Kitces.com - Advancing Knowledge in Financial Planning

Why Saving In A Roth (Or Any) IRA Might Be A Bad Idea For Young People After All

May 23, 2012 11:03 am 27 Comments CATEGORY: Human Capital

Social Image Human and Financial Capital

One of the foundational principles of retirement success is to start saving early. After all, the longer that money can stay invested, the more compounding growth can work in your favor; all the better if your savings grow inside a Roth IRA and avoid the grinding impact of taxation.

Yet the reality is that clients really have two major assets: their financial assets, and their human capital asset. And when the client is young, the human capital asset is actually the bigger of the two by far. As a result, allocating savings towards human capital in ways that increase its value or growth rate can actually have far more impact than investments in financial assets; spending $2,000 on classes that produce a $1,000 raise in base salary can, over the next 40 years, generate nearly 20 times the wealth of merely saving the $2,000 in a Roth IRA and growing it for decades.

Does that mean that clients who allocate savings to retirement accounts when they're young are actually making an inferior long-term investment?

A New Way To Review Client Social Security Benefits – Online!

May 22, 2012 11:03 am 5 Comments CATEGORY: Retirement Planning

Although Social Security benefits are a major part of retirement planning, since the Social Security Administration stopped mailing statements to workers last year, most planners have been limited in their ability to get updated Social Security information for clients - especially new clients who may not have a prior benefits estimate, and/or who may have never previously reviewed their earnings record.

Fortunately, earlier this month the Social Security Administration launched a new online platform allowing anyone to access their own Social Security benefits estimate and earnings record.

In response, many planners are now starting to walk clients through the process of claiming their online Social Security account - which can be done on the spot, in the planner's office, in less than 5 minutes! - and reviewing the benefits estimate and earnings record as a part of their new or existing client meetings!Read More...

What Can Suze Orman Teach Planners About Building Trust Virtually?

May 21, 2012 11:03 am 2 Comments CATEGORY: Marketing

The delivery of advice is ultimately built on a foundation of trust; even if the client is otherwise ready to make a change, if the client doesn't trust the advisor, the advice often won't be taken and implemented. And because most planners struggle and work hard just to establish client trust through in-person meetings and a one-on-one relationship, many are skeptical that advice will ever fully shift to a more virtual world where trust must be built at a distance and possibly without ever having the client and planner meet in person at all.

Yet there is a surprisingly visible demonstration of how trust can be built effectively in a "virtual" environment where the person taking the advice may have never met the person delivering the advice: the Suze Orman show. Does that mean planners have much to learn from the success of Suze Orman, who has built a virtual relationship with millions of people who are all willing to act on her advice, even while so many planners struggle to build trusted relationships one in-person prospective client meeting at a time?Read More...

Weekend Reading for Financial Planners (May 19-20)

May 18, 2012 08:02 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with a discussion of the latest shot fired in the SRO debate, as BCG and the Financial Planning Coalition respond to the latest FINRA estimate of SRO costs.

From there, we look at three significant articles on retirement income planning, including: the latest thoughts from Bill Bengen showing that the 4.5% withdrawal rate is still working just fine, even for a 2000 retiree; an article from the Journal of Financial Planning showing how holding several years of the portfolio in a cash reserve INCREASES retirement failure rates; and a discussion from Bob Veres in Financial Planning magazine about whether we need to change our retirement spending assumptions.

Beyond that, we have a number of interesting markets and investment pieces this week, including highlights from James Montier's opening keynote speech from CFA Institute earlier this month, a look at how 'adaptive' asset allocation holds more promise than traditional strategic allocations, a prediction from Mauldin that Germany is waving the white flag and clearing the way for the ECB to print Euros to solve the Eurozone problems, and ongoing worries from Hussman that we may be dancing at the edge of an investing cliff.

We wrap up with three interesting articles: a scathing 'anonymous' insider letter to Mark Zuckerberg shining a light on the investment bank realities of the IPO marketplace; an article by Angie Herbers about how the greatest problem in most advisory practices is the owner (and how to better get out of your own way for your firm's success); and tips for stressed-out advisors to try to (re-)gain a hold of some balance and efficiency in their practices. Enjoy the reading!

Do Our Brains Really Even Know How To Evaluate A Monte Carlo Analysis?

May 17, 2012 11:03 am 21 Comments CATEGORY: Retirement Planning

As a growing body of research shows, our brains are not quite the logical, rational decision-making machines we think they are – or at least, wish they could be. Instead, our brains take shortcuts; we substitute easier questions for difficult ones, often without realizing it, and respond accordingly with our words and our actions. This can be especially problematic in the world of financial planning, where we often ask clients to make difficult decisions with limited information.

As a result, questions like “what is an acceptable probability of success/failure for your retirement plan?” often get switched for other questions, like “how intensely bad would you feel if your retirement plan failed?” While the questions are still similar, there is an important difference: if you have not clearly defined both the meaning of success and the meaning of failure, your clients may misjudge the intensity of the consequences, leading to an irrational and inappropriate decision about how much or how little “risk” to take.Read More...

Is The Fiduciary Standard Alone Enough To Protect The Public?

May 16, 2012 11:02 am 4 Comments CATEGORY: Planning Profession

One of the major reasons that advocates recommend the fiduciary standard is the belief that if only everyone were subject to the standard, fewer client abuses would occur, because advisors would fear the repercussions (i.e., legal liability) of inappropriate recommendations that fail to meet the standard. Yet at the same time, the financial services industry has been plagued with scandals, and it's not just Bernie Madoff, Allen Stanford, and numerous commission-based advisor improprieties; in the past three years, there have even been investigations against two former NAPFA presidents for malfeasance. Which raises the question - if even people who have led such a fiduciary-centric organization as NAPFA can still conduct such misdeeds, does fiduciary really provide the necessary consumer protections? Or is the fiduciary standard really only effective for those who weren't likely to violate its principles anyway?Read More...