Kitces.com - Advancing Knowledge in Financial Planning

Is The Retirement Plan With The Lowest "Risk of Failure" Really The Best Choice?

March 1, 2012 02:59 pm 12 Comments CATEGORY: Retirement Planning

One of the primary virtues of using Monte Carlo analysis for evaluating a retirement plan is that it frames the conversation in terms of the probability of success and the risk of failure, rather than simply looking at how much wealth is left at the end of the plan. As a result, the focus of planning shifts from maximizing wealth, to maximizing the likelihood of success and minimizing the risk of failure.

Yet the reality is that while "failure" from the Monte Carlo perspective means the client ran out of money before the end of the time horizon, in truth most clients will not simply continue to spend on an unsustainable path right to the bitter end. Instead, if the plan is clearly heading for ruin, clients begin to make adjustments. Some failures may be more severe than others, and consequently some plans may require more severe adjustments than others.

But the bottom line is that a "risk of failure" is probably better termed a "risk of adjustment" instead. However, when viewed from that perspective, it turns out that the plan with the lowest risk of adjustment may not be the ideal plan for the client to choose!Read More...

Why Revenue-Based Incentives: 6 Ways Your Staff Impacts Your Planning Firm’s Revenue

February 29, 2012 03:07 pm 2 Comments CATEGORY: Practice Management

Running a successful planning firm means not only being an effective financial planner, but also having the support of an effective staff. While a good hiring process can help to ensure that the right people are on board, the reality is that providing appropriate compensation with the right incentives can greatly facilitate the success of the firm. Yet there is much disagreement about the best way to provide incentives: should it be based on individual merit, or the revenue of the firm? Many suggest the former, noting that staff can control their individual merit more than they can impact the growth in the firm's revenue. But is it really true that staff - who are not out on the streets trying to find and develop new prospective clients - have so little impact on the revenue of the firm? Recent research suggests otherwise, as firms with revenue-based incentives nearly tripled their revenue growth from the bottom of the markets in 2008, compared to firms with merit-based bonuses. Which means in reality, your staff may impact the planning firm's revenue far more than you realize!Read More...

Do Retirees Spend More, Or Less, In Their Later Retirement Years?

February 28, 2012 02:40 pm 13 Comments CATEGORY: Retirement Planning

Estimating retirement expenses over the entire duration of a client's retirement years is a fundamental part of retirement planning. Yet there is surprisingly little agreement from planners about the spending behaviors of clients as they go through retirement.

Some suggest that retirement spending rises as clients age, due to the accumulating impact of health care expenses. Others suggest that retirement expenditures decrease, as clients reduce their spending in areas like travel and restaurants. Still others suggest that retirement spending is relatively level and simply keeps pace with inflation, as the increases in one category (e.g., health care) offset the decreases in others (e.g., travel and restaurants) - which, notably, is also the implicit assumption of steady inflation-adjusted spending that underlies the research regarding safe withdrawal rates and how much income is sustainable from a portfolio.

So which is it? A growing cadre of research suggests that in reality, client spending probably does decrease over time... with some notable exceptions. And if you don't use a proper assumption, you may force clients to save more than is needed, or retire later than is necessary!Read More...

3 Ways The Digital Age Will Change Financial Planning In The Next 10 Years

February 27, 2012 03:37 pm 19 Comments CATEGORY: Planning Profession

Over the past two decades, the world has begun its transition into the information/digital age. However, the progression has been uneven, and the world of computers are still far more integrated in some industries and professions than others. The pace of change is accelerating, though, and in the coming decade, it will be time for financial planning to enter the digital age, driven in large part by major demographic shifts, as more and more of Generation Y become the newest clients and newest staff members in firms that will increasingly be led not by baby boomers operating their traditional model, but by the more technology-inclined Generation X. And in this future world, where people are connected by so many means, geography itself is less and less relevant; employees can work for employers, and clients can engage planners, even if they are a thousand miles apart, when it's a digital, virtual world. As the importance of geography declines with the transition to the digital age, three key aspects of financial planning - practice management, marketing and business development, and the actual delivery of financial planning services - will be dramatically altered.

Weekend Reading for Financial Planners (Feb 25-26)

February 24, 2012 07:21 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition highlights a study from the Journal of Financial Planning suggesting that proactive use of reverse mortgages can actually increase sustainable retirement income, two practice management articles about focusing on organic growth in your business and documenting your office procedures (including the fact that often you, the planner, are the greatest roadblock to that process). We also highlight an interesting piece from the Wall Street Journal suggesting that investors may now be investing so much in index funds that markets really are becoming less efficient and more correlated, a fascinating interview with Woody Brock suggesting that there's a difference between "good deficits" and "bad deficits" for government spending, and an adaptation of the upcoming annual shareholder letter from Warren Buffett in Fortune magazine that highlights why investing in stocks is so much more productive than investing in bonds or gold for the long run. We wrap up with three somewhat offbeat articles, one about how governments could use our behavioral finance irrational tendencies to help be better citizens (and have fun doing it!), a second that questions whether we are all really as busy as we think and claim we are, and a final article that highlights Pinterest, the latest emerging "social network" site that is growing like wildfire (with 73 million users already) and that you'll probably hear more about in the coming year. Enjoy the reading!

The Latest Trend In How Advisors Are Using Social Media (With No Compliance Headaches!)

February 23, 2012 04:16 pm 2 Comments CATEGORY: Client Trust & Communication

As social media continues to take the world by storm, advisors are increasingly under pressure to begin using social media in their own practices. Yet the advisory community has generally been slow to adopt, due both to the compliance challenges involved, and a general wariness about whether prospective clients would really make a decision to trust and work with an advisor based on social media marketing. In fact, a recent study by the Aite Group suggested that "the bloom is off the rose" when it comes to advisors adopting social media to bring in new business. Yet at the same time, a new social media trend is emerging - using social media not to develop new clients, but to better communicate and interact with existing clients. And the good news is that this approach to social media potentially has far fewer compliance headaches, too, because it's less about talking, and more about listening.