Nerd's Eye View blog

Reframing Monte Carlo Results To Increase Trust In Dynamic Retirement Spending

June 29, 2022 07:05 am 1 Comment CATEGORY: Retirement Planning

Financial advisors often use Monte Carlo simulation in their financial planning process, which (as is commonly found in major financial planning software packages) traditionally presents the results of the projection in terms of probability of success or failure (with ‘success’ being defined as an iteration of the plan where the client doesn’t run out of money, and ‘failure’ signifying the opposite).

However, some commentators have taken issue with this framing, particularly as it concerns the way that Monte Carlo results are presented to clients. Most significantly, the ‘success/failure’ framing fails to capture the reality that retirees, when facing an unlucky sequence-of-returns scenario which could result in their running out of money, can and often do make adjustments to their spending that allow them to avoid that unfortunate outcome.

To better reflect this reality, the phrase “probability of adjustment” has emerged as a commonly suggested alternative to “probability of success”. While representing an improvement over the original, however, “probability of adjustment” itself can be prone to ambiguity and misinterpretation without being clear about what type of adjustment might be needed, and what the outcome might be if that adjustment weren’t made.

A Monte Carlo simulation can tell us, with the benefit of hindsight, exactly which iterations of a plan would have ended with the retiree running out of money. But in reality, retirees do not have the ability to know which iteration (if any) they are on, and in many instances will likely make adjustments in cases where, in hindsight, no adjustment was strictly necessary. As a result, simply replacing “probability of success” with “probability of adjustment” when communicating Monte Carlo results can significantly underestimate the likelihood that a client will actually make an adjustment at some point, since clients (and advisors) do not have the benefit of knowing when an adjustment is ‘truly’ necessary.

Likewise, if an advisor were to recommend a dynamic spending strategy based on Monte Carlo simulations (such as adjusting spending to maintain a constant probability-of-success level), the “probability of adjustment” framing can skew even further from reality, since preserving a consistent probability of success often calls for relatively frequent adjustments in spending. For instance, maintaining a 70% probability of success level – implying only a 30% probability of adjustment – would in reality have required downward spending adjustments in nearly 100% of all historical scenarios, which would understandably have caused confusion for many clients if the advisor had used the standard “probability of success/adjustment” framing!

Ultimately, the key point is that outcomes, not probabilities, are what matter to clients, and any way of communicating Monte Carlo results should be clear about what those results mean in terms of real spending to the client. Though “probability of adjustment” is an improvement over “probability of failure”, it can still greatly underestimate the probability of actual spending adjustments, especially when dynamic spending strategies are involved. In those cases, it may make sense to avoid framing Monte Carlo results in terms of probabilities entirely, but rather to communicate in terms of the actual dollar spending adjustments that would be triggered in specific scenarios – which is what really matters to the client in the end.

#FA Success Ep 287: Finding Solo Efficiency To Serve 50 Great Clients With $100M AUM, With Jennifer Murray

June 28, 2022 07:03 am 1 Comment CATEGORY: Financial Advisor Success Podcast

Welcome back to the 287th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Jennifer Murray. Jennifer is the owner and founder of Stonebridge Financial Advisors, an independent RIA based in Morristown, New Jersey, that oversees $100 million of assets under management for 50 client households.

What's unique about Jennifer, though, is how she built on her personal tragedy of losing her husband to colon cancer to build a practice that specializes in recent widows, and intentionally works with a limited number of widowed clients to provide a more intimate service without needing to hire up staff around her.

In this episode, we talk in-depth about how, after becoming a widow herself and facing all the financial challenges and questions after losing a spouse, Jennifer realized she had the expertise to help other women going through the same difficulties and decided to focus solely on newly-single women, how a combination of referrals from friends and family and offering advice in her specialization through seminars, bereavement groups, and local hospital foundations helped Jennifer gain clients in her early years, and why Jennifer very intentionally only works with no more than 50 clients so that she can provide her desired level of attentive service to her clients without needing to hire up or feel the pressure of expanding and moving outside of her own comfort zone.

We also talk about how Jennifer realized after years as a lending officer at a private banking institution working with high-net-worth individuals she could have a much greater impact on clients' lives by working with them more holistically as a financial advisor, how even though Jennifer was a well-prepared CFP and had experience in finance, she learned as she experienced widowhood that as a single person there is always a need to have a thinking partner like a financial advisor, and how networking at financial conferences and receiving positive feedback from her clients early in her career gave Jennifer the confidence to eventually launch her own RIA to build her own ideal practice.

And be certain to listen to the end, where Jennifer shares how developing a well-targeted website early on in launching her practice helped increase its growth exponentially (and why it continues to support her growth even though she hasn’t updated it in nearly 10 years now), why Jennifer eventually had to stop taking new financial planning clients and how she handles prospects that she doesn’t have the capacity to serve, and how fulfillment as a financial advisor comes not only from the good that we do for clients, but the feeling that we as financial advisors are valued by our clients and are being paid well for the good work that we do.

So, whether you’re interested in learning about how facing the challenges of widowhood and being a single parent herself gave Jennifer the perspective to truly help her single women clientele, how networking and offering advice to specialized groups helped Jennifer realize her niche and gain referrals to launch her own RIA, or why Jennifer purposefully limits the number of clients she works with so she can provide higher attention and time for her clients to make the best financial decisions for them, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Jennifer Murray.

How To Take More Vacation: An Advisor’s Guide To Balancing Work And Time Off

June 27, 2022 07:01 am 0 Comments CATEGORY: Practice Management

Taking time away from the office can have many benefits for advisors, from the personal (e.g., spending time with family and exploring new places) to the professional (e.g., resting and recharging to help prevent burnout). At the same time, being away from work (whether it is working fewer hours during the week or taking full vacation days off) means having less time for client engagement, business development, and other firm activities. This raises the question of how advisors can most effectively balance their work obligations with the benefits of taking time off.

According to the latest Kitces Research study on Advisor Wellbeing, the median number of weekly hours worked and annual vacation days taken vary by position, where associate advisors tend to work more hours than lead advisors or executives, and where lead advisors tend to take more vacation than their counterparts. Further, median hours worked and vacation days taken also vary based on the advisor's status within the firm. For example, firm owners and employees work a median of 45 hours per week, while solo producers work a median of 40 hours per week. In addition, solo producers also take more vacation days than owners and employees.

These differences could be related to job experience and tenure, but they may also be related to differences in job function of each role, which can have a large impact on how advisors feel they can regulate their work hours and vacation time. For instance, even though some advisory firm executives may have fewer client advisory responsibilities, their job responsibilities include managing their staff and the office itself, which could be one reason why they take fewer vacation days than lead advisors.

Further, work hours and vacation days appear to be correlated with adviser wellbeing. For instance, the Kitces Research study found that advisors who reported very low quality-of-life scores took about 15 vacation days each year and worked about 43 hours per week. Advisors with very high quality-of-life scores took 29 vacation days each year and worked 38 hours per week, suggesting that advisors who work long hours may not be offsetting their regular work hours with vacation days, which could be a source of relaxation.

Given the various benefits of having time away from work, advisors have several options to reduce their weekly work hours and add vacation days to their calendar. For instance, designating a schedule based on realistic working hours can help them structure their time in a way that will help them meet their goal. Also, setting expectations for clients is especially important, both in terms of vacation days (by letting them know at the beginning of the engagement that the advisor will not be available during certain vacation periods) and during the workweek (which advisors can do by including their availability for replies in their email signature). In addition, bringing on new employees to share the work burden can free up time for firm owners, but they need to be careful not to allow this newfound time to be consumed by management responsibilities!

Ultimately, the key point is that taking time away from the office is a key contributor to an advisor's overall wellbeing. And for advisors who would like to work fewer hours per week or take more vacation days (or both!), setting clear expectations with clients and co-workers is an important first step toward creating more high-quality free time!

Weekend Reading For Financial Planners (June 25-26)

June 24, 2022 02:02 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of “Weekend Reading For Financial Planners” - this week’s edition kicks off with the news that the Senate has passed companion bills to the House’s “SECURE 2.0” proposals that would represent the most noteworthy changes to retirement savings since the original SECURE Act was passed in 2019. While changes could be made to the proposals as the Senate and House bills are reconciled, strong support for the measures in both chambers suggest that there could be major changes to the retirement landscape by the end of the year (from increasing the age when RMDs begin, to the ability to use retirement distributions to fund long-term care insurance), that could come with significant planning implications in the years that follow!

Also in industry news this week:

The SEC is considering extending its regulation of advisors to ‘information providers’, such as index providers and model portfolio makers, which could clarify the roles and responsibilities of these companies while further stretching the SEC’s inspection bandwidth
A recent survey suggests that clients of financial advisors have more confidence in their financial situation than consumers without advisors across a range of measures, from saving enough for retirement to controlling the amount of risk in their portfolios

From there, we have several articles on tax-planning strategies:

While tax-loss harvesting has gained newfound attention during the current market downturn, other tax-planning strategies, including asset location and Roth conversions, can also provide significant value to clients
Amid proposals to move the RMD age back further, advisors and their clients can consider the potential value of strategic withdrawals and Roth conversions before reaching RMD age
Why direct indexing is gaining in popularity among a broader base of advisors, and why its uses for clients go beyond tax management

We also have a number of articles on investing:

Why retail investors are increasingly turning to private-market investments and the potential benefits and risks of doing so
The implications for advisors of a recent study exploring the characteristics that make it more likely someone will ‘panic sell’
Why alternative investments could potentially be valuable additions to client portfolios in the current market and economic environment

We wrap up with three final articles, all about the drivers of professional success:

Why specialists often have a leg up on generalists as an industry matures and what this means for financial advisors
Why emotional intelligence and organization are more important than ‘book smarts’ for achieving success in the 21^st century
Why personal experience is necessary to gain understanding and mastery of a profession, including financial planning

Enjoy the ‘light’ reading!

When Roth Conversions Go ‘On Sale’: Discounted Roth Conversions During A Bear Market Decline

June 22, 2022 07:03 am 9 Comments CATEGORY: Retirement Planning

Bear markets can be stressful for both financial advisors and their clients – particularly for those clients who are near retirement or have recently retired and are therefore especially susceptible to sequence-of-return risk, as a market downturn in the first decade of retirement can negatively impact a retiree’s sustainable spending rates. At the same time, though, market downturns can create favorable tax planning opportunities, including the ability to maximize ‘discounted’ Roth conversions.

While individuals at any income level can complete Roth conversions (unlike making Roth IRA contributions, which have income limits), it does not necessarily mean that doing so will always be the most tax-efficient decision. Because whether traditional or Roth accounts are better depends on that individual’s tax rate today as compared to their expected future tax rate. Typically, this means that it will be advantageous to make traditional contributions (and reduce taxable income) when a person’s marginal tax rate is higher today than it will be when the funds are withdrawn in the future, and Roth contributions (or conversions) when the future tax rate is expected to be higher than it is today.

For investors who do consider making a Roth conversion, a declining market can effectively put the conversion ‘on sale’ at a (hopefully) temporarily depressed value. This is because, as the total value of the account drops, the dollar amount to be converted to a Roth account will represent a larger percentage of the pre-tax account, resulting in a larger portion of the future growth of the account being shifted into a Roth without moving into a higher tax bracket as a more sizable portion of the account is converted.

Notably, the benefits of Roth conversions during a market downturn can also depend in large part on how an individual sources the funds to pay the taxes on the conversion. And when it comes to paying the taxes due, cash is usually king, since using available cash set aside in a savings account – instead of taking funds that could have otherwise been converted to pay those taxes – will allow a larger balance of the tax-free Roth account to enjoy a market rebound. As while the individual might not have wanted to invest the money in the savings account, by using it to pay the taxes due on the Roth conversion, the savings is effectively paying for the future tax-free growth in the Roth account!

In addition, because Roth conversions can be made throughout the year in any amount, certain strategies can help maximize the value of the conversions, minimize potential client regret, and avoid running afoul of the tax rules that govern conversions. For example, conversion-cost averaging (dividing a selected annual conversion amount into regular, smaller conversions throughout the year) and Roth barbelling (converting once at the beginning of the year and again at the end of the year when the client’s tax picture is clearer) can allow for adjustments of the amount converted if a client’s income changes unexpectedly, among other benefits.

Ultimately, the key point is that a market downturn presents an opportunity to convert a higher percentage of a pre-tax account to a Roth account for the same amount of taxable income, for those who otherwise should be doing a Roth conversion given their current tax rate. Because while a down market can be challenging for both advisors and their clients, the opportunity for Roth conversions ‘on sale’ during these periods (when appropriate!) offers advisors the chance to generate tax alpha for their clients!

#FA Success Ep 286: Pursuing Intrapreneurship As A Path To Growth Within A Larger Firm, With Matt Cosgriff

June 21, 2022 07:04 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 286th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Matt Cosgriff. Matt is the Director of Wealth Management for BerganKDV, an independent RIA that operates as a division of a regional accounting firm based in Bloomington, Minnesota, and oversees more than $2 billion in assets for 1,000 client households.

What's unique about Matt, though, was his path to launch and build a specialized division within the firm as an “intrapreneurship” opportunity to serve next-generation clients, and then how he leveraged that to create a career path for himself toward leadership of the entire $2B RIA.

In this episode, we talk in-depth about how, despite his young age and lack of CFP marks at the time, Matt was able to get the opportunity to operate not as an entrepreneur starting his own firm but as an intrapreneur inside of BerganKDV to develop and operate a separate brand that catered to next-generation clients, how even though Matt was given some autonomy to launch his division, he struggled with having to ‘side hustle’ within the firm by also supporting a new retirement plan practice and working with traditional smaller wealth management and retirement clients to justify his intrapreneur salary, and how Matt ultimately shifted his career focus toward a leadership path after he realized he enjoyed working more on developing and growing and scaling the business itself than his client-facing responsibilities.

We also talk about how Matt leveraged his intrapreneurship experience and his ‘side hustle’ of working with internal clients to become the Director of Wealth Management for his firm at just 29 years old, how, during his first year as a director, Matt dealt with a lack of trust and confidence from some staff and clients due to his young age while he was trying to create change (which did eventually lead to a few of their departures), and how going through the Schwab Executive Leadership program helped Matt refocus and create space to be more strategic and drive growth for the firm.

And be certain to listen to the end, where Matt shares how he learned in hindsight the importance of being clear about what is realistic and managing expectations upfront to give room to celebrate wins later, why Matt believes that connecting with other professionals in the financial industry, being persistent, and staying curious are the keys to creating a path to a great career, and how Matt has managed to avoid getting stuck on the ups and downs along the way and keep his focus on enjoying his journey.

So whether you're interested in learning about how Matt’s initial experience as a founder taught him to start small, build interest, then scale, how he uses Entrepreneurial Operating Systems (EOS) to break beyond the day-to-day grind and keep everyone focused on long-term growth, or why persistence is key in building connections (and finding prospects!), then we hope you enjoy this episode of the Financial Advisor Success podcast, with Matt Cosgriff.

Summer Reading List Of “Best Books” For Financial Advisors – 2022 Edition

June 20, 2022 07:07 am 12 Comments CATEGORY: Personal/Career Development

The first half of 2022 has not played out as most expected; the good news is that for most parts of the country, businesses and offices are re-opening (at least those that decided to return to in-person at all!), and by whatever means we’ve figured out how to ingrain the pandemic into our normal daily lives. The bad news is that the reinvigoration of activity seems to have spawned inflation, economic worries, and a challenging simultaneous decline in stocks and bonds. Which means the arrival of summer should bring some welcome relief – a traditional time for most to find some rest and relaxation (if only because clients also travel more during the summer, and are harder to pin down for meetings anyway!). And for many, this includes finding some time to read and catch up on a few good books!

For those who love to read, though (and especially for those who have limited time and will only get to read just one or two books over the summer), the question quickly becomes “what’s a good book worth reading this summer?”

As a voracious reader myself, I'm always eager to hear suggestions from others of great books to read, whether it's something new that's just come out, or an "old classic" that I should go back and read (again or for the first time!). And so, in the spirit of sharing, a few years ago I launched my list of "Recommended (Book) Reading for Financial Advisors", and it was so well received that in 2013 I also started sharing my annual "Summer Reading List" for financial advisors of the best books I'd read in the preceding year. It quickly became a perennial favorite on Nerd's Eye View, and so I've updated it every year, with new lists of books in 2014, 2015, 2016, 2017, 2018, 2019, 2020, and a fresh round last year in 2021.

And now, I'm now excited to share my latest Summer Reading list of top books for financial advisors in 2022, from a deep dive into how exactly to ‘deliver massive value’ to ongoing clients after the initial financial planning process, to what it takes to market an advisory firm successfully in a crowded landscape, how to build better rapport with prospects and clients by asking (more) effective questions, why sometimes the best path to a better business is not by growing and adding team members but knowing when to strategically subtract instead, several books on how to more effectively scale your advisory firm if/as it does grow (and how to ‘grow’ your business when the goal is not necessarily to be bigger, but to be better!), and a fantastic book on how to stop living in the “gap” between our current reality and the future ideal that always seems to be a little out of reach and instead learn to celebrate the “gain” by recognizing how far we’ve come in recent years.

So as the summer season gets underway, and summer vacations return, I hope that you find this suggested summer reading list of books for financial planners to be helpful… and please do share your own suggestions in the comments at the end of the article about the best books you've read over the past year as well!

Weekend Reading For Financial Planners (June 18-19)

June 17, 2022 02:02 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of “Weekend Reading For Financial Planners” - this week’s edition kicks off with the news that Charles Schwab has agreed to pay $187 million to settle allegations that it misled users of its Schwab Intelligent Portfolios robo-advisor platform by falsely claiming that the cash allocations in its model portfolios (which were significantly higher than its competitors) were determined through a ‘disciplined portfolio construction methodology’ when regulators ultimately determined they were pre-set to generate a desired amount of revenue for Schwab. In other words, even as Schwab advertised that it was not charging a platform fee for the service, Schwab’s large cash allocations in the portfolios were still set to incur a cost for its clients, serving as a ‘hidden’ fee for an otherwise ‘free’ service, which the regulators treated as a violation of the antifraud (no-misleading-advertising) provisions of the Investment Advisers Act. Which in turn raises questions of whether regulators will eventually apply a similar scrutiny to the similar pricing model offered to RIAs using custodial platforms as well?

Also in industry news this week:

Why it is important for advisory firms to review their compliance and disclosure practices in the wake of a new Department of Labor regulation regarding rollovers of workplace retirement plans and IRAs
How the term ‘ESG’ has lost much of its meaning and how advisors can serve clients who want to take a values-based investment approach

From there, we have several articles on this year’s market volatility:

The tools advisors are using to help clients stay the course during the current market downturn
While the 60/40 portfolio has come under fire amid the poor performance of stocks and bonds this year, the classic asset allocation could now be more attractive given improved stock and bond valuations
Why the day the market seems to be at its worst is often one of the best times to buy

We also have a number of articles on bear markets:

Five things advisors can keep in mind during bear markets to provide clients with a long-term perspective
Why a trend following strategy can be an effective risk management tool for a portion of some client portfolios
Why reading books and prioritizing sleep can help advisors and their clients lower their stress levels during bear markets

We wrap up with three final articles, all about putting money in perspective:

While it seems like the worst of times when it comes to the economy and world affairs, the historical record shows how much things have improved over time
How those with better numeracy skills tend to have higher incomes and greater happiness
Why building wealth is not an end in itself and how money can be used to facilitate health and happiness

Enjoy the ‘light’ reading!

Kitces & Carl Ep 88: Showing Your Value To Prospects When Everything Is Already Going Well

June 16, 2022 07:06 am 0 Comments CATEGORY: Kitces & Carl Podcast

When financial advisors seek new clients, their outreach efforts can often lead to prospective clients approaching them because of a specific issue on their mind that they would like the advisor to address. In these instances, the advisor may start the discussion simply with the intention of better understanding the client’s problem. But sometimes, when the advisor meets a potential prospect (perhaps at a party or other social engagement) who doesn’t appear to have any immediately discernable ‘problems’, the conversation to convince the prospect that the advisor has value to offer, especially when markets are up and everything else appears to be going well, can be more complex.

In our 88^th episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards discuss how advisors can connect with prospects who believe their financial lives are going well. As while it is easier for an advisor to attract prospects who are already aware that they need assistance (e.g., offering investment management to a prospect whose portfolio has underperformed the market), it can be much more difficult to attract prospects who don’t recognize that there are any problems to solve in the first place.

As a starting point, it is important to recognize that a successful connection between a prospect and advisor requires two things: 1) the prospect must recognize they have an issue that needs to be solved; and 2) they must believe the advisor has a solution to their problem. As while most financial advisors have a wide range of services to offer, people rarely have a ‘comprehensive financial planning’ problem. Therefore, an advisor can help prospects identify gaps and areas of weakness, and then show that they have a solution to the specific issue, whether it is portfolio management, retirement planning for a specific career, handling life transitions, or another area.

This situation also demonstrates the value for advisors of serving a particular niche, solving problems for a specific group of people. By being clear about the services they can offer for a specific type of client, advisors can better attract prospects who have issues that match the advisor’s specialty and save time by engaging with fewer prospects who would not be a good fit.

Ultimately, the key point is that an advisor has to offer relevance to prospects in order to convert them into clients. Which means that helping prospects recognize that they have a problem in the first place, by using language that relates to them so they can self-identify with the stated problems, is an important step to connecting with prospects. And identifying specific problems, recognized and understood by both the advisor and the prospect, allows the advisor to build the relationship by explaining how they will help their new client solve their problems!

Complying With PTE 2020-02 Under DoL’s New IRA Rollover Requirements

June 15, 2022 07:04 am 5 Comments CATEGORY: Regulation & Compliance

As of February 1, 2022, financial advisors who give advice to clients about whether to roll over 401(k) plan assets into an IRA are subject to a new set of regulations from the U.S. Department of Labor (DOL). Specifically, advisors who would receive increased compensation as a result of recommending a rollover (such as a commission or advisory fee) must qualify for an exemption from DOL’s prohibited transaction rules by complying with the new standards outlined by DOL.

In this guest post, Jaqueline Hummel, compliance consultant and Managing Director of Foreside, outlines the basics of DOL’s Prohibited Transaction Exemption 2020-02 (PTE 2020-02), details the six key conditions required of financial advisors by PTE 2020-02, and provides tips for advisory firms to comply with the new rules.

At a basic level, PTE 2020-02 expands the definition of a “prohibited transaction” under ERISA to include any recommendation for rolling over 401(k) assets into an IRA (or from one IRA to another) when doing so would increase the compensation for the advisor. To qualify for an exemption to this rule, advisors must comply with six key conditions:

Acknowledge that they are fiduciaries under ERISA;
Disclose, in writing, to the client the scope of the relationship and any material conflicts of interest;
Comply with DOL’s Impartial Conduct Standards requiring advisors to provide prudent investment advice, charge only reasonable compensation, and avoid misleading statements;
Provide written disclosures to clients of why the recommendation to roll over assets is in their best interests;
Conduct an annual review of the firm’s compliance with PTE 2020-02 (and document the results in a written report to a “Senior Executive Officer” of the financial institution); and
Adopt and implement policies and procedures to comply with the DOL’s Impartial Conduct Standards, mitigate conflicts of interest, and document the reasons for recommending rollovers of retirement assets

While many advisors may already be following some of these conditions (for example, RIAs who have fiduciary status by virtue of the SEC’s fiduciary rule may already acknowledge that status in writing and provide disclosures of material conflicts of interest in Form ADV), DOL has its own specific requirements, including model language to use in disclosure documents, that are required to comply with the prohibited transaction exemption. Nevertheless, RIAs may be able to easily adapt their existing disclosure documents, such as Forms ADV and CRS, to satisfy the first two requirements.

Even though it may seem daunting when viewed in its entirety, compliance with PTE 2020-02 can be more manageable by breaking it down into its individual components and determining where the advisor’s existing processes and tools can be used or adapted. Connecting with other advisors or hiring an expert to walk through the steps of developing policies and procedures can also relieve some of the burden on RIAs to build up their own compliance standards from scratch.

Ultimately, with the deadline to meet DOL’s documentation and disclosure requirements approaching on June 30, 2022, the most important thing is for advisors to be proactive about putting their firm’s standards in place (which might need to be adjusted as DOL releases more guidance in the future). Read More...