Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the big announcement that Charles Schwab is entering the "robo-advisor" fray, with an offering called "Schwab Intelligent Portfolios" that will be available for consumers (and shortly thereafter as a white-labeled version for RIAs on the Schwab platform), and will be free to use with only a $5,000 minimum (and automated tax-loss harvesting starting at $50,000).

From there, we have a number of practice management and technology articles this week, including a discussion of what to look for when merging smaller advisory practices into your own firm (from the perspective of someone who's done several such deals, both successful and not), tips for advisors who want to get "cyber liability" insurance to protect against the risk of cyber attacks and wire fraud, guidance on how to form a client advisory board, and a look at how an online chat tool on your website can help engage visitors and turn them into genuine client prospects.

We also have a few more technical articles this week, from a Morningstar analysis of the rise of passive investing that finds predictions that consumers are abandoning active management for low-cost indexing may be overstated, to a look at why it's so significant that the Treasury and IRS gave the green light to deferred income annuities inside target-date funds, an analysis of consumer borrowing options that find borrowing from a 401(k) loan may be quite underrated (at least relative to the other borrowing options typically available to consumers), and a good summary of basic strategies and resources to families who haven't saved enough (or anything) for college and are now trying to figure out what to do as the kids prepare to apply.

We wrap up with three interesting articles: the first looks at how not only do many advisors have a problem branding themselves, but that the entire financial planning profession has a "branding problem" due to a lack of clear vision about its fundamental role and purpose in society; the second is a critique by GMO's James Montier of the whole concept of managing companies by trying to "maximize shareholder value" and how the incentives that have been created are actually damaging (long-term) shareholder value; and the last is a fascinating look at how too much positive thinking can actually be damaging to achieving goals, and that balancing optimism with realism is crucial to obtain the motivation necessary to pursue the goal... which has some notable implications for how we as financial planners guide our clients towards retirement! Enjoy the reading!

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Friday, October 31st, 2014 Posted by Michael Kitces in Weekend Reading | 0 Comments

Many who have known me over the years, and my involvement in both the profession at large and the FPA in particular, were surprised by my article earlier this week criticizing the FPA for its actions and direction in recent years. However, the truth is that these realities – my involvement in the FPA, and my criticism of the organization – are not at odds. In fact, the entire purpose of my article was to recognize the challenges the FPA faces (publicly, as I’ve already voiced these concerns privately to FPA leadership in the past), to encourage a frank discussion of those challenges, and hopefully find a focused path forward, because as a long-standing FPA volunteer myself I desperately want to see the FPA succeed in achieving its founding purpose as an organization!

Nonetheless, to help further reduce the “confusion” about the perspective I was trying to bring and the points that I was trying to make – and to head off any misunderstandings and misinterpretations that might emerge – in today’s article, I highlight at a high level my own views and “beliefs” about how to advance the profession of financial planning, and why the FPA has a crucial role to play. As you will see, I sincerely hope that the FPA will survive and thrive and take on the opportunity that lies before it to continue the role it plays to shape the profession, and believe its path to success lies in “simply” embracing the purpose its prior leadership has already provided to it.

In addition, today’s article also includes a response from the FPA leadership itself to my recent criticisms, and you can read their comments in full in the second half of today’s article. Not surprisingly, the FPA leadership does not entirely agree with my assessment of all the issues, but I hope this frank discussion helps us all to have the important dialogues necessary to keep the financial planning profession moving forward. Personally, I look forward to seeing the FPA national and also chapter leadership next week, as I travel to the FPA Chapter Leadership Conference with an openness to continue the conversation in advancing this profession and association in which so many of us are involved.

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Thursday, October 30th, 2014 Posted by Michael Kitces in Planning Profession | 0 Comments

With the ever-increasing breadth of information available online with each passing year, consumers have more and more information at their fingertips – accessible with a smartphone or tablet! – and problems that once required paid experts for solutions can now be resolved with a quick Google search.

Yet while the power of internet searches can solve more and more complicated problems, when it comes to the real-world challenges of our financial lives, we hit a wall; some problems are just too complex to be solved with information alone, and still require the guidance of an expert to navigate. Of course, real world financial planning problems can be so complex, the financial planner can’t and won’t likely have all the answers, either. There is too much uncertainty for a known outcome, too many what-if scenarios to consider, and ultimately most people face practical constraints on their resources that require them to choose from the available trade-offs; there are no “right” choices, just paths to consider and consequences to weigh.

Which means in the end, the highest and best purpose of financial planners may not simply be to consult with and answer complicated questions, but to actually work collaboratively with clients utilizing technology to help them simulate the possibilities in real time, choose which goals to pursue, and then leverage the planner’s knowledge and experience to craft a plan to get them there.

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Wednesday, October 29th, 2014 Posted by Michael Kitces in General Planning | 0 Comments

Since the merger of the IAFP and the ICFP over 14 years ago, the FPA has faced trying times. Amidst a backdrop of aging advisor demographics, a growing tide of retirees, and a declining total headcount of financial advisors, the FPA has never managed to grow materially beyond its peak membership on the day it was born, and since the 2008 recession was suffered from a 17% decline in membership and a 36% decline in revenue.

Yet the reality is that notwithstanding the difficult environment, the number of CFP certificants has nearly doubled since 2000, and the FPA’s failure to grow actually marks a drastic decline from having over 50% of all CFP certificants as members to under 25% of them, leading in turn to a significant loss in its power and standing as an organization. The FPA’s "mysterious" inability to grow despite the tremendous growth of its target market seems to stem from a battle between the legacy of the IAFP and ICFP that still rages on, with the FPA moving close enough to the ICFP’s "CFP-centric" worldview to alienate non-CFPs, yet not close enough to be a beacon of advocacy and success for CFP professionals either. The end result: while 10 years ago the FPA still had enough strength and momentum to sue the SEC and win in pursuit of its advocacy goals for financial planning, now the FPA’s power has waned to the point that it defers to the CFP Board on key issues to certificants and when the CFP Board launches a career center to compete with the FPA’s own Job Board the FPA congratulations the CFP Board for the competitive victory!

Ultimately, the FPA’s inability to honor its own bylaws and its founding Memorandum of Intent, and the organization's struggle to focus effectively to champion and advocate on behalf of CFP certificants – or even control their own advocacy efforts and messaging amongst the leadership and the chapters – raises the fundamental question of why it’s even necessary to have a standalone membership association separate from the CFP Board that grants the marks. Would CFP certificants be better served by going from paying two organizations to only one, and simply having the CFP Board function as both the credentialing body for CFP professionals and their membership organization as well, as is done in many other countries around the world?

Of course, longstanding CFP certificants have witnessed the CFP Board engage in many of its own blunders over the years, and an outside membership association for CFP certificants can be an effective (and even crucial) form of checks-and-balances against the CFP Board. Yet the FPA has increasingly failed to execute this key role, and the FPA’s ongoing loss in power has been the CFP Board’s gain. As the FPA becomes weaker, is the CFP Board becoming increasingly aggressive in trying to chip away at the FPA’s sources of members and revenue and professional impact, potentially accelerating the FPA’s demise? Will the FPA be able to step up and grow its “market share” of CFP certificants to regain its former power before it’s too late, or has the FPA already lost too much focus and momentum, and made itself too irrelevant for too many CFP certificants?

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Monday, October 27th, 2014 Posted by Michael Kitces in Planning Profession | 0 Comments

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a new study from the Financial Planning Coalition that finds barely 1/3rd of those advisors who hold themselves out as "financial planners" are actually doing financial planning, and that therefore regulators need to be more proactive in overseeing financial planners and how they hold out to the public to reduce the confusion. Also included in this week's news was a study from Cerulli Associates which finds that while the wirehouses have taken criticism for focusing on high net worth clientele, they really are providing the most comprehensive range of services to those HNW clients, beyond advisors at independent broker-dealers or RIAs.

From there, we have a number of practice management and technology articles this week, including a look at what advisors need to consider when adopting "e-signatures" for clients who want to sign documents electronically, a fascinating look at the challenges that large RIAs (e.g., $1B+) are facing in their efforts to grow to $5B and beyond (and what they need to do to take the next step), a review of the latest release of Redtail CRM, and a discussion of how InStream Solutions is transforming financial planning software from just a tool to analyze client situations to a firmwide tool to manage and oversee what advisors are recommending across all their clients.

We also have a few more technical articles this week, from a review of what "collaborative divorce" is all about and why divorcing clients should consider it (and also how advisors can actually do work as a "financial neutral" in a collaborative divorce specialist!), a study looking at how retirees spend their time in retirement (finding that most of their time is spent doing inexpensive leisure activities, and household activities that could actually reduce their cost of living in retirement!), and a great discussion of how young adults have so much job instability that perhaps they should be invested in an especially conservative manner with their portfolios and not aggressively as the conventional wisdom suggests.

We wrap up with three interesting articles: the first looks at the rising number of CPAs entering financial planning, and whether they could help fill the dearth of young talent in the profession; the second examines the latest benchmarking studies for financial advisors, and suggests that advisors may be too complacent about the potential impact the next bear market could have (and that they're underestimating how reliant they've become on market growth to sustain their current growth rates); and the last looks at how even though all the buzz of the industry is about the threat of "robo-advisors" that the real trend that is currently underway has been the rise of "phono-advisors" - mega financial services firms delivered financial planning through call centers that already have more than 100(!) times the AUM of today's robo-advisor platforms!

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including a recently announced Microsoft vulnerability (don't open any suspicious emails with Powerpoint presentations attached!), and a look at advisor tech consulting firms now offering cybersecurity audits for advisors to identify any risks to client data! Enjoy the reading!

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Friday, October 24th, 2014 Posted by Michael Kitces in Weekend Reading | 0 Comments

As the research into behavioral finance has shown, the words we use and how concepts are framed can have a powerful impact on how we see the world and consider the opportunities that may lie before us. A strategy can go from being appealing to terrifying (or vice versa!) based solely on how it’s explained. And in the context of retirement, there are a lot of words and phrases that may unintentionally be hampering our efforts to have a productive planning conversation.

For instance, with the rise of Monte Carlo analysis, it’s become increasingly popular to talk about the probability of success, leading retirees to naturally want to minimize the probability of failure as much as possible, given the catastrophe that implies. Yet the reality is that for most retirees, a “failure” doesn’t just mean running off the retirement spending cliff, but instead a gradual spenddown of assets that necessitates adjustments along the way to get back on track. So what happens if “probability of failure” is reimagined as a “probability of adjustment” instead, to reflect what actually happens in the real world? All the sudden it doesn’t seem so bad; it simply raises the question of how much of an adjustment will be necessary, and when or under what conditions.

Similarly, the focus of generating retirement spending from retirement “income” creates other unnatural distortions, as retirees potentially stretch for income (especially in low-yield environments!) and introduce new risks, not to mention possibly confusing-yet-appealing-sounding retirement “income” products that are actually just returning principal and not income at all! If we talk about retirement “cash flows” instead, and move away from an income-centric conversation, it opens the door to looking more holistically at the retirement portfolio and how it can support retirement spending.

But perhaps the most crucial change in our language of retirement planning is simply to rename “retirement” itself. After all, when the concept of “retirement” was originally created, it wasn’t really meant to be an entire multi-decade phase of life without work, and recent research has found that stripping away work can for many retirees leave them devoid of purpose altogether, actually reducing happiness and well-being! Of course, that doesn’t necessarily mean “retirees” want to do their current job; it simply means they may want to choose work that is independent of the financial compensation it provides. So maybe it’s time to rename the goal of retirement planning altogether, and to recognize that “financial independence” from the need to work for money is the real goal of saving and investing?

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Wednesday, October 22nd, 2014 Posted by Michael Kitces in Retirement Planning | 1 Comment

As the average age of advisors creeps older every year, the industry has continued to predict an impending wave of advisors retiring and looking to sell their practices, leading to a massive buyer’s market for advisory firms. Yet thus far, data from FP Transitions suggests the number of buyers still outnumbers the sellers by a whopping 50:1, and the succession planning “crisis” has been little more than a mirage.

Nonetheless, a recent survey conducted by Aite Group and published by NFP Advisor Services suggests that advisory firm acquisitions may be happening far more than anyone realized, but are occurring primarily within wirehouses and large insurance-affiliated broker-dealers, and just not as much in the independent broker-dealer and RIA channels. On the one hand, this may be driven by the fact that large firms have had even more incentive to ensure a smooth transition to allow the parent firm to retain the clients; on the other hand, large firm acquisitions may also simply be driven by the fact that they are a closer-knit community and the majority of acquisitions seem to occur primarily through the existing personal contact network of the acquirer!

In addition, the Aite/NFP study also provides a rather unique glimpse into “what’s working and what’s not” in the world of advisory firm acquisitions, by comparing and contrasting the characteristics of deals and their subsequent implementation between firms that were happy with their acquisition, and those who later regretted it. The results paint a fascinating picture, with some firms patiently cultivating a network of potential firms to acquire, patiently evaluating and slowly vetting, but ultimately paying top dollar for quality firms and acting quickly to integrate the clients once the deal is consummated. By contrast, the study also finds that while many firms are discovering opportunities that “fall into their lap” when a firm approaches them to be acquired, often for a price that’s on the cheap, that these reactive deals are actually leading to the most problematic implementation, the lowest retention, and the worst satisfaction levels after the fact, despite their appealing price!

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Monday, October 20th, 2014 Posted by Michael Kitces in Practice Management | 0 Comments

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the big announcement that the "robo-advisor" Betterment has launched an Institutional platform that will partner with Fidelity to offer a "robo" solution for advisors to use with their (smaller) clients.

From there, we have a number of practice management articles this week, including a look at new compensation models being explored by advisors who are looking to get away from the AUM model (or serving clients who simply don't have the assets to work on an AUM basis in the first place), examinations from two recent benchmarking studies about what top performing firms do that are different than the rest of the pack (including differentiating themselves with niches and specialization to support their pricing, and using "non-professional" support staff to enhance the productivity of their lead advisors), and an interesting article by Bob Veres looking at the wide range of changes being recommended to advisors and sharing his own take about what is and is not really important for advisors to focus on right now.

We also have a few more technical articles this week, from a review of target-date funds finding that many are becoming increasingly aggressive and equity-centric in the current low bond yield environment (with one fund as high as 94% in equities for someone in their 40s!), to an interesting profile of economic and retirement policy researcher Jeffrey Brown (who may not be familiar to most advisors but probably should be!), to an interview with Nobel price winner Bill Sharpe who has been increasingly focusing his current research time on the complex challenge of retirement planning. There's also an article looking at how, despite all the ongoing fears, health care inflation for seniors appears to be slowing, as the latest announcement of Medicare Part B premiums will be $104.90/month again for the third year in a row.

We wrap up with three interesting articles: the first is a comparison of popular risk tolerance tools FinaMetrica and Riskalyze, finding that one seems to be far better as a sales and prospecting tool for clients but the other may be more defensible in court; the second provides some tips on efficiency and productivity based on the latest research of behavioral finance expert Dan Ariely; and the last is a profile of venture capitalist and technology innovator Marc Andreesen, who created the first popular web browser and backed Twitter, Facebook, and AirBnB, and now sees opportunities for similar disruption in financial services (especially around how big banks charge for facilitating credit card and banking transactions, as "crypocurrencies" like Bitcoin gain momentum).

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including his take on the recent announcement that Betterment Institutional will partner with Fidelity, and how amidst the SEC's push for better cybersecurity with advisors they lost 200 of their own laptops with potential client data (oops!)! Enjoy the reading!

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Friday, October 17th, 2014 Posted by Michael Kitces in Weekend Reading | 0 Comments

While no one likes to pay more in insurance premiums than they have to, an important fundamental principle of insurance is that in the end, there must be enough premiums (plus growth) to cover potential future claims (plus overhead and profits for the insurance company). Insurance coverage that is “too” cheap is actually risky, and coverage that is “expensive” is actually the most secure!

In fact, one of the most significant caveats to considering any form of insurance (or annuity) guarantee at all is if the insurance is not going to lose you money on average, it’s actually something to avoid. In other words, insurance guarantees should never be expected to make money on average for the policyowner, or the insurance company will lose money until it inevitably goes out of business and the guarantee will be gone anyway!

As a result, decisions to purchase insurance and/or seek out guarantees should always be viewed from the perspective of seeking to trade a small known loss to avoid a big unknown loss instead. The goal is not to finish with more money on average, but simply to shift the range of outcomes in a manner that increases the number of small losses and reduces the exposure to big ones that may be unrecoverable. So the next time you’re considering a type of insurance or annuity guarantee with a client, make sure you know why and how the coverage and guarantees are expected to lose money… and then decide if the trade-off is worthwhile anyway! And if you can't figure out how the guarantee will lose you money on average, it's a strong indicator that either you're missing a key detail and/or the guarantee is overpromising something it can't deliver, or the guarantee itself may be a mirage that the insurance company cannot possibly make good on in the end!

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Wednesday, October 15th, 2014 Posted by Michael Kitces in Insurance | 1 Comment

The essence of a unique value proposition is to answer the consumer question “what is it the value that you offer, and why should I buy it from you?” In other words, what is it that you uniquely do that can’t be gotten anywhere else, unless doing business with you? In an increasingly competitive advisory firm environment, having a clearly defined unique (and compelling!) value proposition is essential to getting clients to do business with you and not someone else.

Yet in a recent new study on advisor value propositions, Pershing Advisor Solutions finds that in reality, most advisor value propositions are not actually all that unique, nor are they necessarily delivered in a very compelling manner. Instead, advisor value propositions are rife with industry-specific jargon, and what are apparently intended as “differentiators” often describe what are little more than “table stakes” – the minimum required just to have a seat at the table and be considered a potential solution at all, but certainly not a unique and differentiated one that helps the advisor stand out from the competition.

In the past, providing customized, individualized advice solutions specific to client needs form a trusted, experienced, credentialed advisor may have been an effective way to stand out in a competitive landscape filled with “stockbrokers” and “insurance agents”. But going forward, the Pershing study results highlight that not only do advisors need to better describe the value they do provide, but they will also need to more clearly focus on how they can truly differentiate themselves beyond the minimum table stakes, whether it’s by delivering a genuinely unique client experience, providing services and solutions that really cannot be found elsewhere, or simply focusing in on a particular type of clientele that allows the firm to go deeper in its services and solutions than what any generalist can match.

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Monday, October 13th, 2014 Posted by Michael Kitces in Practice Management | 0 Comments

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Out and About

Thursday, November 6th, 2014

Cutting Edge Tax Planning Developments & Opportunities Future of Financial Planning in the Digital Age @ ACP 2014 Conference

Friday, November 7th, 2014

Setting a Proper Asset Allocation Glidepath in Retirement @ Charles Schwab IMPACT 2014

Monday, November 10th, 2014

Expanding the Framework of Safe Withdrawal Rates Future of Financial Planning in the Digital Age @ PICPA 2014 PFP Conference