Nerd's Eye View blog

Weekend Reading For Financial Planners (May 21-22)

May 20, 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 a court ruling has called into question the Securities and Exchange Commission’s use of its own judges for adjudicating enforcement actions. The court order could pave the way for those advisers ever accused of violating SEC regulations to have the guaranteed right to a jury trial instead, ensuring they will get a chance to ‘have their day in court’ to prove their innocence.

Also in industry news this week:

While some observers thought new leadership at the SEC might pave the way for increased enforcement of Regulation Best Interest, the agency has yet to take any major enforcement actions, potentially leaving consumers still vulnerable to the problematic broker behaviors that Reg BI was meant to solve, and leaving other broker-dealers wondering how to implement the principles-based guidelines
A coalition of advocacy groups has asked the SEC to investigate RIAs’ use of mandatory arbitration clauses with clients, including a call to use regular examinations to gather data on the terms of these clauses and how they are used

From there, we have several articles on the current state of financial markets:

How advisors can put the current market downturn into historical context for their clients
Why seemingly everyone has a bearish outlook for financial markets, and why this could offer a glimmer of hope for market performance going forward
Why the market downturn could present an opportunity for advisors and their clients to take advantage of Roth conversions, as well as alternative strategies advisors could consider

We also have a number of articles on practice management:

How some firms are using equity ownership to attract and retain employees amid the tight labor market
Why asking job candidates about their open browser tabs could be a useful interview question
The most important criteria to consider when selecting a business partner and how best to nurture the relationship

We wrap up with three final articles, all about what it means to be ‘rich’:

While having more money can improve wellbeing for advisors and the broader public, a range of other factors might be even more important
A recent survey shows what net worth Americans think is required to be ‘wealthy’ or ‘financially comfortable’ and also suggests that values-based investing might be gaining momentum
How being ‘rich’ and being ‘wealthy’ are not necessarily the same thing, and how advisors can help clients achieve a life of financial freedom

Enjoy the ‘light’ reading!

Kitces & Carl Ep 86: Aligning Client Capital To Goals (Which Are Only Clarified Over Time)

May 19, 2022 07:05 am 1 Comment CATEGORY: Kitces & Carl Podcast

One of the primary objectives for many financial advisors is to help their clients align their goals and priorities with their spending habits, time, and energy. And even though advisors have the unique advantage of being well-positioned to have these important conversations with clients, encouraging clients to define their financial goals and developing a deeper understanding as to why those goals are meaningful to the client have proved to be a significant challenge for many advisors.

In our 86^th episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards discuss how advisors can broach the discussion when they notice that their clients’ use of capital and financial goals are not in alignment, and how they can help clients re-examine their goals and actions to get their financial plan back on track.

As a starting point, it is important to recognize when a client’s goals may be shifting, and to communicate with clients to understand whether their use of capital actually supports their goals or if they need to examine those goals more carefully. As while it is natural for a client’s goals to change over time, it is still up to the advisor to understand these changes so that the client’s financial plan can be adjusted accordingly. Asking thoughtful questions can help advisors understand if there are distractions or other external factors that are preventing the client from making progress toward their originally stated goals, if the client’s goals have changed (or if their original goals weren’t what the client genuinely wanted in the first place), or if the client’s circumstances have changed to the extent that they no longer even know what their actual goals are.

Even though it may be difficult for clients to examine and accept the reasons why a financial plan may have derailed, it is still crucial for advisors to ask clients to clarify and confirm what their goals are, especially when the client’s actions appear to oppose the originally stated goals of their plan. Because the consequences of not having the discussion can compromise an advisor’s values (and duties as a fiduciary!), at the same time possibly allowing for further client action that doesn’t support the goals outlined by the plan.

Ultimately, the key point is that when a client’s use of capital seems out of alignment with their stated goals, advisors have an opportunity to help clients revisit and clarify how their goals reflect their priorities and values. And maintaining an open line of communication over time, that accommodates an empathetic and judgement-free space, can help the client to identify any changes (whether to goals or actions) that should be incorporated into the plan to keep things (or bring things back) on track. Because in the end, the financial plan is a continually evolving guide that is meant to help clients reach their financial purpose over time. And by encouraging clients to revisit their goals frequently along the way, advisors not only help clients stay on track with their plans, but also connect with them on a deeper level, creating strong and lasting relationships!

The Gamification Of Monte Carlo: How To Incentivize Proactive (Not Reactive) Retirement Spending Goals

May 18, 2022 07:08 am 1 Comment CATEGORY: Retirement Planning

In recent years, Monte Carlo simulation has become a popular tool for financial advisors to motivate their clients to follow recommendations. By presenting a single probability-of-success percentage, Monte Carlo analyses give clients a simple, instantaneous metric on the state of their financial plan. And because many clients naturally like to challenge themselves to do better and score higher, they are incentivized to take action that will increase their plan’s probability of success. The idea of using the same fun and appealing motivating elements found in games that people like to play (e.g., accomplishment, empowerment, and unpredictability) to encourage them to take action on other aspects of their lives is a concept known as “gamification”.

Yet, as many advisors know, the end goal of financial planning is not necessarily to achieve the highest possible Monte Carlo probability-of-success result, as a 100% Monte Carlo success rate effectively guarantees that the client will have excess money left over at the end of their lives (likely more than they would need to have at the end of their plan, and otherwise could have spent and enjoyed earlier in their life). Which means that, while Monte Carlo incentivizes clients to achieve higher and higher probabilities of success, actually working to achieve the ‘best’ success probability of 100% may push clients toward outcomes that are out of line with their goals for spending, giving, and leaving behind assets during their lifetimes.

Fortunately, several ways exist for advisors to use the gamification power of Monte Carlo simulation to motivate clients to follow their recommendations. First, advisors can reframe how outcomes are measured by shifting the focus from an acceptable probability of success to a more dynamic concept of probability of adjustment, to emphasize the fact that ever-higher probabilities of success do not necessarily equate to desirable outcomes for the client and that lower probabilities of success can actually be more sustainable than they may sound, when factoring in a client’s ability and willingness to make spending adjustments along the way.

Alternatively, advisors and their clients could pre-define a range of acceptable probabilities (in other words, implement a risk-based guardrail strategy) which allows the probability of success to float up or down with market movements over time, and specifies the point at which the client would need to cut spending if the probability drops too low (or conversely, increase spending if the probability increases above the target range), which serves to help the client understand the long-term ongoing nature of their plan, and that the plan shouldn’t be considered as a one-time blueprint for all future spending up to (and beyond) retirement. Going further, advisors using a guardrails-based approach could even consider shifting the focus away from probability of success entirely, and toward more concrete metrics such as actual dollar figures (e.g., to reflect spending, portfolio balances, etc.) since, to the client, what ultimately matters is not their plan’s probability of success itself, but instead, the actions (e.g., the level of spending) that allow them to achieve that probability of success!

Ultimately, what makes Monte Carlo simulation so powerful for clients is the ability to visualize how they can impact their plan’s long-term outcome through the actions they take. However, without first defining the range of probabilities – and whether they serve as metrics for success or adjustment – that will best achieve the client’s goals, the instinct will be to pursue ever-higher probabilities of success (and correspondingly more conservative plans). Advisors can help harness the gamification power of Monte Carlo in a way that is better aligned with the client’s goals by framing the range of desirable outcomes and reorienting the conversation away from probability of success and toward the client’s concrete actions.

#FA Success Ep 281: Leveraging Tax Planning To Create Unique Value For Small Business Owners, With Duncan Kelm

May 17, 2022 07:01 am 1 Comment CATEGORY: Financial Advisor Success Podcast

Welcome back to the 281st episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Duncan Kelm. Duncan is a managing partner for Arrow Point Wealth Management, a hybrid advisory firm based in Santa Rosa, California that oversees $163 million in assets under management for 142 client households.

What's unique about Duncan, though, is how he leverages owning and operating his own tax firm, in addition to his advisory firm, to offer more integrated tax planning and wealth management services to his small business owner clientele.

In this episode, we talk in-depth about how Duncan leveraged his tax expertise and years as a business consultant to build his own tax firm to offer full-suite tax and financial planning to his clients, how Duncan utilizes his tax business as well as local CPAs to generate leads for prospective wealth management clients, and how Duncan created what he calls ‘Character Insurance’ with his clients to help them define who they are and document their ethos for future generations when they are no longer around.

We also talk about how Duncan fought to become more knowledgeable to prove his worth after transitioning from consulting to an entry-level position at a wirehouse, how Duncan decided to partner with his father to build their own independent firm after he became frustrated with the lack of freedom and opportunities at the wirehouse, and how Duncan struggled to accept becoming his father’s successor as he tried to balance building a career on his own and taking advantage of the partnership opportunity in front of him.

And be certain to listen to the end, where Duncan shares how he drew upon the lessons in mental toughness he learned during his years as an Olympic Rugby player to help him through the difficult transition to owning his firm, how even though Duncan thoroughly enjoyed his prior consulting work he changed his career path to gain more independence and time to spend with his family, and how Duncan lives a philosophy of focusing more on the effort he puts towards achieving life goals than just focusing on the outcome (which usually helps it turn out favorably in the end anyway).

So whether you’re interested in learning about how Duncan utilizes his tax firm to gain referrals for his wealth management firm and provide consolidated tax and financial planning to his clients, how Duncan developed 'Character Insurance’ to help his clients (and himself) express to loved ones what is truly important to them when they’re gone, or how Duncan was able to overcome the challenges of transitioning from a business consultant to a partner at his own firm, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Duncan Kelm.

How Working With The Most Affluent Clients Can Actually Make Advisors Less Happy

May 16, 2022 07:06 am 2 Comments CATEGORY: Financial Psychology

Self-worth can be an important component of an individual’s well-being, but people often base their own sense of self-worth on how they compare with others around them. And because finances are often a part of that comparison, the financial situation of the people we interact with on a regular basis can have a significant effect on how we perceive our own self-worth. For financial advisors, this could mean that comparing themselves to their own clients (who tend to have high incomes and net worth) can have negative effects on how they view their self-worth, especially when they believe that their level of success or income does not measure up to that of their clients.

According to Kitces Research on Advisor Wellbeing, advisors on average do tend to have a high sense of self-worth. But despite being high overall, there is a small but clear pattern in which advisors’ self-worth declines as the net worth of their clients grow, with a steep drop-off coming as clients surpass $2.5M in net worth. Which suggests that being around high-net-worth clients can cause financial advisors to be constantly reminded of those clients’ affluence, and how their own financial status compares.

The effects of social comparison on advisors’ self-worth can also be felt when advisors move ‘upmarket’, serving more affluent clients as they gain experience in their careers. Doing so can cause the advisor to move out of their financial comfort zone, because if they originally served clients who were closer to the advisor’s own peer group and upbringing, moving to serve clients of a different socioeconomic status can cause tension between the advisor’s own values and attitudes toward money and that of the clients they serve. Which can in turn cause the advisor to feel as if they are inadequate to serve their (more affluent) clients’ needs, or unable to relate to those clients’ goals and desires – either of which might cause the advisor to feel dissatisfied with their place in life and consequently lower their sense of self-worth.

It is important, therefore, for advisors to avoid the traps that could cause their self-worth to suffer from over-comparison to their high-net-worth clients (since serving these types of clients is, for many advisors, the hallmark of a successful career). One method is for advisors to mark their own progress over time, not only in terms of income and net worth but also in terms of skills and overall life satisfaction. Comparing our progress and improvement over time by benchmarking against our own past performance can help us feel (just as we often help our clients feel) the satisfaction of making progress toward our goals.

Another way to improve self-worth is for advisors to use their knowledge to help those who are less affluent, such as providing pro-bono financial planning to those who cannot otherwise afford professional advice. Aside from the intrinsic benefits of helping those who are less well-off, this can also serve to balance out the feeling of having only highly affluent clients and can help the advisor feel more confident and useful in their ability to provide valuable, impactful advice.

Ultimately, maintaining a healthy sense of self-worth is key for financial advisors to stay focused on themselves and the positive impact they are providing through their advice. While social comparisons are inevitable – being hard-wired into most of our brains – it is possible to reshape and augment those perceptions by deciding who to compare ourselves to, which gives us the power to determine (and improve) our own self-worth!

Weekend Reading For Financial Planners (May 14-15)

May 13, 2022 02:06 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 T3 Technology Conference was held last week after a two-year hiatus, drawing a record crowd to see the latest in advisor technology. The event highlighted the growing data management needs of advisors as well as advisors' interest in ways to better scale their practices while continuing to offer individualized planning to their clients.

Also in industry news this week:

A recent survey shows that the focus of many RIAs remains on attracting ‘mass affluent’ clients through referrals from current clients, perhaps suggesting an opportunity for those willing to break the mold in terms of client wealth or marketing strategies
With many firms looking to diversify the traditionally male-dominated financial advisory industry, the market for female advisors has become increasingly competitive

From there, we have several articles on tax and retirement planning:

While the recent market downturn has created opportunities for advisors to engage in tax-loss harvesting in client accounts, there are several potential pitfalls to avoid
How to find the best solution for clients to make contributions to Roth retirement accounts, no matter their income
Why a contingent deferred annuity might be an appropriate vehicle for clients who want income protection while keeping their assets invested in the market

We also have a number of articles on advisor marketing:

Why webinars can be a valuable lead-generation tool for advisors and how to make them more effective
The key features of advisor websites, from a call to action to credibility indicators, that turn visitors into prospects
Why advisors might want to avoid using the phrase ‘follow-up’ with prospects and an alternative option that could lead to converting more into clients

We wrap up with three final articles, all about saying ‘no’:

How to say ‘no’ firmly and gracefully, whether it is to a friend or a prospective client
Why it is not necessary to make the most out of every minute of the day and how taking time to do nothing and being idle can improve your mental and physical health
How saying ‘no’ can allow advisory firm owners to set their own schedules and work with their optimal clients

Enjoy the ‘light’ reading!

Evaluating Retirement Spending Risk: Monte Carlo Vs Historical Simulations

May 11, 2022 07:03 am 7 Comments CATEGORY: Retirement Planning

Financial advisors often rely on software that uses Monte Carlo simulations to incorporate uncertainty into their retirement income analysis for clients. While Monte Carlo analysis can be a useful tool to examine multiple iterations of potential market returns to forecast how often a given plan may be expected to provide sufficient income for the client throughout their life, there is a lot about Monte Carlo simulation that we are still learning. For instance, advisors may wonder if there is any benefit to increasing the number of Monte Carlo scenarios in their analyses to provide a more accurate picture of the range of potential sequences of returns a client might face.

While financial planning software typically uses 1,000 scenarios, advances in computing make it possible to run 100,000 or even more scenarios within reasonable amounts of time. To examine the potential impact of various numbers of simulated scenarios that could be chosen, we tested how consistent Monte Carlo plan results are when run at different scenario counts and iterated these simulations 100 different times. We find that the variation of sustainable real annual retirement income suggested by simulations running 250 versus 100,000 scenarios varies only by about 1.5% for given levels of spending risk. However, the variation is wider at the extreme tails (0% and 100% risk), which provides some particular considerations for those who might be aiming for as close to 100% probability of success as possible. Ultimately, the results of our first analysis suggest that the common scenario count levels built into Monte Carlo tools today are likely to be adequate to analyze the risk of different spending levels.

Another common concern is how Monte Carlo results might differ from historical simulations. Monte Carlo results are often considered to be more conservative than historical simulations – particularly in the US, where our limited market history contains the rise of the US as a global economic power. In our analyses, we find that the two methods provide differing results in a few notable areas. First, Monte Carlo estimates of sustainable income were significantly lower than income based on historical returns for the worst sequences of returns in the simulations (which give us risk spending levels of 0–4/96–100% probability of success). In other words, Monte Carlo results projected outcomes in extreme negative scenarios that are far worse than any series of returns that have occurred in the past. Similarly, for the best sequences of returns in the simulations, Monte Carlo suggested sustainable income amounts significantly higher than historically experienced (corresponding to spending risk levels of 88–100/probability of success 0–12%). Both results are possibly due to the treatment of returns in consecutive years by Monte Carlo as independent from each other, whereas historical returns have not been independent and do tend to revert to the mean.

Interestingly, Monte Carlo simulations and historical data also diverged at more moderate levels of risk (spending risk levels of 10–60/90–40% probability of success), with Monte Carlo estimating 5–10% more income at each risk level than was historically the case. Which means that, rather than Monte Carlo being more conservative than historical simulation as commonly believed, at common levels used for Monte Carlo simulation (e.g., 70% to 90% probability of success), Monte Carlo simulations might tend to be less conservative compared to historical returns! One way advisors can address this issue is to examine a combination of traditional Monte Carlo, regime-based Monte Carlo (where assumed return rates differ in the short run and the long run but average out to historical norms), and historical simulation to explore a broader range of potential outcomes and triangulate on a recommendation accordingly.

Ultimately, the key point is that while future returns are unknowable, analytic methods such as Monte Carlo and the use of historical returns can both provide advisors more confidence that their clients’ retirement spending will be sustainable. Contrary to popular belief, Monte Carlo simulation can actually be less conservative than historical simulation at levels commonly used in practice. And while current financial planning software generally provides an adequate number of Monte Carlo scenarios, the deviation from historical returns at particular spending risk levels provides some additional insight into why multiple perspectives may be useful for informing retirement income decisions. Which suggests that incorporating tools that use a range of simulation types and data could provide more realistic spending recommendations for clients!

#FA Success Ep 280: Overcoming The Pain Of Scaling: When The Second 100 Clients Is Harder Than The First, With Brian Carney

May 10, 2022 07:03 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 280th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Brian Carney. Brian is a co-founder of RiversEdge Advisors, an independent RIA based in Wilmington, Delaware that oversees over $400 million in assets under management for nearly 300 client households.

What's unique about Brian, though, is how he and his partner dealt with the ‘fortunate’ problem of having rapid growth as their firm gained momentum, rising from $150M to $300M of AUM in just 18 months… and how the associated growing pains led to burnout, losing nearly half their staff, and required them to completely rebuild the infrastructure of the firm to actually be able to get to the next level.

In this episode, we talk in-depth about how Brian and his partner made a goal in 2018 to double their AUM of $150 million in 5 years and the Center Of Influence referral marketing approach that let them get there in only 18 months, why what should have been a positive of big growth turned into a nightmare of working too-long hours and making staff changes that lost almost half their headcount in just a few months, and how Brian was only able to turn it around by hiring 2 recruiters and 2 consultants, to help not only the then-struggling culture of the firm, but to quickly find the replacement employees they needed who were the right fit and could help the firm get back on track to success.

We also talk about how, despite having an optimistic outlook, Brian struggled to not take it personally as the culture declined at his firm and the bulk of their employees decided to leave, the realization that Brian had that being a manager was just not his nor his partner’s natural skillset and that they needed to hire an Operations Manager to take over those responsibilities, and the weekly Operations and Opportunities meetings that the firm has implemented to get more organized and keep the whole team aligned.

And be certain to listen to the end, where Brian shares how he was surprised even after being in the financial industry for years, how much work and emotions are involved in going from a financial planner to a financial planning business owner, why Brian believes it is important for newer advisors to find a firm that can provide the space for them to concentrate more on their client relationships and less on prospecting, and how even though Brian has faced many challenges in scaling his firm, he and his partner are ready to set even bigger growth goals in the future… now that they’ve made the key hires they needed to get there.

So, whether you’re interested in learning about how Brian and his firm were able to attain rapid growth in only 18 months, how Brian handled a decline in firm culture and nearly losing all his employees, or how Brian and his partner pivoted to attract new talent and set up the firm for even greater success, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Brian Carney.

A Career Changer’s Guide To Becoming A Financial Advisor: Career Paths, Preparation, Education, Costs, And More!

May 9, 2022 07:01 am 8 Comments CATEGORY: Personal/Career Development

The COVID-19 pandemic has led many workers to consider changing careers, perhaps for greater pay or flexibility. For those with an interest in personal finance and helping others, a career change into the financial advice industry could be an attractive option, particularly given that financial advisors generally report having a strong sense of wellbeing and that they have the potential to earn significantly more than the national median income. And with all of the ways that aspiring advisors can enter the profession, career changers have many factors to consider, including the type of work and career path they would ultimately like to pursue. Because the various financial advice career tracks come with different education and certification requirements, this decision will influence the career changer’s path as they pursue their first job in the industry.

For aspiring planners who want to work directly with clients but who don’t yet have leads of their own or experience with business-development strategies, one option is to start at a firm that assigns clients to advisors (so that the advisor can focus on practicing their financial planning advice skills as they learn how to generate new clients for the firm). Career changers who already have business-development experience (or who have access to many potential clients) might instead prefer to find a firm where they will be responsible for pursuing their own clients. Still, other career changers might want to eventually start their own firm; while this may allow for the greatest autonomy, this option also comes with the greatest financial risk (as the advisor will be entirely responsible for making up income lost after leaving their previous job!). For career changers who want to work in the industry but do not want to work directly with clients, pursuing a career track that allows them to construct financial plans and develop recommendations (without presenting them to the client) could be the best option.

After deciding which career path best suits them, a career changer can pursue the education and credentials that will help them stand out to potential employers and clients. For many, the first step will be to complete a broad financial planning education program to gain the technical knowledge needed to be a successful advisor. There are also designations (e.g., the CFP certification) and specialized training programs that can serve as a signal to future employers and clients that they have the skills and dedication to be effective advisors. Next, constructing a plan that makes the transition as smooth as possible (e.g., scheduling out time for classes, training, and job hunting; and budgeting the financial costs of a transition into financial advising) can help the advisor manage a potential salary reduction (for those pursuing an employee position) or foregone income (for those starting their own firm) as they get up to speed in their new career.

Ultimately, the key point is that while a career change into financial planning can be a fulfilling decision, it is important to plan in advance to ensure a smooth transition, from considering what kind of role in the industry is of interest to the education and credentials needed for that career track. Because with proper preparation, the career changer can increase the chances that they will not only have a good first job in the industry, but also have a successful long-term career in financial advice!

Weekend Reading For Financial Planners (May 7-8)

May 6, 2022 02:08 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 amid a wave of mergers, the number of broker-dealers has declined during the past few years, according to a report from FINRA. And while broker-dealers are also seeing a decline in the number of their registered representatives, their profits have actually ticked higher in the past few years, perhaps supported by strong market performance buoying their growing fee-based business. At the same time, the number of RIAs continues to grow, suggesting that the shift toward advice-centric, rather than product-centric, business models is continuing!

Also in industry news this week:

For the largest independent broker-dealers, fee-based revenues now make up a majority of total revenue (with commissions accounting for just 34%) according to a recent survey, representing a dramatic shift from just a decade ago, when commissions made up the majority of revenue.
Why FINRA is considering raising the barriers for retail investors to purchase a range of “complex” investments, potentially including leveraged and inverse ETFs

From there, we have several articles on industry studies:

A recent study shows that advisors at RIAs tend to focus on expense ratios rather than recent performance when picking mutual funds for client portfolios, leading to better outcomes than both broker-dealer registered representatives and dual registrants, who are more likely to choose more expensive, active mutual funds
A Cerulli study indicates that in a world of low stock and bond returns, advisors are increasingly considering alternative asset classes to generate income for clients
How an advice-only business model can allow advisors to be more creative with their service offerings and reach a wider range of potential clients

We also have a number of articles on retirement planning:

The pros and cons of using a Qualified Longevity Annuity Contract (QLAC) to insure clients against longevity risk while deferring some RMDs
Why clients with long-term care policies may soon see premium increases and how advisors can help these clients analyze their options
Why planned changes to “Traditional” Medicare could make it look more like Medicare Advantage and how advisory clients might be affected

We wrap up with three final articles, all about how one’s personality can affect their wealth:

How certain personality types are correlated with increased lifetime earnings among the general population, and why the traits that lead to success for financial advisors might be different
How the personality traits associated with ‘self-made’ millionaires differ from those who inherited their wealth, and why these traits could affect client behavior
Why certain characteristics are associated with the ability to separate ‘financial BS’ from genuinely profound advice

Enjoy the ‘light’ reading!