Kitces | Nerd's Eye View

"Planners and academics need to work together to develop a profession with evidence-based practices." That is the message given at the FPA Retreat by Dr. Michael Finke, a professor of personal financial planning at Texas Tech University, and a co-author of mine at the Journal of Financial Planning. Yet while the Journal of Financial Planning is a great resource, and it has been the go-to outlet for research on retirement planning from the perspective of practicing financial planners, especially regarding safe withdrawal rate strategies, the academic research approaches the retirement challenge from a different perspective and focuses on different tools and strategies. Ultimately, researchers can use their technical skills to investigate optimal retirement strategies, and practitioners can guide these investigations by suggesting real world constraints and ideas for solutions, and even by sharing in the nitty-gritty process of conducting the research. Let’s encourage these interactions to get rigorous analyses which can be applied to real-world problems. Continue reading "Linking Academic and Planner ... »

In planning for retiring clients, it's crucial to get an understanding of what the client's goals are in the first place - so that recommendations can be made about how to financially secure those goals. In the context of setting a spending goal, a popular delineation is to separate retirement spending into "essential" versus "discretionary" expenses - not unlike "needs" versus "wants" for accumulators - with the idea of using guarantees to secure the essential expenses, and less certain growth assets with some risk to fund the discretionary expenses (since they're 'only' discretionary and not essential, by definition). Yet in reality, even discretionary spending still constitutes an important part of a retiree's overall lifestyle - the loss of which could be very psychologically damaging. As a result, merely securing the essential expenses of retirement and leaving the rest at risk still, in the eyes of most retirees, would constitute a failure of the overall retirement goal. Instead, clients often choose to ensure that all their spending can be sustained - by continuing to work as long as necessary (as health allows) to secure all of their goals. Does that mean the distinction between essential versus discretionary retirement expenses isn't necessarily helpful after all?

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As the country continues to struggle with its fiscal woes, Congress and the White House are increasingly proposing tax law changes intended to cut down on perceived "abuses" and "tax loopholes" - especially those used by the wealthy. The latest, in the President's Fiscal Year 2013 budget, is a proposal to change to the estate tax laws, requiring any grantor trust to be included in the estate of the grantor (or pay gift taxes if the grantor trust assets are distributed before the grantor's death). The proposal would kill the popular Intentionally Defective Grantor Trust (IDGT) estate planning strategy, which works specifically by relying on the fact that a trust can be a grantor trust for income tax purposes even while being excluded from the grantor's estate for estate tax purposes - after all, if the grantor trust is automatically included in the grantor's estate, there's no longer any value to make gifts or sales of property to an IDGT. While the rules are only proposed at this point - and would only apply to trusts created in the future, after the enactment date of any legislation - the fact that the change was proposed at all suggests that the days of IDGT planning strategies may be numbered.  Continue reading "President's Budget Proposals ... »

Good financial planning is typically built upon a personal relationship between the client and the planner, as trust is established to the point that the client is comfortable to share and engage with the planner, and take the advice that is given. Yet the reality is that while it takes time to build trust, it doesn't necessarily have to be built face-to-face. In fact, as personal finance 'celebrities' like Suze Orman have shown, a remarkable amount of actionable advice can be implemented even if the person giving the advice and the person receiving the advice have never met in person at all! So what does it take to begin to establish trust with a prospective client before ever meeting face to face? As Orman demonstrates, the keys are that people work with people, expert credibility is important but not alone sufficient, and trust is built over time through repeated exposure to the planner. And in today's world, the digital age is leveling the playing field; it's not just about being on television or having a radio show anyone, because any planner can begin to build trust with potential future clients, through blogs, e-newsletters, videos, social media, and other channels of the digital world! Continue reading "Building Trust With ... »

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with an interesting article from the Journal of Financial Planning about how the industry can develop more effective risk tolerance questionnaires, along with a good article reviewing college funding strategies and a review of a new cloud-based software program to analyze all the different possible combinations of Social Security claiming opportunities for couples. From there, we look at a few practice management pieces, from how advisory firms can better build their own brand, to some tips about how to develop trust more quickly in new relationships with prospective clients, to the reasons why clients don't refer (and what to do about it), and the increasing amounts that advisory firms are spending on technology with a focus on ROI. We also look at some articles highlight trends and opportunities in the industry, from the potential fallout in the 401(k) marketplace when the new fee disclosure rules take effect later this year, to the "career arbitrage" that's occurring as one executive after another leaves the custodian, broker-dealer, and investment company environment to take on a position as a principal with an independent RIA. We wrap up with a look at the potential for a "Grexit" - the new term du jour for a potential Greek exit from the Euro - and a striking article from The Economist that asks whether the era of the public corporation is coming to an end, given the resurgence in everything from private equity to state-owned enterprises to partnerships around the globe. Enjoy the reading!

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As the retirement income research evolves, an increasingly common question is whether the popular safe withdrawal rate approach is better or worse than an annuity-based strategy that provides a guaranteed income floor, with the remaining funds invested for future upside. Yet the reality is that as it's commonly applied, the safe withdrawal rate strategy is a floor-with-upside approach, too. Unlike the annuity, it doesn't guarantee success with the backing of an insurance company; yet at the same time, the annuity is assured to provide no remaining legacy value at death, while the safe withdrawal rate approach actually has a whopping 96% probability of leaving 100% of the client's principal behind after 30 years! Which means an annuity is really an alternative floor approach to safe withdrawal rates - one that provides a stronger guarantee while producing a similar amount of income, but results in a dramatic loss of liquidity, upside, and legacy. Does the common client preference towards safe withdrawal rates and away from annuities indicate that in the end, most clients just don't find the guarantee trade-off worthwhile for the certainty it provides? Continue reading "Annuities Versus Safe ... »

One of the foundational principles of retirement success is to start saving early. After all, the longer that money can stay invested, the more compounding growth can work in your favor; all the better if your savings grow inside a Roth IRA and avoid the grinding impact of taxation. Yet the reality is that clients really have two major assets: their financial assets, and their human capital asset. And when the client is young, the human capital asset is actually the bigger of the two by far. As a result, allocating savings towards human capital in ways that increase its value or growth rate can actually have far more impact than investments in financial assets; spending $2,000 on classes that produce a $1,000 raise in base salary can, over the next 40 years, generate nearly 20 times the wealth of merely saving the $2,000 in a Roth IRA and growing it for decades. Does that mean that clients who allocate savings to retirement accounts are actually making an inferior long-term investment? Continue reading "Why Saving In A Roth (Or ... »

Although Social Security benefits are a major part of retirement planning, since the Social Security Administration stopped mailing statements to workers last year, most planners have been limited in their ability to get updated Social Security information for clients - especially new clients who may not have a prior benefits estimate, and/or who may have never previously reviewed their earnings record. Fortunately, earlier this month the Social Security Administration launched a new online platform allowing anyone to access their own Social Security benefits estimate and earnings record. In response, many planners are now starting to walk clients through the process of claiming their online Social Security account - which can be done on the spot, in the planner's office, in less than 5 minutes! - and reviewing the benefits estimate and earnings record as a part of their new or existing client meetings! Continue reading "A New Way To Review Client ... »

The delivery of advice is ultimately built on a foundation of trust; even if the client is otherwise ready to make a change, if the client doesn't trust the advisor, the advice often won't be taken and implemented. And because most planners struggle and work hard just to establish client trust through in-person meetings and a one-on-one relationship, many are skeptical that advice will ever fully shift to a more virtual world where trust must be built at a distance and possibly without ever having the client and planner meet in person at all. Yet there is a surprisingly visible demonstration of how trust can be built effectively in a "virtual" environment where the person taking the advice may have never met the person delivering the advice: the Suze Orman show. Does that mean planners have much to learn from the success of Suze Orman, who has built a virtual relationship with millions of people who are all willing to act on her advice, even while so many planners struggle to build trusted relationships one in-person prospective client meeting at a time? Continue reading "What Can Suze Orman Teach ... »

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with a discussion of the latest shot fired in the SRO debate, as BCG and the Financial Planning Coalition respond to the latest FINRA estimate of SRO costs. From there, we look at three significant articles on retirement income planning, including: the latest thoughts from Bill Bengen showing that the 4.5% withdrawal rate is still working just fine, even for a 2000 retiree; an article from the Journal of Financial Planning showing how holding several years of the portfolio in a cash reserve INCREASES retirement failure rates; and a discussion from Bob Veres in Financial Planning magazine about whether we need to change our retirement spending assumptions. From there, we have a number of interesting markets and investment pieces this week, including highlights from James Montier's opening keynote speech from CFA Institute earlier this month, a look at how 'adaptive' asset allocation holds more promise than traditional strategic allocations, a prediction from Mauldin that Germany is waving the white flag and clearing the way for the ECB to print Euros to solve the Eurozone problems, and ongoing worries from Hussman that we may be dancing at the edge of an investing cliff. We wrap up with three interesting articles: a scathing 'anonymous' insider letter to Mark Zuckerberg shining a light on the investment bank realities of the IPO marketplace; an article by Angie Herbers about how the greatest problem in most advisory practices is the owner (and how to better get out of your own way for your firm's success); and tips for stressed-out advisors to try to (re-)gain a hold of some balance and efficiency in their practices. Enjoy the reading!

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As a growing body of research shows, our brains are not quite the logical, rational decision-making machines we think they are – or at least, wish they could be. Instead, our brains take shortcuts; we substitute easier questions for difficult ones, often without realizing it, and respond accordingly with our words and our actions. This can be especially problematic in the world of financial planning, where we often ask clients to make difficult decisions with limited information. As a result, questions like “what is an acceptable probability of success/failure for your retirement plan?” often get switched for other questions, like “how intensely bad would you feel if your retirement plan failed?” While the questions are still similar, there is an important difference: if you have not clearly defined both the meaning of success and the meaning of failure, your clients may misjudge the intensity of the consequences, leading to an irrational and inappropriate decision about how much or how little “risk” to take. Continue reading "Do Our Brains Really Even ... »

One of the major reasons that advocates recommend the fiduciary standard is the belief that if only everyone were subject to the standard, fewer client abuses would occur, because advisors would fear the repercussions (i.e., legal liability) of inappropriate recommendations that fail to meet the standard. Yet at the same time, the financial services industry has been plagued with scandals, and it's not just Bernie Madoff, Allen Stanford, and numerous commission-based advisor improprieties; in the past three years, there have even been investigations against two former NAPFA presidents for malfeasance. Which raises the question - if even people who have led such a fiduciary-centric organization as NAPFA can still conduct such misdeeds, does fiduciary really provide the necessary consumer protections? Or is the fiduciary standard really only effective for those who weren't likely to violate its principles anyway? Continue reading "Is The Fiduciary Standard ... »

As financial planners - especially those who provide comprehensive financial planning services - try to convey the overall value of the services they provide, it is increasingly popular to reduce how often portfolio performance is reported to clients. As the theory goes, if performance is reported less frequently, clients will fixated on it less often. Yet perhaps the reality is not that performance reporting is making clients focus on investments, but instead that clients are simply being prudent stewards of their wealth who want to know how they're progressing towards their goals? If that's the situation, then the reality is that restricting access to good portfolio information may not make clients think about it less, but instead may make them worry about it more! Which means, counter-intuitively, that the best way to make clients focus less on investments may be to make information available even more often! Continue reading "Is Quarterly Performance ... »

The financial planning world is in a state of change, as the rise of the digital age begins to exert its impact upon the profession. Thus far, trends have included the shift to outsourcing, the rise of web-based software, and a growing number of planners using services like GoToMeeting and Skype to supplement face-to-face meetings with more virtual interactions. As the coming decade wears on, technology will play an increasing role in the financial planning world, driving change in everything from how we deliver services to the client experience. Nonetheless, while technology will continue to augment financial planners, it will never replace them, for one simple reason - real financial planning solutions require clients to implement recommendations and make changes in their lives, and there are few forces for behavior change more effective than the accountability of another human being. Which means, simply put, as long as we are human beings and our brains operate the way that they do, effective financial planning will require another human being at the other end of the relationship, especially in times of stress and when we need an outside perspective. Technology alone may give clients the answers... but the fact that we all don't get the right amount of exercise, eat a perfect diet, and take all the other steps necessary to become optimal human beings, makes it clear that technology delivering information alone will never be the solution. Continue reading "Technology Will Improve ... »

Enjoy the current installment of "weekend reading for financial planners" - this week's edition focuses entirely on practice management issues, leading off with a discussion in the Journal of Financial Planning about whether the profession needs to institute a process of peer review to both clean up those delivering poor advice, and to help challenge everyone to deliver better advice. From there, we look at some articles about how to navigate the challenges of being in a small firm, from how to demonstrate that you can compete with the services of larger firms, to supporting the career development of staff in a small firm environment, to managing the challenges when you're both the business owner and the financial advisor driving the firm. We also look at some articles that share how to know whether your website is a clunker, how advisors are adopting video on their websites, and how your marketing efforts should be certain to both capture target clients and allow unqualified clients to slip through your marketing net so you don't waste time finding out you can't work with them anyway. We also look at a good article by Mark Tibergien about the key traits for an enduring advisor firm, and a discussion by Bob Clark of how some independent broker-dealers are stepping up to define a new offering - with remarkably high payouts for the B-D world - to be appealing to the new independent advisor. Wrapping up, we look at an interesting article from the Harvard Business Review about how Gen X and Y are redefining a new, more human definition of what it means to be a "professional" and a nice article from Bill Bachrach reminding us how important it is to take a real vacation - with some concrete tips about how to really do that, especially if you're not good at taking vacation in the first place. Enjoy the reading!

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