Kitces | Nerd's Eye View

Under the Defense of Marriage Act (DOMA), the Federal tax law only affords treatment to married couples when the marriage is between a man and a woman, and denies marital treatment for same-sex couples, regardless of whether the couple is recognized as married under state law. However, in the recent Windsor v. United States court case, a New York District Court declared the applicable Section 3 of DOMA to be unconstitutional, and ruled that a same-sex couple should be eligible for the marital deduction for Federal estate taxes, resulting in a $363,000 estate tax refund. The case will likely end up in the Supreme Court, and in fact appears to be on the fast track to get there soon. If DOMA is ultimately declared unconstitutional, it will result in a dramatic shift in planning for same-sex couples, opening the door for marital treatment for estate tax marital deduction, intra-couple gifts, and numerous income tax deductions, credits, and other benefits afforded to married couples. At this point, DOMA is still the law of the land, but same-sex couples may wish to begin filing protective refund claims in case DOMA is ultimately struck down in the coming year. Continue reading "Will Same-Sex Couples Soon ... »

The assets-under-management model for financial planning firms has become increasingly popular in recent years. However, its rising popularity has also brought a great deal of criticism, especially regarding the volatility of revenues as markets cycle up and down. As a result, some firms have begun to shift to a retainer-style model in an attempt to smooth out fees, rather than pricing on a strictly AUM basis. Unfortunately, though, an annual retainer model where clients have to write a check for services makes the fee significantly more "salient" and can actually force firms to either cut prices or work harder to generate the same income, and may result in worse client attrition during down markets as fee-sensitive clients choose not to renew during difficult times. As a result, some firms that shift to annual retainers are even shifting away from retainers and back to AUM pricing after a few years of business pain! Of course, the reality is that the AUM model can't serve all clients, and retainers may be necessary in some segments of the marketplace; nonetheless, in situations where there is a choice, the AUM model may have far more longevity than some expect. Continue reading "Why Annual Retainer Fees ... »

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with a recent survey by the CFP Board and the Consumer Federation of America, showing that financial planning helps people to have more successful financial outcomes, and that the results hold regardless of income or wealth levels. We also look at some of the breaking legislative news this week, including new legislation to authorize the SEC to assess user fees to step up examinations (rather than delegate it to FINRA), and the indefinite tabling of the Baucus legislation due to lack of a clear consensus for support. From there, we look at a nice article about how inbound marketing can help advisors grow, and an advance peek at a new iPhone app to help advisors get a handle on the ever-growing contact list (especially given the explosion of social media). There's also an interesting article exploring some of the math behind whether it's really a good idea to wait to annuitize or not (given today's interest rates), and a consumer article with a great series of estate planning questions everyone should consider for themselves that is equally relevant to planners and their clients. This week's investment articles include a good discussion of long-term secular market cycles, some of the risks of exchange-traded notes, an evaluation by Morningstar of their new stewardship ratings for funds and how it impacts fund performance (and even survival), and the latest Mauldin missive discussing some of the economic surprises that may be coming in a few years. We finish with an interesting article by Aspiriant former CEO Tim Kochis, who shares what it was like as he transitioned from being a leader in one of the largest independent wealth management firms in the country to becoming a client - the outcome is some interesting insights, but Kochis' article also raises the question about what kinds of experiences other planners might have if they became consumers of their own service. Enjoy the reading!

Continue reading "Weekend Reading for ... »

Identifying centers of influence has been useful and effective for businesses and advertisers as long as people of influence have wielded power in their communities. Historically, though, the challenge has been that it's not always clear who is influential, especially in relatively narrow niches. However, as the use of social media continues to grow and evolve, quantifying influence, at least through social media channels, is becoming possible for the first time - and companies are jumping quickly to fill the void.

The current leader in this space is a company called Klout, which seeks to make itself the standard of measuring (online) influence. While thus far the company is relatively new and its impact is limited, it is growing fast.  In fact, in some industries, an individual's Klout score is already impacting their ability to get a job, or their opportunity to receive discounts and perks from advertisers. While the time hasn't arrived yet, Klout may soon become relevant in the world of financial planning as well, for everything from increasing the visibility of an influential planner, to identifying centers of influence to contact in a target niche market. Which raises the question: do you have Klout?

Continue reading "Why Having Klout May Soon ... »

As financial planning firms continue their search for scalability and efficiency, more and more firms are choosing to outsource various aspects of their business, retaining only the core areas where they provide the most value. As a result, Turnkey Asset Management Programs (TAMPs) have exploded in recent years, as more and more planning firms outsource their investment process to focus on their financial planning services. However, a new option is beginning to emerge - the Turnkey Financial Planning Program (TFPP), designed to be a holistic one-stop shop for starting a financial planning practice. And as signaled by LPL's recent announcement to acquire Veritat, one of the early TFPP platforms, building an effective TFPP can be a valuable business proposition itself, in addition to being an appealing offering for the growing financial planning firm. In fact, arguably the TFPP is a glimpse at the broker-dealer of the future - a core offering for financial planning firms, once the other parts that are unnecessary for a financial planning practice are stripped out - and may also represent a way for RIAs to grow as well. So forget the TAMP - it's time for the TFPP. Continue reading "Forget The TAMP - It's Time ... »

Monte Carlo analysis has become an increasingly popular arrow in the financial planner's quiver, as an improvement over the oversimplified traditional straight-line projection. Unfortunately, though, use of Monte Carlo analysis has begun to focus excessively on a singular probability of success, that itself can be almost as misleading as straight-line projections when not viewed in proper context. However, this is not a flaw of the Monte Carlo approach itself, but instead of the tools being used by financial planners. Instead, what's ultimately needed is software that shows not just the probability of success, but also the magnitude and consequences of failure, and a sensitivity analysis that helps clients understand the impact of the trade-off decisions they have available. What can ultimately result is a "next generation" of Monte Carlo analysis, that provides a more useful, relevant, and actionable framework to help clients make effective financial planning decisions. Continue reading "It's Time For The Next ... »

Choosing a financial advisor is difficult, and as a result it's helpful to provide the public with guidance about how to select one. Unfortunately, though, in recent years recommendations to the public from many organizations have increasingly focused on whether the advisor is a fiduciary, without any acknowledgement of whether the advisor has the training, education, and experience to provide effective financial advice. Consequently, the public increasingly runs the risk of being poorly served by a well-intentioned advisor whose advice is totally incompetent. Ultimately, protecting the public will require setting forth a standard that meets fiduciary and competency requirements. And as it standards right now, the clearest choice for a professional minimum standard appears to be the CFP certification. While the CFP marks - as with any standard - don't unequivocally mean someone will get the best and most optimal advice because the advisor has the CFP, that's not the point; in the end, the purpose of such a standard is not to define a best practice, but instead the minimum acceptable standard to ensure the fundamental protection of the public. Continue reading "The CFP Certification As A ... »

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with an interesting Journal of Financial Planning article suggesting that a uniform fiduciary standard would not, in fact, reduce access of the mass market to financial advice or increases costs. We also look at an article from Bob Veres questioning why it is that more independent broker-dealers and registered representatives don't object to the Financial Services Institute's lobbying for FINRA as an overarching regulator for all advisors. From there, we look at several practice management articles, including one up-and-coming RIA custodian Scottrade Advisor Services, another on succession planning, and a discussion of how client communication supports business growth. We also look at a series of technology-related articles, including how to stay safe when using the cloud, a new secure client vault solution, a new retirement income modeling tool to do simplified/expedited basic retirement projections for clients, and a discussion of the incredible return-on-investment that firms see when adopting rebalancing software. We wrap up with a good discussion from John Mauldin of the current plight in Europe, a nice list of social media timesaver tips for those who are looking to dabble or have become active with social media, and an intriguing article from the Harvard Business Review showing how several companies are beginning to increase their sales and growth activity by eliminating commissions for better results. Enjoy the reading!

Continue reading "Weekend Reading for ... »

As the so-called "fiscal cliff" looms, and the debate continues about whether to solve the country's fiscal woes with tax increases and/or spending cuts, a third option to help the situation is also emerging: do a better job collecting the taxes already due under the laws as they're written now. In the latest such shift, the word is out that the IRS is becoming less and less lenient regarding IRA mistakes, given the significant potential penalties involved - for instance, failing to take a required minimum distribution results in a penalty that is a whopping 50% of the RMD itself, and the penalty for an improper IRA contribution is 6%, per year, potentially accumulating for years on end. And there is potential that the IRS' efforts could extend further, leading to a crackdown on perceived abusive IRA strategies. As a result, clients should be more cautious than ever to comply properly with all IRA rules, including the timely distribution of RMDs, and proper compliance with all IRA contribution and rollover limits, and be wary of aggressive IRA strategies. From the planner's perspective, it's more important than ever to not only help clients comply properly with the rules, but to be cautious about giving accurate IRA advice, or run the risk that if the client ends out with IRS penalties, that the advisor - or his/her E&O insurance - may end out sharing in the high penalty cost to fix the mistake. Continue reading "IRS Crackdown On IRAs ... »

While we often focus on the long-term return of stocks, the reality is that market growth is very uneven, not just due to volatility, but as markets go through long-term cycles called secular bull and bear markets. In the midst of a secular bull market - such as the one that exploded stock prices upwards from 1982 to 2000 - the optimal investment strategy is fairly straightforward - buy-and-hold, buy more on the dips, and dial up the leverage and risk exposure. In the midst of a secular bear market, though, buy-and-hold tends to merely produce the flat returns associated with the overall markets, and instead concentrated stock-picker portfolios, sector rotation, alternative investments, and tactical asset allocation become more effective. Using the wrong strategies in the wrong investment environment can produce poor results - just as many styles of active management generated little to no value and just became a cost drag in the 80s and 90s, so too does buy-and-hold now generate benchmark returns that may do little to achieve client goals. The ultimate key is to match the investment strategy to the market environment, given that such cycles can persist for 1-2 decades at a time. And notwithstanding the fact that a secular bear market has been underway for 12 years, it appears that the secular bear market still has a ways to go - which means its dominant investment strategies still have many more years to shine. Continue reading "How Secular Market Cycles ... »

The long-term care insurance marketplace has struggled tremendously over the past decade, as premiums have risen on both existing and new policies, and companies have become increasingly more stringent in their underwriting process. Over the past two years, however, the pace of change has accelerated, as major players like Prudential and MetLife have stopped offering long-term care insurance entirely. And with the low interest rate environment continuing to persist, a new round of changes is underway, with industry leader Genworth announcing the elimination of both so-called "limited pay" options (10-pay and pay-to-65 policies), and also declaring that it will no longer offer unlimited (i.e., "lifetime") benefits on policies anymore. In point of fact, while Genworth has not been the first or only company to make these changes, it's notable when even the top carrier feels the need to cut back on its exposure to long-term care insurance policies. Ultimately, this is probably not the beginning of the end for long-term care insurance, but it's also not clear if or when clients in the future will ever be able to get policies as "generous" as those offered in the past. Continue reading "Yet More Big Changes ... »

As the world moves inexorably forward into the digital age, technology increasingly takes on a role in both augmenting and competing against traditional businesses. The world of financial services is no exception; in recent years, technology has taken leaps and bounds to augment and enhance what financial planners do, but now a new breed of technology firms threatens to challenge advisors as well. The rise of the so-called "robo advisor" - online startup firms that aiming to replace traditional advisors, as TurboTax did to tax preparers - has begun. But so far, it's unclear whether the current breed of robo advisors will really make a dent in what real advisors do; in fact, the scope of most robo advisors is so narrowly focused on delivering passive, strategic, low-cost index portfolios, that arguably their greatest competition is not from comprehensive financial planners but instead from do-it-yourselfer alternatives like Vanguard and Charles Schwab! The real test for the robo advisors, though, is the one they have not yet faced - will clients really be willing to stay the course through turbulent markets and change their behavior for the better because a computer told them to do so? Continue reading "Why Robo-Advisors Will Be No ... »

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with an interesting article by Bob Veres, suggesting that most advisors may be undercharging their clients, by as much as 50%! From there, we look at a number of practice management articles, including a nice piece from Bill Winterberg about using online video, the shift to a more 'conversational' approach to marketing, a strongly-worded article from Mark Tibergien suggesting that women are NOT a practice niche, and an article highlighting the recently enacted 408(b)(2) fee disclosure rules for retirement plans (is your practice in compliance?). We also look at a number of investment articles this week, including one from Dan Moisand questioning the use of many types of "alternatives", another from Ed Easterling of Crestmont Research suggesting that we may still be in the early stages of the secular bear market (a nightmare for Wall Street and the advisory world?), and an intriguing article in the Journal of Financial Planning showing how guaranteed products may deserve less of an allocation after adjusting for their credit and illiquidity risks. We wrap up with two interesting policy articles - one about healthcare "myths" we must confront to move forward with reform, and another exploring how government policy decisions might be better shaped with input from behavioral scientists - and close with a nice light article from Morningstar Advisor with "23 Best Practices" tips for planners to implement. Enjoy the reading!

Continue reading "Weekend Reading for ... »

Using newsletters for drip marketing has long been a cornerstone of marketing for financial planners. However, the newsletter process itself is relatively inefficient - costs of production can be high if it's printed, the process of building a distribution list is slow, the content often cannot be effectively shared, and there is no means for someone to find and access the content if they aren't already on the mailing list. By contrast, operating a digital blog has no printing cost, has content that can be distributed on multiple digital channels, can easily be shared by readers and prospects with others, and can even be found by search engines without any further effort from the planner. The challenge, of course, is that a blog requires content - yet the reality is that for firms already producing a newsletter, the content is already being created. In which case, the blog is simply a more efficient way to get the content out there and drip market to a growing a list of prospective clients! Continue reading "Why Blogging Will Replace ... »

With the looming "fiscal cliff" at the end of 2012, a wide range of tax increases are scheduled to occur at the start of 2013. One of the most dramatic is the treatment of dividends, which will nearly triple from a current maximum rate of 15% to a top rate of 43.4% (or higher when accounting for high-income phaseouts). In the case of small business owners with closely-held C corporations, this presents a unique planning opportunity, because the client can actually control the timing of dividends, choosing to extract cash and profits from the business by the end of 2012 instead of waiting for 2013 and beyond. And given the magnitude of the scheduled tax increase, it may well make sense to do so. While some clients may at least adopt a wait-and-see approach until the election and potential end-of-year tax legislation, the reality is that it's prudent to at least begin planning now - because getting this "wrong" for a business with $1,000,000 of accumulated profits could cost the client a whopping $284,000 in lost taxes! Continue reading "The End Of Qualified ... »