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.
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!
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.
With two market "crashes" in the past decade, prospective baby boomer retirees have grown increasingly afraid of the risk that the next market crash could topple their retirement if it comes at the wrong time. This fear has been exacerbated by the recent stream of research on safe withdrawal rates, that highlights how an unfavorable sequence of returns in the early years of retirement can derail a retirement plan. Yet the reality is that failure is dictated not simply by the magnitude of the market decline, but the speed at which it recovers. As a result, while clients are increasingly obsessed about the risk of a sharp decline in the markets (or a so-called "black swan event"), the true danger is actually an extended period of "merely mediocre" results that are uncommon but not rare, not a black swan market crash!
On October 3, 2008, then-President Bush signed into law the Emergency Economic Stabilization Act of 2008. Although it was widely known as the "bailout" bill - it was the legislation that authorized the Treasury Secretary to use $700 billion under the Troubled Asset Relief Program (TARP) - the legislation also contained a number of measures to help bring in additional revenue to the Federal government.
Amongst those provisions was the establishment of a new requirement for financial intermediaries to track and report cost basis on securities transactions to the IRS on an updated Form 1099-B, to better ensure that taxpayers properly their gains and losses on investments and pay taxes as appropriate, and the new rules took effect for stocks that were purchased in 2011. Over the long run, the new rules will make it easier for clients to track the cost basis for most of their investments, simplifying reporting and preparing returns during tax season.
However, in the near term, the introduction of cost basis reporting brings new complexities and challenges to manage. To help support taxpayers through this process, the IRS has revamped Schedule D, and introduced the new Form 8949 - which may have to be done three times for many individuals! - for reporting capital gains and losses for the 2011 tax year.
The long-term impact of inflation is a fundamental risk for retirees; a 60-year-old retired couple loses 50% of their purchasing power by age 85 at a mere 3% inflation rate. To plan for this, retirement projections typically assume an annual inflation adjustment, as does the research on safe withdrawal rates and sustainable retirement income. Yet many planners are quick to point out that no clients called the office on January 1st, 2012 to request their monthly distributions be adjusted from $3,000/month to $3,090/month to reflect the 3.0% increase in CPI in 2012. In fact, most clients rarely request to adjust their ongoing portfolio distributions more than once every several years. Does that mean retired clients don't really experience ongoing annual inflation? Or is the reality that they just handle it some other way?Read More...
