Kitces.com - Advancing Knowledge in Financial Planning

The Real Reason Most Financial Planning Firms Have No Career Track

December 23, 2013 07:01 am 3 Comments CATEGORY: Practice Management

In recent years, it has been increasingly popular to lament the lack of career tracks at most financial planning firms, especially as financial planning struggles in the aggregate to attract enough new advisors to fill the shoes of those likely to retire in the coming decade.

Yet for all the furor about the need for career tracks, relatively few firms have established them so far, and the ones that have tend to be the largest of the advisory firms. Yet indirectly, that perhaps is the point - it takes a certain size and scale to be able to craft a career track in the first place, and most firms are simply not large enough to do so.

Of course, that doesn't mean there are no opportunities in financial planning. For the subset of firms that are enjoying some healthy growth - where 15% compound growth rates double the firm every 5 years - there are an ever-growing array of opportunities available.

Nonetheless, what this suggests is that as long as most advisory firms are small, trying to create fully fleshed out career tracks may be unrealistic anyway. Instead, the real focus should be on firms that are growing, which may increasingly become an imperative for those practices that want to attract and retain the top talent, and the new question for new planners should shift away from "what is the career track at this firm" to instead focus on "what are this firm's plans for growth" instead.

Weekend Reading for Financial Planners (Dec 21-22)

December 20, 2013 03:01 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's reading kicks off with some of the latest industry news, including a new filing from the CFP Board in its lawsuit with the Camardas asking the court to either throw out the lawsuit or at least narrow the scope of the Camardas' information requests as being a "fishing expedition" (if the court declines the motion, depositions of key CFP Board staff members will begin in the coming weeks); there's also an interesting announcement from Schwab that they will begin rebating the last quarter's worth of fees for any unhappy advisory clients (will other financial advisors feel compelled to match the offer for their own clientele?), and an interesting study from TIAA-CREF suggesting that Gen Y may actually be even more receptive to financial advice and willing to change their behavior than baby boomers.

From there, we have a number of "trends and predictions" articles that are so common towards the end of the year, including a white paper about "transformations" that broker-dealers must make to survive and be competitive as the differences between B/Ds and RIAs continue to blur with the movement towards AUM business models, a look at some of the big regulatory changes coming in 2014 (beyond just fiduciary and harmonization, look for increased focus on protecting clients from identity theft and business continuity plans for advisory firms), some of the biggest tech trends coming for advisors (big focus on the cloud and software integrations), and a broader look at four 4 trends that will impact advisors for many years to come (from demographics to technology and more).

We also have a few more technical articles this week, including a discussion from actuary Joe Tomlinson on some of the latest research debates on the best asset location strategies, an interesting (and high quality) analysis of some of the flaws in the Shiller P/E10 ratio and how to fix them, and a broad look at how estate planning is changing in a world of 'permanent' exemptions that have removed most clients from the reach of Federal estate taxes (shifting the focus to income tax planning, step-up in basis opportunities, and asset protection).

We wrap up with three interesting articles: the first discusses the recent acquisition of David Loeper's Wealthcare Capital and their Financeware financial planning software by a private equity firm, which is notable not just because they are investing into growing the company, but because they may also try to re-assert Loeper's patents related to financial planning (which some have gone so far as to call a risk to all financial advisors); the second is an article looking at the challenges that average Americans have with trying to save, and how it may be less a matter of their attention span or focus and more than the sheer urgency of spending interruptions prevents them from ever focusing on the less-urgent-but-still-important financial goals; and the last is an interview with indexing legend John Bogle, who suggests that the ETF industry has taken indexing "too far" and that he wouldn't advocate investing in almost 97% of today's ETFs! Enjoy the reading!

Why Qualified Charitable Distributions From IRAs Are Often Not Best For End Of Year Contributions

December 18, 2013 07:01 am 13 Comments CATEGORY: Taxes

While charitable giving should always be done first and foremost for charitable and not tax purposes, the Internal Revenue Code does afford a number of different tax strategies for charitable giving. In recent years, the opportunity to complete "Qualified Charitable Distributions" (QCDs) directly from IRAs to a charity have been especially popular, in part because QCDs not only allow for "spending" amounts in IRAs without ever paying any taxes, but also because QCDs satisfy an individual's Required Minimum Distribution (RMD) obligations (and since QCDs are only available to those over age 70 1/2, there must be an RMD to satisfy!).

However, the reality is that while QCDs from IRAs do have favorable tax treatment, they are generally still less favorable than donating appreciated securities to satisfy charitable goals. While the former allows for entirely pre-tax charitable contributions (directly from an IRA), the latter effectively provides a "double tax" benefit, as contributions are deductible (making them pre-tax) and donations of appreciated securities permanently avoid taxes on the associated capital gains. As a result, while QCDs from an IRA are better to satisfy charitable goals than just writing a check or giving cash, using appreciated securities is still better (and the greater the appreciation, the more they come out ahead!).

Notwithstanding this difference in treatment, QCDs are still preferrable in situations where the deduction for donating appreciated securities might be limited - for instance, if the deductions in total will exceed the charitable contribution AGI limits (including the 5-year carryforward), where deductions have been already capped at 80% due to the Pease limitation, or for those who have so little in the way of itemized deductions that it would be better for them to simply claim the standard deduction (and donate separately via QCDs if desirable). And of course, sometimes the dollar amounts involved simply don't make it worthwhile to go through the hassle of donating appreciated securities. Thus, ultimately, whether QCDs or donating appreciated securities will be more tax-efficient depends upon the facts and circumstances of the situation; nonetheless, all else being equal, QCDs still tend not to be the best charitable giving option available!

Crafting a Compelling Job Description For Your Next Financial Planning Hire

December 17, 2013 07:01 am 3 Comments CATEGORY: Practice Management

Hiring a new financial planner can be a challenge, especially for firms that have never hired a professional staff member before. Even for larger firms that have hired successfully in the past, the process can be daunting. Yet in many cases, a difficult hiring process can be exacerbated with a key mistake coming right out of the gate: not having a compelling written job description (or worse, not having any job description at all).

In this guest post, financial planner recruiter Caleb Brown shares his insights about what it takes to craft a compelling job description for a prospective financial planning hire. It's a look at all the key areas a job description should cover - from a proper "what's in it for the candidate" introduction, to a position summary, current responsibilities, future responsibilities, and what should be discussed as qualifications and benefits - along with some helpful hints, and tips of things to avoid.

If you're thinking about starting the process of hiring a financial planner, this should be a helpful starting point for what to consider when crafting the job description for that future hire. Alternatively, if you've already started the process of hiring, but have been struggling to find the right person - or anyone at all - this article may be a helpful look at whether the problems might be stemming from a job description that is not compelling in the first place.

The Real Hidden Cost That Has Been Inhibiting Financial Planning For The Masses

December 16, 2013 07:01 am 16 Comments CATEGORY: Planning Profession

As financial planning slowly and steadily builds itself towards being an established profession, there has been an increasing focus on the importance of figuring out how to widen the scope of financial planning to reach more of the masses. Although notably, it seems that recent efforts to expand the reach of financial planning services is not purely altruistic; the reality is also that there are simply a lot more CFP certificants around than there used to be, making it increasingly appealing for advisors to seek out new audiences to grow their businesses, rather than compete in the same bloody red ocean of their competition.

Yet notwithstanding the growing desire to reach the masses, financial planners have struggled to extend their services. The promise of the web and the potential efficiencies of technology create the potential to bring down the cost of financial planning and make it more accessible to the masses, even as planners now find that they may soon be in competition with the technology itself seeking to deliver parts of those services directly to the public in the form of "robo-advisors."

However, the reality is that the real inhibitor to bringing financial planning to the masses is not about the use of technology to drive down the cost of delivering financial planning. The real challenge is how difficult it remains to get new clients in the first place, especially given that so many financial planning firms have relatively little cash flow available for broad-based marketing programs. The end result - the real challenge in bringing financial planning to the masses is not about the cost to deliver it, but the incredibly high cost necessary to get those clients in the first place! When we figure out how to bring down the cost to acquire clients, we will figure out how to truly bring financial planning to the masses.

Weekend Reading for Financial Planners (Dec 14-15)

December 13, 2013 01:01 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's reading kicks off with a "no-news" article... that after four months since the CFP Board's "fee only" controversies began, there are still not yet any formal talks amongst NAPFA, the FPA, and the CFP Board about how to resolve the differences in compensation definitions, or address the fact that a number of FPA and NAPFA members appear to be currently out of compliance with the current rules.

A number of other practice-management and industry-related articles are highlighted this week as well, including: the first practice management study released by the FPA's new Research and Practice Institute which found that only 46% of financial planners even have a retirement plan for themselves; a renewed push by the Financial Planning Coalition (along with AARP, CFA, IAA, and NASAA) to advocate for legislation to assess user fees on RIAs to enhance oversight (in lieu of allowing FINRA or another SRO to take over); rising scrutiny by the SEC on so-called "reverse churning" where advisors put clients into AUM fee arrangements but have so little trading that clients may be charged far more than they would have been by just staying in a commission-based account; new fees that many custodians are charging to advisors who try to trade away to get better price execution on ETF trades; and an announcement by BrightScope that its Advisor Pages offering will now be free to advisors who want to update the essential information, with premium features available for those who want to pay more to further engage in marketing through the platform.

From there, we have a several more technical financial planning articles this week, including an analysis by Wade Pfau comparing variable withdrawal rate strategies from Jon Guyton and David Blanchett, a look at how recent changes for reverse mortgages may make them less appealing to financial planners even as reverse mortgages are becoming more recognized in research as a financial planning tool, and a look at how for many financial advisors their health insurance premiums may go up next year as premiums are shifted to be based on each plan participant's individual age (which means older advisors who saved on premiums by having younger employees who brought down the average age of the plan will no longer enjoy such savings).

We wrap up with three interesting articles: the first looks at how some big trends, from industry consolidation and pressured profit margins to generational shifts and technology will threaten advisors to "adapt or die" (with lessons from Blockbuster video as an example of a company that failed to recognize their own industry trends and adapt accordingly); the second is a satire article from Vanguard announcing new "AlphaBet" ETFs as a demonstration how simple data mining and research biases can create new ETF products that have no reasonable expectation of sustaining their results (advisors beware of backtest-based new ETF offerings!); and the last is a discussion from the NY Times of Britain's new "Ministry of Nudges" that is applying behavioral finance and research principles to help better implement government policies, with some very notable successes. Enjoy the reading!