Kitces.com - Advancing Knowledge in Financial Planning

Safe Withdrawal Rates In Today’s Low Yield Environment – Walking On The Edge Of A Cliff?

February 6, 2013 12:05 pm 17 Comments CATEGORY: Retirement Planning

Safe withdrawal rates have been under a great deal of criticism in recent years, as both investors and planners ratchet downwards their expectations of market returns in the face of a low return environment. Of course, the reality is that safe withdrawal rates are actually based upon low-return environments in the first place, and do not rely upon long-term historical average returns. Nonetheless, a growing body of research suggests that expectations of the safe withdrawal rate should be adjusted based on the current market conditions that apply at the time of retirement.

Accordingly, today's low-yield environment, where the real return on TIPS is actually negative in the coming years, arguably represents one of those times where safe withdrawal rates should be applied with caution. And in fact, a recent draft study by Finke, Pfau, and Blanchett affirms this concern, finding that the probability of failure for today's retirees could be much higher than commonly recognized, given today's real returns on TIPS.

Ultimately, though, just because starting conditions are suboptimal does not guarantee that safe withdrawal rates will fail for today's retirees. By analogy, just because you're walking along the edge of a cliff does not mean you're certain to fall off of it; nonetheless, being closer to the edge of the cliff is certainly more dangerous than being safely inland, and similarly starting a retirement in today's market conditions clearly merits more caution and monitoring!

How All Financial Planning – Even Fiduciary – Is About Sales, Sales, Sales

February 4, 2013 12:01 pm 17 Comments CATEGORY: Practice Management

As financial planning continues to shift further and further away from selling products and towards the delivery of quality advice, many have suggested that financial planning may soon reach the point where it departs entirely from its "sales" roots - a vision widely supported by both consumers and new financial planners entering the profession, who all view sales with a highly negative stigma.

Yet the reality is that at its purest level, "selling" is really just about persuasion and influencing the decisions of others, and financial planners really are in the business of persuasion, convincing clients to: 1) pay the planner for services; 2) to engage in the financial planning process; and 3) to implement the advisor's recommendations. As a result, if you - as the planner - don't know how to "sell" your clients on the value of you, the financial planning you offer, and motivate them to act on your recommendations, then you simply can't succeed as a financial planner, regardless of whether the sale of an insurance or investment product is ever involved (though especially if clients really do need to implement such products!).

Accordingly, the reality is that perhaps it's time to ditch the sales stigma in the financial planning profession, and take a fresh look at how the noblest implementation of sales, persuasion, and influence is at the very core of what it takes to be a successful practitioner. To do this, however, also requires dropping the embarrassing history of how "sales" has been done in financial services in the past, and instead look to the latest tools and research available, so that we can develop proper training for how to "sell" effectively in the 21st century.

Weekend Reading for Financial Planners (Feb 2-3)

February 1, 2013 07:30 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's issues starts off with a fascinating article that studied brain images of investors working with CFPs or non-CFPs in volatile markets, and found that those following a CFP-credentialed advisor were more likely to stick with the advice and less likely to second guess than with a non-credentialed advisor. A second article looks further at some recent brain research and what it's beginning to tell us about not just how clients behave in general, but about how they interact with advisors and why they often don't implement an advisor's recommendations.

From there, we look at a few articles on the regulatory front, including one that suggests the SEC's recent crackdown on advisors misrepresenting AUM may be partially the regulator's own fault for having such a poor and ambiguous definition of what constitutes AUM in today's complex marketplace, a second looking at how fiduciary rulemaking is very likely to proceed this year from the DOL even if the SEC's own rulemaking progress has slowed, and a third striking piece by Don Trone suggesting that the real roadblock to moving forward on the fiduciary issue is that fiduciary advocates are spending too much time talking about principles the industry already agrees with and not enough time focusing on developing the fiduciary best practices and safe harbors that are really necessary for wider fiduciary adoption.

We also have a few technical articles this week, including guidance from Joe Tomlinson about how to craft better asset class return expectations for financial plans, a fascinating look from John Hussman at how the "great rotation" from bonds to stocks is a myth, a look at how "career asset management" is a new frontier for financial planners to deliver value to clients, and a deep look at the new "play or pay" tax rules for employers offering health insurance (or not) that will kick in starting next year.

We wrap up with three articles looking more broadly at the industry - the first suggests that financial advisor conferences are broken and need to be fixed (with a few suggestions about how to do so), and the last two provide a striking look at the research that's come out in recent years trying to quantify whether or how much value financial advisors really bring to the table for their clients - research that shows promising signs for the value of a financial planner, but research that is unfortunately confounded by the fact that apparently researchers often can't tell who's an advisor and who's a salesperson any more than consumers can! Enjoy the reading!

MailBag: Is A Qualified Charitable Distribution (QCD) From An IRA Better Than Donating Appreciated Securities?

January 31, 2013 12:10 pm 17 Comments CATEGORY: MailBag

Many readers of this blog contact me directly with questions and comments. While often the responses are very specific to a particular circumstance, occasionally the subject matter is general enough that it might be of interest to others as well. Accordingly, I will occasionally post a new "MailBag" article, presenting the question or comment (on a strictly anonymous basis!) and my response, in the hopes that the discussion may be useful food for thought.

In this week's MailBag, we look at a recent inquiry regarding whether it's still a good deal to donate appreciated securities to a charity, now that the rules are back allowing Qualified Charitable Distributions (QCDs) directly from an IRA to a charity.

Understanding Marginal Tax Rate Vs Effective Tax Rate And When To Use Each

January 30, 2013 01:03 pm 15 Comments CATEGORY: Taxes

Effective financial planning for clients often has tax-related consequences, which in turn requires a good understanding of not only the tax laws themselves, but also the client's tax rates. Unfortunately, though, significant confusion abounds regarding what tax rates should be used when analyzing various problems. Is it the client's tax bracket? Or a marginal tax rate? Or an effective tax rate? When should each be used? The key is that in the end, marginal tax rates should be used to compare strategies, and effective tax rates should be used to compare people.

Accordingly, if you want to know who commits a larger portion of their total income to their tax obligations, use an effective tax rate. But if you want to know whether to do that Roth conversion/IRA withdrawal/annuity investment/sale for a capital gain or loss/etc., the marginal tax rate is what should be used. In point of fact, this actually means that the marginal tax rate is really the only rate that should be used for financial planning scenarios!

The caveat, however, is that in practice determining a client's marginal tax rate requires more than just looking at his/her tax bracket... so be certainly to calculate the marginal tax rate correctly, too!

How The Digital Age Is Turning The Financial Planning Software Industry Upside Down

January 28, 2013 12:01 pm 11 Comments CATEGORY: Technology & Advisor FinTech

Historically, the various software and technology solutions serving financial planners has been very fragmented. Independent firms were often stuck with small, homegrown solutions for financial planning, client relationship management (CRM), and portfolio reporting software, and/or working with providers that simply didn't have enough resources for growth and development; advisors with larger firms often had access to the best software, but since it was a proprietary solution of the parent firm, the advisor effectively faced a world where key client and business data might held captive. As the world transitions into the digital age, though, this landscape is rapidly changing, due both to the accessibility brought about by having near-universal access to "the cloud" from any computer or device and any location, and the emergence of Application Programming Interfaces (APIs) that allow disparate software packages to integrate in a way that has never before been possible.

These changes in turn are driving several new emerging trends. The first is that now independent software companies are often larger and better developed than proprietary solutions, which both invites in new firms to innovate and also makes it easier than ever for advisors to change firms knowing that they will have more portable client and business data and access to similar (or even better) software after making a change. In addition, the growing integrations through software APIs are rapidly bringing advisors towards the infamous "holy grail" of a unified central solution for CRM, portfolio management and reporting, and financial planning software, which is further driven by a growing number of "integrators" - firms that help adapt software packages through their APIs to develop customized advisory-firm-specific holy grail solutions.

As of now, these trends are still underway and will be playing out for many more years. Nonetheless, the direction is clear, and remarkably positive for both startup firms - who have more opportunity for growth and success than ever - and also advisors, who may enjoy software in the future that is simultaneously cheaper, more efficient, more innovative, more integrated, and just downright superior to anything we've ever had in the past!