of sheer business necessity as financial planning firms of the future find they must lower their minimums and seek out a new “blue ocean” of prospective clients rather than continue to fight in a highly competitive space where just being a comprehensive financial planner is no longer the differentiator it once was!