Kitces.com - Advancing Knowledge in Financial Planning

Planning Around Estate Tax Impermanence – Decisive Action Or Tentative Flexibility?

April 10, 2012 12:28 pm 2 Comments CATEGORY: Estate Planning

In 2012, planners and clients once again face the proposition of the estate tax 'sunset' that next year may revert the estate tax exemption and rate back to their 2001 levels. This impermanence in the current rules, with a scheduled lapse to a less favorable environment, creates an opportunity for clients to take decisive action while the current rules hold.

Yet at the same time, if Congress ultimately does extend the current rules, decisive action may simply lead to irrevocable transfers that prove to be unnecessary, but cannot be unwound after the fact - a potential hardship for all but the wealthiest of ultra high net worth clients. And the reality is that there is little historical precedent for Congress to actually decrease the estate tax exemption or increase the estate tax rate - such a shift hasn't occurred since World War II!

Accordingly, some planners have begun to lean in the opposite direction - viewing the current environment not as one for decisive action, but one for tentative flexibility and a wait-and-see approach. Read More...

Is Growing Your Practice With Referrals Really a Best Practice?

April 9, 2012 01:20 pm 9 Comments CATEGORY: Marketing

Growing a financial planning business through referrals has long been accepted as the top strategy for building a practice, and in recent years one study after another has validated the approach by showing that the majority of advisors generate the majority of their growth through referrals.

Yet an increasing number of studies are showing that a significant portion of growth-by-referrals is not really through any proactive referral marketing strategy, but instead is merely the result of passive referrals that show up on their own.

Which in turn means that if passive referrals are actually how a majority of advisors are generating growth, it may be more a testimonial to the ineffectiveness of advisors as marketers at all, rather than the benefits of a referral strategy implemented on a purely passive basis.

This doesn't necessarily mean a proactive referral marketing approach cannot be used to generate new clients... but it does raise the question: have we overstated how effective referrals really are in growing a business? Is referral marketing really a best practice, or simply the only result that's left in the absence of any other marketing best practice?

Weekend Reading for Financial Planners (Apr 7-8)

April 6, 2012 07:12 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition highlights recently announced changes from the CFP Board regarding the experience requirement and the consequences of a bankruptcy for certificants, and three 'warning' articles to take note of: one about the crowd funding solicitations your clients will likely receive in the coming year(s) as a result of the new JOBS act; a second about problems arising in the ETN/ETF marketplace that suggest more due diligence may be in order; and the third about an annuity agent who was thrown in jail for selling an annuity to a senior who was later deemed incompetent due to dementia, raising serious questions for all advisors about the standard of care for determining whether a client is competent before working with them. From there, we look at three interesting studies hitting the news this week: the first was a research study by NBER that suggested most 'advisors' are not giving advice in the interests of their clients; the second found that "fee-based" is actually a negative term in the minds of most consumers and may be eroding consumer trust; and the third suggesting that a uniform fiduciary standard for brokers may not increase the cost of advice for lower income individuals or shift the industry to focus on the affluent, despite many claims to the contrary. From there, we look at two blog posts: one about how using video on your website may be easier (and cheaper) than most people believe, and another that makes the good point that just because someone offers investment insights in the financial media does not mean they're giving advice - and we need to stop confusing the two. We finish with a striking write-up of a recent study released by the BLS looking at consumer spending over the past century, and exploring the challenging question: if our country has gotten so much richer, why do so many feel poor and struggle these days? Enjoy the reading!

Are Retirement "Bucket" Strategies An Asset Allocation Mirage?

April 5, 2012 01:33 pm 23 Comments CATEGORY: Investments

As baby boomers continue into their retirement transition, two portfolio-based strategies are increasingly popular to generate retirement income: the systematic withdrawal strategy, and the bucket strategy. While the former is still the most common approach, the latter has become increasingly popular lately, viewed in part as a strategy to help work around difficult and volatile market environments. Yet while the two strategies approach portfolio construction very differently, the reality is that bucket strategies actually produce asset allocations almost exactly the same as systematic withdrawal strategies; their often-purported differences amount to little more than a mirage! Nonetheless, bucket strategies might actually still be a superior strategy, not because of the differences in portfolio construction, but due to the ways that the client psychologically connects with and understands the strategy!Read More...

Would Financial Planning Be More Valuable If It Focused On The Short-Term?

April 4, 2012 12:53 pm 17 Comments CATEGORY: General Planning

What is the value of financial planning? What do you get from it? What does it really do for you? Historically, the profession has tended to answer these questions with explanations like "financial planning brings you peace of mind" and "financial planning gets you on track for retirement [or other] goals."

The problem is that these results are intangible and long-term, which makes them hard to define clearly and difficult to be held accountable to over a relevant time period. In fact, arguably one of the greatest challenges for the advancement of financial planning is our inability to clearly explain the value proposition and what clients will get out of it.

So what's the solution? Financial planning needs to redefine itself from long-term intangibles to short-term tangible results; after all, clients who can really see that the outcome of the planning experience has benefited them become true advocates of our services, and build the habits that ultimately lead to long-term success! Which in turn raises the question: what are some short-term tangible results we can establish to better demonstrate the value of financial planning?

Utility Functions in Financial Planning – A New Framework For Decision Making?

April 3, 2012 01:29 pm 7 Comments CATEGORY: General Planning

Making decisions about trade-offs that only have distant, future ramifications, and deal in abstract projections can be difficult for clients. Yet while we can always revisit decisions as time passes, the reality remains that in order to establish a plan in the first plan, we need to assess such uncertainties and make some initial decision. Would you rather have a plan that has a little risk of spending cuts and a high probability of excess wealth, or a plan with lots of risk of spending cuts that is less likely to leave over wealth you failed to use during your lifetime, none of which will be relevant for years to come? How do you weigh the risk of spending cuts against terminal wealth, or the volatility of a portfolio against the future impact it may have on spending?

Recent research suggests a new way to evaluate these problems, adopting utility functions that have been applied elsewhere in economics to the financial planning world, and opening up a new body of research in the process. While we may still have a ways to go before utility functions become commonplace in planning, this may be an early glimpse at the future of how we craft recommendations for clients... at least, if we can overcome some hefty hurdles, first.Read More...