Nerd's Eye View blog

Series I Savings Bonds: End-Of-Year Strategies To Take Advantage Of The Current High Interest Rate

December 8, 2021 07:06 am 18 Comments CATEGORY: Investments

Fixed income investments are an important component in a portfolio because of their ability to cushion against equity market losses. However, when it comes to abundant returns, fixed income holdings have not had much luck during the low-interest-rate environment of the past few years. Accordingly, those seeking higher returns from their bond holdings have had to venture into less secure instruments, such as high-yield “junk” bonds and other alternative-fixed income holdings. Making matters worse, the recent spike in inflation means that many fixed income investments are earning a negative real yield. However, this is not bad news for all fixed income instruments, as this increase in inflation has made the rarely used Federal Series I Savings Bond (or, more simply, the “I Bond”) significantly more attractive for investors.

I Bonds are offered via the Treasury Department and are backed by the U.S. government. They can be purchased through the TreasuryDirect website, and such purchases are limited to $10,000 annually per person. What makes I Bonds unique is their interest structure, which consists of a combined “Fixed Rate” and “Inflation Rate” that, together, make a “Composite Rate” – the actual rate of interest that an I Bond will earn over a six-month period.

While the current Fixed Rate for newly purchased I Bonds is 0%, the Inflation Rate for I bonds purchased before May 1, 2022 is an annualized 7.12%, meaning the Composite Rate is also an annualized 7.12% (the highest rate of I Bonds since May 2000!) for the first six months that the I Bond is held (after which a new Composite Rate will be determined by any change to the Inflation rate). While I Bonds have a 30-year maturity, they can be redeemed after being held for at least 12 months. Investors who redeem I Bonds between 12 months and 5 years after issue will forfeit the last 3 months of interest, but I Bonds held for more than 5 years can be redeemed at their current value.

The $10,000 annual limit on I Bond purchases restricts their benefit for those with larger portfolios, but there are several ways investors could increase the amount purchased at the current (very favorable) Composite Rate. For example, because the annual limit is a calendar-year limit, individuals could purchase $10,000 worth of I Bonds before January 1, 2022, and then an additional $10,000 between January 1 and April 30, 2022. Which means a couple could purchase a combined $40,000 worth of I Bonds and receive the annualized 7.12% Composite Rate for the first six months the bond is held. In addition, I Bonds can also be purchased for children or by trusts and estates, which could further increase the amount purchased. Finally, paper I Bonds can be purchased using a tax refund up to a $5,000-per-return limit, which is in addition to the $10,000 annual limit on I Bonds purchased through the TreasuryDirect website.

Ultimately, the key point is that there is a limited amount of time for investors to purchase I Bonds at their very favorable Composite Rate of 7.12%, especially if they want to maximize the amount purchased for the 2021 and 2022 calendar years. In the current environment of low-interest rates and high inflation, I Bonds represent a potential opportunity for investors to increase the yield for a portion of their fixed income portfolio!

#FA Success Ep 258: Learning Advice Before Getting Clients: The Future Of Financial Advisor Career Tracks, With Joseph Pitzl

December 7, 2021 07:01 am 1 Comment CATEGORY: Financial Advisor Success Podcast

Welcome back to the 258th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Joseph Pitzl. Joe is the founder of Pitzl Financial, an independent RIA based in the Minneapolis area that oversees nearly $270 million of assets for almost 270 client households.

What's unique about Joe, though, is his unique next-generation career path into the advice business, which started out by working as an associate planner in a large advisory firm because he was scared to be in a sales role. And only after getting 10 years of experience, decided that he was ready to be in charge of business development and finally launched his own firm to start building his own client list.

In this episode, we talk in-depth about how Joe navigated his initial entry into financial planning, despite being an admitted bad student who struggled in a traditional classroom. The way Joe's involvement in the FPA, and with the NextGen community, built his networks to the point that whenever he needed to switch firms, he never struggled to find the next job opportunity, and why Joe has found business development so much easier in his 30s than it ever was in his 20s.

We also talk about how Joe structured and scaled his advisory firm as it's added more than $250 million of AUM in barely 7 years, including why the firm decided to outsource its portfolio management to a TAMP in order to focus more on financial planning services, how the firm structures its lean team of just five people, of which four are lead or associate advisors, to serve their 270 client households. And how Joe's firm turned local Google searches into a key driver of new clients.

And be certain to listen to the end where Joe shares how he's navigated some of the biggest challenges in his career, including finding himself out of a job at the same time he was just starting a family and had bought a house. How Joe clears his mind when he finds that he needs to regain clarity in the business, and why forming a study group with five other advisors at a similar age and career stage was so foundational to Joe's own career success and getting the support he needed at the key turning points along the way.

And so whether you’re interested in learning how Joe created opportunities towards becoming a financial advisor by utilizing the connections made through financial networks, why he places importance in creating deep and meaningful relationships with clients, or why he focuses his business on a younger clientele, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Joe Pitzl.

The Latest In Financial #AdvisorTech (December 2021)

December 6, 2021 07:01 am 0 Comments CATEGORY: Technology & Advisor FinTech

Welcome to the December 2021 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 Halo Investing has raised a $100M Series C round to fuel the ongoing growth of structured notes, annuities, buffered ETFs, and other “protective” investment vehicles alongside competitors Simon Markets and Luma, as high valuations and diminished forward return expectations for stocks are leading financial advisors to more proactively ‘hedge’ client portfolios against a potential market decline… mirroring a similar trend in the rise of Alternative Investment platforms as below-average expected returns on fixed income are similarly leading advisors to find non-traditional alternatives for their bond allocations as well!

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

Geowealth raises a $19M Series B as a ‘next-generation’ tech-savvy platform TAMP competitor
Orion acquires BasisCode Compliance to expand its compliance capabilities (as a pathway into larger enterprises?)
Skience rolls out new integrations with Redtail as the ‘CRM overlay’ business expands beyond just Salesforce
TIFIN Group raises another $47M Series C round in an attempt to make the whole worth more than the sum of their variously acquired parts
FeeX partners with Advyzon as advisors continue to adopt tools to expand from AUM to the AUA model

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

FP Alpha launches a new prospecting tool to help advisors find new planning opportunities more quickly
Helios Estate Planning announces it is shutting down as advisors continue to de-emphasize estate planning
Vestwell expands into state-sponsored auto-IRAs and 529 plans as it broadens its offering for advisors serving small business owners
CapGainsValet and Blackrock’s Tax Evaluator ramp up with fresh data for end-of-year capital gains distributions from mutual funds (and some ETFs!)

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 (Dec 4-5)

December 3, 2021 02:20 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 industry giant Envestnet has filed with the SEC to launch its first four ETFs, which will take an ‘ActivePassive’ approach that will take both active and passive investing approaches within the same ETF. And while Envestnet has previously used the ‘core and explore’ approach in its mutual funds, these will be their first offerings using the more tax-friendly ETF wrapper.

Also in industry news this week:

Client risk assessment provider Riskalyze is further expanding its product offering with ‘Discovery’, a tool that combines Riskalyze’s risk assessment score with its proprietary investment risk-adjusted performance metrics to facilitate client portfolio construction for advisors
A new company is being formed that will support RIAs that want to provide Pooled Employer Plan (PEP) services to clients without running afoul of IRS rules

From there, we also have several articles on retirement planning, including:

A critique of Morningstar’s suggestion that the “4% Rule” for safe retirement withdrawal rates should be lowered to 3.3%, from the financial planner who first wrote about the 4% Rule
New research shows how retirees increased their spending as a percentage of their pre-retirement income from 2016 to 2019… but subsequently cut back when COVID struck in 2020
How the new, streamlined Social Security statement better illustrates the potential benefits of delayed filing

We also have a number of articles on year-end tax planning:

How to reduce the capital gains tax impact from rebalancing investment portfolios after a strong year of performance in the stock market
How to determine which types of assets (and accounts) make for the most tax-efficient charitable contributions
Why cryptocurrency investors may see increased scrutiny from the IRS as it ramps up its efforts to enforce tax compliance on digital assets

We wrap up with three final articles, all about charting a career path and how it might change along the way:

Why mental models can be useful tools for individuals considering a career change
How individuals can facilitate ‘hot streaks’ in their career by exploring different areas and exploiting their skills once a promising opportunity is identified
The importance of understanding which ‘career season’ – growth, lifestyle, and reinvention – an individual wants to pursue at a given time

Enjoy the ‘light’ reading!

Kitces & Carl Ep 74: Making Clients Care About Financial Planning By Finding Their (Truly) Critical Issues

December 2, 2021 07:02 am 2 Comments CATEGORY: Kitces & Carl Podcast

While it was once a common practice for financial advisors to apply cold-calling strategies to attract any client willing to engage with them, framing their value in terms that clients would understand was often a challenge for advisors positioning themselves as experts able to solve all of a client’s financial problems. But when clients have financial issues that aren’t clearly obvious or understandable to them, they are generally not very motivated to have an advisor help them address their problems, especially when they don’t understand the specific services – beyond the commonly offered (yet vague) “peace of mind” promise – the advisor can provide.

In our 74th episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards discuss strategies that motivate clients to seek financial planning services, and how identifying the right areas of specialization can help advisors to better communicate how their services can help clients address their unique problems.

As a starting point, it is important to acknowledge that clients often don’t seek out help unless their problem becomes a critical pain point. For example, while regular auto maintenance is important to prolong the life of a car, it is often not considered a high priority. By contrast, being stranded with a flat tire in a strange area needs an immediate solution. Similarly, clients who don’t seek financial planning services may not have any critical needs to address; this isn’t to say they are not in need of service, they may simply not consider the service immediately relevant.

However, when a client’s problems escalate to a high level of urgency, they can become very motivated to seek out a clear solution to their issue. Accordingly, advisors can benefit from understanding these truly critical issues that matter most to their own clients and aligning the solutions they provide to their current and future clients. This can present a significant opportunity for the advisor to enhance and improve their business strategy, as communicating specific solutions available to critical problems that clients care about can minimize the indifference many clients (current and prospective) have with advisors who don’t clearly identify the solutions they offer.

Ultimately, by communicating specific solutions that are relevant to their clients’ critical issues, advisors can help clients better understand the value that they offer and enhance opportunities to expand their business. And by asking clients the right questions to identify which issues are most critical to them, advisors not only strengthen their relationships with their clients but also have the opportunity to proactively develop planning and communication strategies to attract more clients. Which, in the end, allows them to refine their financial planning services to best meet their clients’ needs!

Getting Comfortable Delaying Social Security With Six-Month ‘Reversible’ Delays

December 1, 2021 07:07 am 6 Comments CATEGORY: Retirement Planning

Financial advisors often assist their clients with deciding when to file for Social Security benefits, helping them choose between filing prior to their Full Retirement Age (FRA) for a reduced benefit, filing at FRA for the ‘full’ benefit, or delaying benefits after FRA until (at the latest) age 70 to increase the monthly benefit by 8% per year. Often, advisors encourage their clients to delay their filing to increase their future monthly benefit (since the ‘return’ on delaying benefits can be higher than what the client would expect to achieve on their invested assets), unless there are clear reasons (such as health issues) that the client would not expect to live long enough to make delayed filing worth the wait.

But for some people, the decision of when to file for Social Security is not strictly about numbers. Individuals can experience feelings of anxiety and doubt about the decision to delay filing – even if the available information supports the case for delaying – if they fear they will not live long enough to enjoy the higher monthly benefit. These feelings can be magnified when the decision to file or delay is framed as a one-time choice, increasing the pressure on the individual to make the ‘right’ decision in spite of uncertain information (such as future health and life expectancy) on which to base it. Consequently, a person might feel compelled to file for Social Security benefits rather than delaying them, even when doing so might increase their risk of outliving their retirement savings.

Fortunately, the Social Security rules allow advisors to reframe the filing decision to make it easier for their clients to decide more confidently whether to file or delay. Because, in reality, delaying Social Security benefits isn’t a one-time decision at all: An eligible individual can change their mind and file for benefits at any time. Furthermore, once they have reached FRA, that person can apply for up to six months of retroactive benefits, allowing them to receive a lump sum of accumulated payments while also activating their monthly benefits going forward. Meaning that, if the individual initially decides to delay filing, they effectively have a six-month window to change their mind without giving up any of the benefits they would have received had they chosen to file in the first place.

Therefore, rather than asking clients to make a single, irrevocable decision for the entire 3- to 4-year period between FRA and age 70, advisors can, instead, reframe the choice as a series of reversible decisions for six months at a time. If the client changes their mind within that six-month timeframe and wants to file, they can file a retroactive application and claim their benefits as if they had done so at the beginning of the period. Otherwise, they can continue to delay filing for another six months, further repeating the cycle until the client either decides to file or reaches age 70 (at which point they would file anyway, having reached the maximum age for delayed benefit credits). Not only does this framing provide the client with a more reasonable timeframe to foresee future health issues or other factors that could cause them to change their mind, but because the six-month intervals align with the period in which individuals can apply for retroactive benefits, each six-month decision is entirely reversible.

As with any Social Security filing strategy, it’s important to be aware of the risks and tradeoffs of recommending this strategy to clients – for example, applying for retroactive benefits and receiving a six-month lump sum could result in a temporary spike in taxable income, with potential cascading effects on tax deductions, credits, and Medicare premiums. Ultimately, however, by nudging clients with the option to consider when to claim benefits through six-month ‘reversible’ decisions, advisors can potentially help them make better choices and to act with confidence!

#FA Success Ep 257: Deepening Client Relationships By Going Deeper For Clients In Transition, With Beth Jones

November 30, 2021 07:07 am 1 Comment CATEGORY: Financial Advisor Success Podcast

Welcome back to the 257th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Beth Jones. Beth is the co-founder of Third Eye Associates, an independent RIA in the Hudson Valley of New York that oversees $125M of assets under advisement for nearly 200 client households.

What's unique about Beth, though, is the way her firm goes deep in its financial planning process with clients, spanning a series of 7 initial meetings that go deep into creating a personal vision statement to help clients truly understand what they need to do to align their money with their values.

In this episode, we talk in depth about Beth’s financial planning process with clients, including assessments like a wellness worksheet and a communication preferences tool that she uses to determine how best to work with new clients, how Beth leverages eMoney Advisor’s account aggregation to spark client conversations around their household cash flow, and why Beth still chooses to provide a physical financial plan deliverable to clients (even as she acknowledges that few open the plan again after it’s first delivered).

We also talk about how Beth structures her advisory fees with clients, the way she arranges an upfront multi-month retainer fee based on the initial complexity of the client and the number of meetings she anticipates it will take to cover all their issues, why Beth also charges an AUM fee to monitor client portfolios but has chosen to work with AssetMark as her TAMP of choice for clients to implement with, and how becoming known for her in-depth financial planning discovery process has led to a waiting list for her new clients after more than 15 years of growth.

And be certain to listen to the end, where Beth shares how the greatest challenge of scaling up her advisory firm has not been about continuing to find new clients but finding the new team members to serve them, how Beth ultimately made the decision to let go of 85 of her earliest clients after discovering that she was actually losing money on them, and how Beth navigated the challenging transition of finding out that her co-founder was ready to retire while Beth wanted to continue running the business and serving clients longer.

So whether you are interested in learning how Beth creates a safe space for her clients, how she helps her clients create a Life Vision, or how she overcomes the challenges of working with clients through major life transitions, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Beth Jones.

How To Choose The Best CFP Exam Review Program (For You)

November 29, 2021 07:08 am 2 Comments CATEGORY: Personal/Career Development

The Certified Financial Planner (CFP) designation is one of the most respected credentials for financial advisors and the process to earn it is rigorous. Candidates must fulfill education, experience, and ethics requirements, in addition to passing the comprehensive CFP Exam, a 170-question, multiple-choice test taken across two 3-hour sessions in one day. Material on the CFP Exam is categorized into the CFP Board’s eight principal knowledge topics, which range from retirement savings and income planning to investment planning, professional conduct, and regulation. With a general recommendation that exam takers study for at least 150 hours before the exam, the cost in time and money of failing can be high. Furthermore, given that the exam covers a broad range of financial planning topics, having an organized and disciplined study routine is a necessity to pass the exam.

Accordingly, CFP exam review courses can be a good option to help exam takers not only review the material that will be on the test but also develop strategies for preparing for and taking the exam. The core of most CFP exam review programs is based on instructor-led review sessions that typically come with extensive pre-study materials, which can include condensed reviews of the principal knowledge topics and practice questions, as well as questions and mock exams to help exam-takers gauge their progress and practice in similar conditions as the actual exam. While the core elements of most CFP exam review programs are similar, they differ in their method of delivery, level of personalization, and cost. Instructor-led sessions for some programs can be held synchronously, either in person or livestreamed virtually, while others are held asynchronously, with recorded lectures available to view on demand. Some programs also offer more personalized instruction, from one-on-one video coaching to email access to instructors. Certain programs also offer students some form of exam-pass guarantee, which can range from being able to retake the program for free, to receiving a refund of the program cost.

With more than twenty different CFP exam review options to choose from, exam takers can methodically approach selecting a program by first deciding whether to take a synchronous or asynchronous program. While synchronous programs can be good for exam takers who want (or need) the structure of set schedules, asynchronous programs can be useful for those with unpredictable schedules and the discipline to complete the program on their own. Individuals can then consider other important factors (e.g., group size, guarantees, and cost) that are most important to them based on their preferred learning style and budget. As an alternative, exam takers with very tight budgets can choose a self-study approach using printed review materials and practice questions without the lecture component.

Ultimately, the key point is that while there is no single ‘best’ CFP exam review program that will be suitable for all test takers, those taking the exam can consider their individual situation to narrow the field of available programs. And while there is no guarantee that an individual will pass the CFP exam after taking a review program, these programs can greatly improve the quality and efficiency of the strategy the exam taker chooses when preparing for the exam. Which is important, because passing the CFP exam requires a high level of commitment and hard work – and finding the right method to review and prepare can make a big difference in helping prospective test takers pass the exam!

Weekend Reading for Financial Planners (Nov 27-28)

November 26, 2021 01:58 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of “Weekend Reading for Financial Planners” – this week’s edition kicks off with a breakdown of how the Build Back Better Act is likely to change now that it has passed the House but is just now heading to the Senate for a fresh round of debates – including, most notably for financial advisors and their clients, the potential increase in the SALT deduction cap that was included at the last minute in the House’s version of the bill but faces resistance from the progressive wing of Democrats in the Senate.

Also in industry news this week:

IRS data showing that the amount of estate tax paid by Americans fell by over 50% from 2018 to 2020, the result of a combination of higher estate tax exemptions after the Tax Cuts and Jobs Act… and higher adoption of more sophisticated estate planning methods (e.g., GRATs and FLPs) by wealthy individuals
A new report by Cerulli showing how investors, despite being increasingly aware of the fees they pay for financial advice, are also becoming more willing to pay for the advice itself, creating opportunities for advisors with non-AUM fee-for-service models

From there, we also have several articles on digital marketing, including:

The highest-performing types of financial advisor blog posts, including both topics that demonstrate the advisor’s expertise, and those that showcase their personality and client experience
How to create email subject lines that lead to higher opening and click-through rates with prospects
How video marketing campaigns outperform other media – as long as they are hosted natively on the advisor’s site (not just via YouTube or social media) and promoted effectively

We also have a number of articles on changes to the college financial aid process and student loan planning:

Upcoming changes to the Free Application For Federal Student Aid (FAFSA) and the formula used to determine financial need
How distributions from grandparent-owned 529 accounts will no longer negatively affect a student’s eligibility for financial aid under new FAFSA changes in the coming years
Why the biggest student loan burdens are shifting from undergraduates to graduate students, and the challenge of ‘elite’ Master’s degrees that have a high cost but don’t lead to (materially) higher incomes

We wrap up with three final articles, all about financial advisory practice management and conveying our value as financial advicers:

Why ‘unbundling’ financial planning services can create value for both advisors and clients
How clients determine the value they get from a financial planning engagement, and the way advisors can (re-)price their services accordingly
A consumer survey highlighting that consumers may get initial introductions to advisors through friends-and-family referrals, but increasingly are looking to the advisor’s presentation of services, brand, cost, and communication style, to determine whether to hire (and stick with) the advisor

Enjoy the ‘light’ reading!

The Retirement Distribution “Hatchet”: Using Risk-Based Guardrails To Project Sustainable Cash Flows

November 24, 2021 07:04 am 8 Comments CATEGORY: Retirement Planning

One of the questions retirees often have is how much they can afford to spend each year over the course of their retirement without depleting their portfolio during their lifetimes, and financial advisors have many tools to aid in this discussion. One classic technique is the use of withdrawal rates; based on asset allocation and historical return data, advisors can calculate a safe annual portfolio withdrawal rate that retirees can use to guide their spending throughout their retirement. However, this approach does not account for the investment returns the clients actually experience in their retirement; for example, the safe withdrawal rate could increase over time if the client experiences strong investment returns in their first few years of retirement.

To solve this problem, advisors can use withdrawal-rate guardrails, which are guidelines to increase or decrease spending when portfolio withdrawal rates reach certain levels. For example, if an initial 4% withdrawal rate calls for $5,000 in monthly spending, the spending amount could be adjusted higher if it reaches 2% of the portfolio value or lower if it hits 6%. Yet, withdrawal-rate guardrails can be flawed because the relatively steady withdrawal rate patterns used do not necessarily align with how retirees actually pull distributions from a portfolio in retirement.

In reality, what is more commonly seen is a “retirement distribution hatchet” in which the initial retirement distribution rates from a portfolio are highest early in retirement, then significantly decline when deferred Social Security is claimed (as late as age 70), and falling further yet because of the tendency for retirees’ spending to decline in real dollars as they move through retirement. A dynamic portfolio withdrawal strategy should also consider other sources of income in retirement (e.g., pensions, rental properties, part-time jobs, house downsizing, and inheritances) that can impact the size of needed portfolio withdrawals to cover spending requirements.

To compensate for this issue, advisors can consider using holistic risk-based guardrails, which reflect current longevity expectations, expected future cash flows, expected future (real) income changes, and other factors. Probability of success via traditional Monte Carlo analysis can serve as the risk metric to guide the implementation of risk-based guardrails. There is a risk of causing anxiety for clients if the risk is presented in terms of the success or failure of their plan as a whole, but advisors can instead use the language of income risk, which may be less stress-inducing. For example, an advisor could explain that if risk increases (e.g., if investment returns are weak), downward adjustments to spending will be needed; alternatively, if risk declines (e.g., because the client has reached an advanced age with a strong portfolio) spending can be safely increased.

Ultimately, the key point is that a risk-based guardrails model can provide clients with a more accurate picture of how much they can sustainably spend than can models based on static withdrawal rates or withdrawal-rate guardrails. While risk-based guardrails can be less efficient to calculate manually than withdrawal-rate guardrails because of the many factors considered in the risk-based model, when properly assisted by technology, risk-based guardrails can be implemented and maintained as efficiently as withdrawal-rate guardrails. And, given how different the retirement distribution hatchet is from the distribution patterns assumed by withdrawal-rate guardrails, the movement from withdrawal-rate guardrails to risk-based guardrails represents a significant improvement in planning quality for retirees!