Historically, the active vs passive divide has been primarily a question of how to invest within an asset class. Is it better to utilize an active manager who will try to outperform an index (at the risk of underperforming it), or simply buy the index itself in the form of a fund that at worst should simply “underperform” by the margin of a very small fee. Either way, most investment managers will still implement a remarkably similar asset allocation – regardless of the active vs passive divide – based on the principles of Modern Portfolio Theory.

Yet a deeper look at MPT reveals that in reality, it may have never been intended as a model for strategic asset allocation in the first place. Markowitz himself advocated in his original research that MPT should not be implemented simply by looking at long-term historical averages, but instead by adjusting the statistical analysis of risk and return based on nuances not taken into account by formal computations alone.

The end point of this dynamic is that the active vs passive divide of investment management is actually split on two different dimensions: to be active or passive within asset classes, and whether to be strategic or tactical amongst them, leading to four quadrants of investment management styles depending on which combination(s) the advisor chooses.

Ultimately, this means that going forward investment managers must be more cognizant to frame their approach based on both dimensions, and recognize clearly where they can – or cannot – add value for clients. So what’s your investment management style? Tactical active, Strategic active, Tactical passive, or Strategic passive?

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Wednesday, April 23rd, 2014 Posted by Michael Kitces in Investments | 0 Comments

As financial planning continues its rise, more and more advisors are getting the CFP certification, and an increasing number of firms – from insurance companies to wirehouses to RIAs and everything in between – have been incorporating financial planning into their offering to varying degrees. And now it looks like a new player is entering the space, likely to make a big splash: Vanguard.

In fact, the new “Vanguard Personal Advisor Services (VPAS) offering may have the potential to do to financial planning what their launch of the index fund has done to investment management: create a core, low-cost, basic "indexing" solution to everyone, above which any advisor must rise to deliver value and justify their cost. And priced at a 0.3% AUM fee with a $100,000 minimum (that may soon drop to $50,000), the “Vanguard Financial Planning Indexing” solution may be very disruptive to both “robo-advisors” and today’s traditional advisors as well.

Ultimately, this won’t be the end of individual financial planners – in fact, Vanguard’s move, including the decision to use real human advisors who are CFP certificants and not be a "robo-advisor" – validates the importance of financial planning and the value of getting it from a real human being. Yet at the same time, the sheer size that Vanguard already has creates the potential for it to instantaneously reach the requisite volume of clients to achieve both operational and marketing scale. For individual advisors to survive and thrive, it will become more necessary than ever to gain further expertise, specialize, establish niches, and create ways to differentiate themselves from the new low-cost financial planning “indexing” Vanguard solution.

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Monday, April 21st, 2014 Posted by Michael Kitces in Planning Profession | 0 Comments

Enjoy the current installment of "weekend reading for financial planners" - Practice Management Edition! This week's edition kicks off with the results of the FPA's latest practice management study on time management, which finds that if you feel like you're not in full command of your time and schedule as a financial advisor, you're not alone; as the results show, only about 1/3rd of advisors are feeling in control of their time these days! The FPA study provides some suggestions of "what's working" for advisors who do feel in control of their schedules, and is part of their broader rollout of practice management guidance under the new Research and Practice Institution.

From there, we have a long list of practice management articles this week, including: how to protect your practice against thieves trying to commit wire fraud against your clients (and what you must do to avoid liability for a mistaken transfer!); how to craft a social media policy for your firm and roll out social media across your employees; the "right" way to attend a conference to get value (hint: meet as many people as you can); how the key to improving your firm is about trying to improve things one step at a time, rather than delaying until there are lots of problems and trying to fix them at once (which is overwhelming and rarely works); how to manage the coming "crunch" in advisor compensation as competition heats up (key takeaway: go big or go niche); ideas in better implementing common practice management tips; some wisdom in how to ensure your prospective merger with another advisory firm goes smoothly in the long run; and recent survey of CFP certificants suggesting that at least some advisors believe the recent CFP Board "scandals" have been taking a toll on its credibility. 

We wrap up with three interesting articles: the first suggests that perhaps we should back away from trying to set financial goals for/with clients, and instead try to focus on the systems and habits that will make them financially successful in the long run; the second looks at the psychology of tax refunds and some research suggesting that for clients who have difficulty saving, getting a big tax refund might not be such a bad thing after all (and in fact, bigger may be better); and the last explores how being a successful leader means at some point, leaning to say "no" and limiting how people can access your time and attention, or you will struggle to achieve your own goals and priorities. Enjoy the reading!

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Friday, April 18th, 2014 Posted by Michael Kitces in Weekend Reading | 0 Comments

As the buzz around the "robo-advisors" continues, this week marks another two big announcements: Betterment has raised another $32M in a fresh round of venture funding, with another $28M for Learnvest, following on the heels of $35M from Wealthfront just two weeks ago. Collectively, the three platforms have raised a whopping $95M in just the past two weeks, with the total collective funding for the robo-advisor space approaching a quarter of a billion dollars.

Yet despite all this focus, the actual business and revenue growth results for robo-advisors has been fairly meager, at least so far. The latest fundraising for these three platforms brings their total venture capital funding up to more than $150M, despite the fact that after 3-5 years the companies have been around with "exponential" growth, they cumulatively have less than $5M of revenue. Collective across all the robo-advisor-labeled platforms, actual assets under management (not just fuzzy "advisements") is no more than a few billion dollars, which at the fee schedule for these platforms likely amounts to little more than $10M of revenue for platforms that have cumulative venture capital funding in excess of a quarter of a billion dollars. Which implies, to say the least, that at least a few of these VC investments probably won't work out so well.

Nonetheless, this doesn't mean the robo-advisor trend should be ignored, despite the fact that they have little more than roughly a 1/1000th market share of household investable assets. While there's still little evidence to suggest that robo-advisors are drawing any volume of clients from human advisors, they are demonstrating how the core of constructing and implementing a passive, strategic portfolio can be commoditized for an extremely low cost. In the end, we may look back on this 2009-2014 era as one that transformed technology-driven portfolio construction the way the introduction of the index fund transformed the world of stockpickers 40 years ago. Notably, the introduction of the index fund did not eliminate the need for or value of human advisors, but it did force advisors to continue to evolve their value proposition to keep up, as today's evolving robo-advisors will likely do as well. In fact, in the end, the primary players that get "disrupted" by robo-advisors may not actually be human advisors at all, but the custodians, broker-dealers, asset management, and technology firms that support them!

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Wednesday, April 16th, 2014 Posted by Michael Kitces in News Highlights | 2 Comments

As financial planning and wealth management become increasingly popular, advisors are increasingly experiencing a "crisis of differentiation" where it's difficult to distinguish themselves from the competition. This has not only slowed the organic growth rates of many advisory firms as it gets harder to generate referrals, but made client retention all the more crucial to maintain the revenue of an advisory firm.

A new offering for financial advisors called SAGE Scholars offers a unique new way for advisors to offer a "client perk" that can help to support retention and potentially generate referrals: Tuition Rewards, which are "rewards points" clients can accrue based on the assets under management (or potentially, the retainer fees) being paid to the advisor, as a rate of 5%/year of the AUM. Which means a client with $1,000,000 of assets with an advisor can potentially accrue a whopping 50,000 points per year, which can be used as a dollar-for-dollar discount for tuition amongst a list of 323 eligible colleges and universities (up to 1 year's worth of free tuition) for any family member (including children, grandchildren, nieces, nephews, etc.).

Ultimately, the reality is that many students can already potentially earn merit-based aid and discounts from many schools, but there is little certainty about whether the discounts will really be there when the time comes. From the advisor's perspective, then, offering Tuition Rewards as a form of "loyalty points" for clients can have a high perceived value for clients who wish to stay with the advisor, and be something that potentially generates "buzz" amongst clients to drive additional referrals as well. In an environment where it's difficult to find unique "client perks" that are relevant to clients in the first place, the SAGE Scholars program represents an intriguing new opportunity!

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Monday, April 14th, 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 a strong response from CFP Board chair Ray Ferrara to last week's rather harsh editorial from Financial Advisor magazine's Evan Simonoff, focusing on all the ways that CFP Board has been growing successful in recent years, and suggesting that many of the criticisms being levied at the organization are more about what the organization once was, rather than what it actually is today.

From there, we have several practice management articles, including a good overview of what advisors should know and pay attention to regarding this week's widespread "Heartbleed" internet security bug, a look at how the SEC is turning up its attention on the growing space of hybrid- and dual-registered advisors, a review of the new software company Oranj which provides website and client "app" tools for advisors, some guidance about key areas that firms should focus on if they're planning to grow "inorganically" (e.g., via mergers and acquisitions), and a good discussion of the other key factors to consider when selling your practice besides just the valuation multiple (many of which can impact the sale even more!).

We also have a trio of more technical planning articles this week, from a good list of 24 Social Security "quirks" and planning tricks (or traps!), to a nice discussion from the New York Times about the current landscape of college financial aid and the increasing distinction between how public and private colleges determine "need" and available aid, to an overview of the current legal landscape when planning for "digital assets" and prospective legislation called the Fiduciary Access to Digital Assets Act (FADAA) that may pass later this year.

We wrap up with three interesting articles: the first looks at how, in the end, having a good website is the key to succeeding in getting clients online, and that trying to get active with social media isn't going to yield much of a result if it's not paired together with a website that can actually convert visitors to true prospects and eventually to clients; the second provides a great reminder that, as long as we're irrational human beings, there is a limit to what a "robo-advisor" or any automated solution can really accomplish, though advisors may still be underestimating how well such tools can execute what they are designed to do; and the last is a big announcement this week from "robo-advisor" Betterment that it is 'breaking ranks' with the other robo-advisors and launching Betterment Institutional, an offering to partner with and provide a version of its platform directly to RIAs, a big step that begins to blur the line between where a robo-advisor will end and a human advisor will begin.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end! Enjoy the reading!

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Friday, April 11th, 2014 Posted by Michael Kitces in Weekend Reading | 0 Comments

While the American Taxpayer Relief Act of 2012 (ATRA) finally ended more than a decade of "temporary" Alternative Minimum Tax (AMT) patches and fixes that kept expiring and had to be renewed, the ultimate resolution of ATRA was not permanent repeal of the AMT. Instead, ATRA provided permanent "relief" by merely locking in the latest AMT exemptions from 2011, and adjusting the exemption - and everything else under the AMT system - for inflation going forward.

As a result, high-income individuals continue to be potentially exposed to the AMT, depending on exactly what their income levels may be, and the AMT adjustments and preference items that have to be added back to income for AMT purposes. Fortunately, though, a client's AMT exposure can actually be quickly evaluated by looking at a chart that maps income after deductions, and the amount of deductions that are lost for AMT purposes, to figure out what combinations of income and lost deductions will result in an AMT liability.

Notably, though, being exposed to the AMT is not always a "bad" outcome. In fact, because the top AMT tax rate is "only" 28%, in some cases high income individuals will actually want to accelerate more income into an AMT year. In an AMT environment, the primary planning opportunity is actually to manage income around the AMT "bump zone" - that span of income where the AMT exemption is phased out, temporarily boosting AMT rates (and capital gains rates!) by an extra 7%. For those below the AMT bump zone, the goal is to spread out income to stay below the zone. But for those above the AMT bump zone, it turns out the best strategy to reduce the long-term bite of the AMT may actually be to pay even more in taxes!

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Wednesday, April 9th, 2014 Posted by Michael Kitces in Taxes | 1 Comment

For most of its history, "getting paid" for financial planning has really been about giving away financial planning at little or no cost and making it up from the income generated by implementing the recommendations of the financial plan, first through the sale of insurance and investment products, and more recently by providing ongoing investment management services. While this has allowed for the growth of many successful financial planning firms, it also opens the door to the risk that the plan will lead to the sale of inappropriate products, and limits access for financial planning to those who have assets to manage or need to buy insurance or investment products in the first place.

To address this challenge, this month marks the launch of XY Planning Network, a new Turnkey Financial Planning Platform (TFPP) designed to help younger Gen X and Gen Y advisors who want to deliver financial planning to their Gen X and Gen Y peers, with a monthly retainer fee model that allows them to actually get paid for the advice itself and supports an ongoing financial planning relationship, without the sale of products or requiring AUM. Notably, this provides a path not only for younger consumers to finally have access to a financial planner, but also an important new career path for younger advisors who want to grow and develop a business serving their Gen X and Gen Y peers.

In fact, ultimately the launch of XY Planning Network may just be the next step in a long line of turnkey financial planning platforms that emerge, as advisors increasingly shift away from product- or asset-centric business models, towards ones that seek to get paid for financial planning itself. That doesn't necessarily mean that broker-dealers and custodians, or the associated product-based or AUM-based business models, are going to go away anytime soon. Nonetheless, the slow but inexorable transition towards actually getting paid for financial planning itself means the business models for financial advisors are changing, and so too are their needs for a very different kind of support service and infrastructure to help them be successful.

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Monday, April 7th, 2014 Posted by Michael Kitces in Practice Management | 1 Comment

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a notable but nasty editorial from Financial Advisor editor Evan Simonoff, who suggests that the CFP Board has been irresponsible in setting its compensation for CEO Kevin Keller (at $888,000 in 2012, up 90% from 2008) and has been giving lavish travel perks to board members while trying to support the global growth of financial planning (with the potential for more details to come to light with the ongoing discovery process in the CFP Board's lawsuit with Jeff and Kim Camarda). Also in the news this week was a big announcement that Morningstar is acquiring ByAllAccounts for $28M, with rumors that this may lead to an account aggregation offering inside Morningstar Office (and possibly some interesting new analytics from Morningstar based on the data it can glean from its new account aggregation service).

From there, we have several practice management articles, including a good discussion from Financial Advisor magazine on the rise of the "robo-advisor", a plea from RIABiz editor Brooke Southall that it's time to stop calling them "robo-advisors" and adopt a better term instead, the latest from the FAInsight practice management research on the growing squeeze for quality lead (and even associate/support) advisors, and some advice about the "benefits" of firing a toxic client (what you lose in revenue from a client you can more than make it in a better firm culture and reduced staff turnover!).

We also have a trio of investment management articles this week, from a good discussion on the rise of "smart beta" strategies and fundamental indexing, to a WSJ "response" after the release of Michael Lewis' new book "Flash Boys" about High-Frequency Trading (HFT) from AQR founder Cliff Asness suggesting that on the whole HFT is driving down trading costs more than causing any trading harm (and that those complaining most about HFTs may be other HFTs and the legacy Wall Street firms they're undercutting), and an interesting discussion from Bob Veres about whether advisors need to do a better job analyzing the bonds that they hold and managing the "shape" of their bonds relative to the yield curve.

We wrap up with three interesting articles: the first looks at the launch of a new "Vanguard Personal Advisor Services" (VPAS) offering that provides wealth management plus financial planning with a $100,000 minimum and a mere 0.3% AUM fee (a new "quasi-robo-advisor"!?); the second is about how visual tools and interactive financial planning software may literally change the way our brains think through financial planning decisions; and the last looks at the research on aging and the brain, finding that perhaps the decline in our ability to make good financial decisions in later years isn't just about the potential onset of dementia but that our brains more selectively process information overall in our laters (which helps in many other ways, but not regarding our financial decisions!).

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end! Enjoy the reading!

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Friday, April 4th, 2014 Posted by Michael Kitces in Weekend Reading | 0 Comments

While much has been written about the inherent benefits of delaying Social Security benefits to age 70, a fundamental challenge in the real world is that the decision cannot be viewed in the abstract. The decision to delay Social Security isn't just about the value of delaying, but also about the money that must be spent from the portfolio to sustain spending in the meantime, and/or the decision to allocate money towards delaying Social Security and not towards other fixed income investments or a commercially available lifetime immediate annuity.

Yet a deeper look reveals that when viewed from an investment perspective, the decision to delay Social Security actually represents an astonishingly valuable "investment" return, based on the internal rate of return of the cash flows that it provides over time. While it is certainly unlike other more "traditional" investments, in that its return is based not on interest rates or market performance but on the longevity of one's life, for those who do live a long time the decision to delay Social Security can produce real (inflation-adjusted) returns of 4%, 5%, or even 6% for those who live into their 90s and beyond.

Viewed in this manner, the reality is that for those whose greatest retirement "risk" is living far past life expectancy, the decision to delay Social Security can actually be a highly beneficial investment, with a real return that dominates TIPS, is radically superior to commercially available annuities, and even generates a real return comparable to equities but without any market risk! Of course, there is still an aspect of "mortality risk" inherent in the decision to delay, but for those who are most concerned about living a long time and funding a long retirement, the decision to delay Social Security - even if it means partially spending down the portfolio in the meantime - can actually be the best means to securing a successful retirement, by converting the uncertainty of market returns into the certainty of higher Social Security payments!

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Wednesday, April 2nd, 2014 Posted by Michael Kitces in Retirement Planning | 3 Comments

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Out and About

Monday, April 28th, 2014

Safe Withdrawal Rates: Mechanics, Uses & Caveats @ St. Louis Estate Planning Council

Thursday, May 1st, 2014

Cutting Edge Tax Planning Developments & Opportunities @ NATC Annual Meeting

Saturday, May 3rd, 2014

Setting a Proper Asset Allocation Glidepath in Retirement Understanding the New World of Health Insurance @ FPA Retreat 2014

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