Kitces.com - Advancing Knowledge in Financial Planning

Are Cash Reserve Bucket Strategies For Retirement Really Necessary?

April 18, 2012 11:30 am 14 Comments CATEGORY: Retirement Planning

For retirees who fear the impact of a market downturn on their spending, an increasingly popular strategy is just to hold several years of cash in a reserve account to accomplish near-term spending goals. As the logic goes, if there are years of spending money already available, the portfolio can avoid selling equities in a down market to raise the required cash, and clients don't have to sweat where their retirement income distributions will come from while waiting for the markets to recover.

Yet the mathematics of rebalancing reveals in the truth, even clients following a standard rebalancing strategy don't sell equities in down markets, rendering the cash reserve strategy potentially moot. On the other hand, some benefits still remain - although aside from an indirect short-term tactical bet, the most significant impact of a cash reserve strategy may be more mental than real.

Nonetheless, is the cash reserve bucket strategy still a viable option for retirees? Or is it just another bucket strategy mirage?Read More...

Is Your Financial Advisory Firm’s Website Leaving A Bad First Impression?

April 17, 2012 11:36 am 13 Comments CATEGORY: Marketing

The importance of making a good first impression has long been recognized - often influencing advisors regarding how they look, how they dress, and how they design their offices and conference rooms. Yet in an increasingly digital world, the reality is that by the time a prospective client actually shows up in your office to see it and meet you for the first time, the true first impression has long since been formed... by your website. And recent research shows it takes just seconds for clients viewing your website to form a first impression - one that may impact your relationship with your client, or worse, turn a prospective client away for appearing unprofessional. Yet advisors have generally spent little time and focus on the quality, look, and appeal of their website, and what time is spent is generally spent on the written content, which matters, but only if the website is already visually appealing enough to make a good impression! As a result, it may be time for many advisors to consider a website makeover, in recognition of the fact that looks do matter for first impressions, yet you as the advisor are rarely your client's first impression, anymore.Read More...

How The "Advisor Sting" Study Completely Missed The Mark

April 16, 2012 02:16 pm 17 Comments CATEGORY: Planning Profession

One of the most common ways that financial advisors demonstrate a value proposition to clients is to help clients manage their own behavioral biases and misconceptions; simply put, we help to keep clients from hurting themselves through impulsive, emotionally driven investment decisions. Of course, hopefully most financial planners do more than "just" keep their clients from making bad investment decisions, but it is nonetheless an important starting point. Accordingly, a recent NBER study tried to test this, in what has been characterized as an "advisor sting" study - where the researchers actually went undercover to the offices of advisors, to see what kind of advice would be provided in various scenarios, and unfortunately the results were not terribly favorable to advisors.

However, a look under the hood reveals a significant methodological flaw with the NBER study - simply put, they failed to control for whether the people they sought out for advice actually had the training, education, experience, and regulatory standards to even be deemed advisors in the first place, and in fact appear to have sampled extensively from a pool of salespeople with little or no advisory training or focus.

As a result, the study might have been better classified as a "salesperson sting" study simply showing that non-advisory salespeople don't give good advice, regardless of the title they put on their business card. Is that really news to anyone, though?Read More...

Weekend Reading for Financial Planners (Apr 14-15)

April 13, 2012 04:40 pm 3 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition highlights a scary new trend for advisors to be aware of: thieves who impersonate clients and/or hack into their accounts to try to get you to wire money out to the thief's account. From there, we look at a mixture of articles, from a review of the recent upgrades to wealth management software eMoney Advisor, to a call by Bob Veres for new 21st century regulation (and what it might look like), to some good practical tips on how to get more value from networking events with the right questions to ask, and how advisors can start using Pinterest (the latest social media site that is exploding in popularity). We also look at some technical articles on the resurgence of reverse mortgages, and the latest from Wade Pfau in the Journal of Financial Planning on how valuation-based tactical asset allocation can increase safe withdrawal rates and reduce required savings by accumulators. We finish with a review by John Mauldin of the latest jobs report, an interesting blog from the Harvard Business Review about how you should focus on your accomplishments and not your affiliations, and an interview with yours-truly in the Journal of Financial Planning on a wide range of financial planning and professional topics. Enjoy the reading!

Markets May Be Volatile, But Research Shows Risk Tolerance Isn’t!

April 12, 2012 01:22 pm 6 Comments CATEGORY: General Planning

Determining a client's risk tolerance is a standard requirement in financial services, both as a matter of best practices, and regulatory minimums. In recent years, though, advisors have increasingly leaned towards doing the minimum required to assess client risk tolerance, due to the frustration that client risk tolerance itself has varied wildly through the bull and bear market cycles of recent years. However, a new study out using FinaMetrica risk tolerance data from before and after the global financial crisis joins a growing body of research suggesting that in reality, client risk tolerance is actually remarkably stable, and that what's changing through market cycles is not the client's risk tolerance, but instead risk perceptions. The significant implications of the research are that planners struggling with unstable client investment behaviors around risk - e.g., buying more in bull markets and selling out in market declines - may actually need to focus more on managing risk perceptions, rather than blaming the instability of client risk tolerance.Read More...

CFP Board Redefines The Optimal Financial Planning Career Track

April 11, 2012 01:28 pm 6 Comments CATEGORY: Practice Management

In order to obtain the CFP certification, prospective financial planners must complete financial planning Education, take the CFP Exam, agree to follow the CFP Code of Ethics, and obtain 3 years of financial planning Experience. These four "E's" form the basis of the path that potential planners must follow in order to become CFP certificants. However, the methods to achieve these requirements - especially for education and experience - have been very flexible, allowing candidates to complete them in a variety of CFP Board-Registered Programs and in a wide range of financial-planning-related jobs. In a new change, though, the CFP Board has declared that one job path will receive preferential treatment: candidates who obtain a position focused exclusively on the delivery of financial planning, working under an experienced CFP professional, can satisfy the experience requirement in only 2 years, instead of 3. As a result of this change, the CFP Board has forever changed the career track that financial planners will now follow as an entry to the financial planning profession, and firms that fail to adapt may lose access to the best job candidates.Read More...