Nerd's Eye View blog

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!

Kitces & Carl Ep 85: Building Your (Local) Brand With PR That Actually Works

May 5, 2022 07:06 am 0 Comments CATEGORY: Kitces & Carl Podcast

Traditionally, advisors have relied on client referrals and networking to attract potential clients, but with modern technology and an increase in publicity mediums available, advisors have many more options to build a brand to represent themselves. However, with more available methods to choose from, advisors are increasingly challenged to find the ones that are most effective. Choosing an effective public relations strategy can seem daunting and exhaustive to already busy advisors. Moreover, with so many metrics to consider, making sure there is a strong return on investment and leveraging any public relations efforts is even more difficult.

In our 85th episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards discuss how financial advisors can utilize public relations to better brand themselves, how to decide which medium will have the best return on investment, and how to leverage public relations to increase the number of connections with potential clients.

As a starting point, it’s important to identify the intention behind utilizing public relations and to determine the effort the advisor wants to commit to. Writing an article for a local paper or receiving a one-time mention in a periodical may be suitable for those who simply want to offer social proof of their expertise to current and potential clients. Whereas running a local radio show or becoming a go-to financial expert on a high-profile medium may be better suited for those who want an ongoing presence and have the capacity for a higher level of commitment.

Identifying a specific intention will help advisors to better track the right metrics to assess the ROI of their public relations strategy. If an advisor’s intention is to attract more clients, using social media might be a good way to connect with a larger audience (and gain popularity), but will not necessarily increase the number of potential clients who will possibly do business with the advisor. Which means that it is important to spend time determining the right metrics to track, as this will support the advisor in identifying the right strategy to realize their primary goal.

Furthermore, while some advisors may be uncomfortable sharing their media coverage (for fear of sounding too boastful), it is important to recognize that telling clients about their efforts is the only way clients (current or potential) will find out about their appearances. Providing printouts or links to publications to current and prospective clients can be an easy way for advisors to relay their work to clients, which can serve to build their credibility and grow their referrals.

Ultimately, the key point is that while public relations can be used by advisors to build their brand, having a clear intention will help advisors leverage their branding efforts to realize their goals. Understanding the different strategies available and how results can be measured for each will allow the advisor to spend more time on the right actions that will yield better results for them and help them reach their goals!

Questions, Not Answers: Conversations For Advisors To Navigate Clients’ Anxiety Around Change

May 4, 2022 07:09 am 0 Comments CATEGORY: Client Trust & Communication

Financial advisory clients are bound to experience stressful conditions that can impact their finances at some point during their relationship with their advisor. From market downturns to geopolitical shocks, there are many potential external factors that might make a client nervous about their financial situation. What’s more, the stories individuals tell themselves can lead to decisions that negatively compound the initial impact of the event. For example, a market correction can create fear for investors (particularly those nearing – or even in – retirement), and when they create certain narratives (e.g., “I need to sell all of my stocks now before the market drops further”) they can find themselves in an even worse situation. For worried clients, advisors often serve as a sounding board for many of their stories, putting the advisor in a unique situation to help clients weather their emotional challenges and stay on course with their financial plans.

Advisors naturally strive to offer expert guidance to their clients, but sometimes addressing only the technical intricacies of a client’s plan is not always the most helpful response. For example, reminding a panicking client during a market downturn that they have a diversified portfolio or that corrections are a regular part of market cycles might not resonate with them to truly alleviate their anxiety.

Instead, addressing a client’s upsetting stressors by encouraging them to form new personal narratives can help them understand and implement new perspectives that make it easier for them to address challenging situations in different (and often more successful) ways. In this way, the client can become their own ‘expert’ through facilitation from their advisor. One way for advisors to start this conversation is by asking the client the question, “What would you tell your best friend if they asked you this question?”

This strategy can lead the client to expand their narrative (by serving as an ‘outside’ advisor to themselves) and to potentially accept new ideas that they may already know but have been resistant to acknowledge before. Because reminding a friend that having a well-diversified portfolio is a good way to manage market risk can be easier than reminding themselves of the same thing (as they watch their portfolio value fall during a downturn); at the same time, clients are likely to respond to a friend with more kindness and empathy (versus the negative self-talk they can present to themselves). Thus, going through this exercise can calm and empower the client by revealing a more compassionate and relatable response that they come up with for themselves! Additionally, the advisor is afforded valuable insight into productive ways in which the client might want to respond to the situation.

Ultimately, the key point is that by finding ways to change their own narrative stories, a client can expand how they see themselves and better understand that they can change their role in the story. In this way, they can become empowered and more capable of preventing a stressful situation from compounding negatively. And advisors can play an important role in this exercise by facilitating the conversation and listening actively, enabling the client to craft a new narrative and potential next steps!

#FA Success Ep 279: Expanding The Impact Of Sustainable Investing For Ultra-HNW Families, With Erika Karp

May 3, 2022 07:03 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 279th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Erika Karp. Erika is the Chief Impact Officer at Pathstone, an independent RIA based in Englewood, New Jersey that oversees $35 billion in assets under management for a few hundred ultra-high-net-worth households.

What's unique about Erika, though, is how she and her firm are incorporating sustainable investing by utilizing their own internal ESG analysis to align their ultra-high-net-worth clients’ sizable amount of capital with their own values.

In this episode, we talk in-depth about how Erika and her firm utilize environmental, social, and governance analysis to find the intersection between investments that are expected to be sustainable and produce a strong investment return, how Erika focuses on the factors of intentionality, additionality, and measurability to ensure the impact of their investments decisions align with her clients’ values and objectives, and how Erika and her firm use manager due diligence discussions and their own thematic research to better identify managers that better fit with, and then hold them accountable to, the firm’s investment standards.

We also talk about how Erika was inspired to begin her own firm after becoming frustrated with the relatively slow pace that her prior firm was (not quickly enough) recognizing the emerging shift towards sustainable investing, how Erika’s confidence in her abilities was juxtaposed with the intense pressures of putting up her own capital to launch and then having to quickly reach $25 million in AUM within 90 days to receive SEC approval on her Federal registration, and how Erika leveraged publishing her own proprietary ESG investing research through a monthly report and doing corporate consulting to create a revenue stream on the side while she was launching her own firm and getting her initial clients.

And be certain to listen to the end, where Erika shares how the realization that we all have to make decisions that are based on imperfect information known at the time helped her have fewer regrets in her own life, how Erika struggled with wanting to be known as a trusted advisor while also feeling the pressure of needing to sell herself and her services to acquire clients as she was building her firm, and why Erika believes it is important as an advisor to focus on the work that brings personal joy and to keep aspiring to do more of that work to develop a better career.

So whether you’re interested in learning about how Erika and her firm analyze and measure the ESG impact of their investments, how Erika was able to navigate the pressures of having to fully fund her own firm and get SEC approval in a short amount of time, or how Erika was able to reach a point where she could focus more on the aspects of her career that she loves, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Erika Karp.

The Latest In Financial #AdvisorTech (May 2022)

May 2, 2022 07:05 am 4 Comments CATEGORY: Technology & Advisor FinTech

Welcome to the May 2022 issue of the Latest News in Financial #AdvisorTech – where we look at the big news, announcements, and underlying trends and developments that are emerging in the world of technology solutions for financial advisors!

This month's edition kicks off with the big news that Orion Advisor Services is acquiring Redtail CRM, increasingly positioning Orion as the ‘All-In-One’ solution to compete against Envestnet with its combination of financial planning (Advizr vs MoneyGuide), performance reporting (Orion vs Tamarac), and now CRM (Redtail vs Tamarac CRM), paired with its back-end TAMP solutions (Brinker and Orion’s model marketplace vs Envestnet’s PMC and its SMA platform). Though in the near term, it is more likely that Orion and Redtail will simply focus on trying to cross-sell their respective services to the users of the other, given what was ‘only’ a 20% - 30% overlap in existing advisors already using both (while still respecting the majority of each user base that may not be looking to switch and will remain with its current CRM or portfolio management solution).

From a broader industry perspective, though, the real significance of the Orion-Redtail deal may simply be a sign of the ongoing bullishness of growth for AdvisorTech more broadly, as Redtail’s valuation was likely buoyed by Wealthbox’s recent Series B, and Orion’s potential IPO valuation in the future may be boosted by rumors that a PE firm may take Envestnet private. In other words, the Orion-Redtail deal may not necessarily be one of a great unified vision of a single all-in-one solution for all advisors – though few would likely object to seeing greater integrations between the two – but simply a financial opportunity to attempt to make the whole worth more than the sum of the parts.

From there, the latest highlights also feature a number of other interesting advisor technology announcements, including:

Advyzon launches its “Quantum Rebalancer” to shore up its hold on small-to-mid-sized investment-centric firms that want to use Advyzon for ‘everything’ (excluding financial planning)
RightCapital launches a new ‘One-Page Financial Plan’ Snapshot feature that highlights the gap in financial planning solutions for clients after their initial plan is done

Read the analysis about these announcements in this month's column, and a discussion of more trends in advisor technology, including:

Vanguard launches a new partnership with American Express to pay the same 25bps promoter fees that have become common in the independent RIA channel as well (and highlighting the ongoing extraordinary cost of lead generation)
SimplyEasier launches a new fee-for-service billing solution as more advisors continue to explore non-AUM business models
Schwab gears up for the launch of its new Personalized Indexing solution at a 40bps cost that may actually offset most or all of the tax-loss harvesting benefits it purports to generate?

In the meantime, we’ve also launched a beta version of our new Kitces AdvisorTech Directory to make it even easier for financial advisors to look through the available advisor technology options to choose what’s right for them!

And be certain to read to the end, where we have provided an update to our popular “Financial AdvisorTech Solutions Map” as well!

*And for #AdvisorTech companies who want to submit their tech announcements for consideration in future issues, please submit to [email protected]!

Weekend Reading For Financial Planners (Apr 30-May 1)

April 29, 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 Investment Advisers Association has become the latest industry organization to push back against the SEC’s guidance limiting the use of the term “fiduciary” on Form CRS, joining a growing number of voices attesting that RIAs should be able to highlight the differences between the standards of care required of them with respect to their entire advisor-client relationship, versus Reg BI’s standard of care for broker-dealers that is limited to just the moment the broker makes the recommendation (rather than the structure of the broker-dealer itself).

Also in industry news this week:

In response to the SEC’s proposed regulations for RIAs to address cybersecurity threats, industry advocates have focused on the proposed requirement to report incidents to the SEC within 48 hours, a rule that could impede advisors’ ability to respond to threats adequately while also rushing to meet the reporting deadline, while highlighting that smaller RIAs just don’t have the resources to respond in the same way that large firms do.
The FPA’s Virtual Externship program is open for enrollment for its third year, offering experiential training at scale for newer advisors (and exposure to a diverse range of firms and planning techniques) to give those with classroom knowledge opportunities to see how different advisors “do” financial planning

From there, we have several articles on how advisors are approaching the decision to retire (or not):

At a time when the ‘Great Resignation’ is making headlines, why many advisors are choosing to continue working well into their 70s and 80s
The steps advisory firm owners can take to prevent ‘seller’s remorse’ when they sell their firms by vetting more than just the price of the offers
How one firm navigated an internal succession and the lessons learned from guiding clients through the transition

We also have a number of articles on taxes:

How advisors can add value by reviewing clients’ tax returns (and gain insights about the client’s behavior and values that might not have been revealed in earlier conversations)
How owners of highly appreciated artwork have taken advantage of a tax-planning strategy of donating ‘fractional’ shares of art, allowing them to keep the art for a part of the year while enjoying the tax deduction for the donated share
Why moving to a state with lower income tax rates can actually result in higher costs of living because of factors like property taxes and housing costs (and why financial aspects, including taxes, should make up only part of the reason for moving – or not – to another state)

We wrap up with three final articles, all about personal development:

Why the most important and often hardest step to achieving a goal, whether it is running a marathon or starting an advisory firm, is just getting started, as habits are far easier to maintain than to begin
How a lifetime of recreational exercise could pay dividends for our health as we age
Why ditching your smartphone at key moments during the day can promote personal and professional fulfillment

Enjoy the ‘light’ reading!