Kitces | Nerd's Eye View

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with a fascinating interview with Ron Rhoades where he shares his thoughts about the history of fiduciary and regulation of financial advisors, with some surprising insights, and also look at the recent back-and-forth between incoming FPA CEO Lauren Schadle and American College CEO Larry Barton about the CFP marks and whether there should be one designation for financial planning. From there, we look at a few good articles from Advisor Perspectives, including a list from Bob Veres of the top ten faulty assumptions in financial planning, and a good article by Joe Tomlinson looking at how safe annuity companies are. There are a few retirement articles as well this week, including a look at the "critical path" approach to setting a threshold for when clients can and cannot afford to take risk, a new framework for evaluating various retirement income strategies and alternatives, and an article looking at how disability can threaten retirement success yet may be neglected by advisors (especially for their female clients). There's also an article that presents a good discussion about risk (and the difference between risk and uncertainty), and the latest from John Mauldin showing some surprising employment trends (older workers are actually taking job market share from younger workers!). We wrap up with two very interesting articles - one looking at the dynamics between patients and doctors in providing recommendations that has some striking parallels for what we do as financial planners, and the other exploring some surprising research that demonstrates we actually value the potential for future success more highly than a demonstrated track record of prior success (which may help to clarify why many clients are always so attracted to the next great thing, even when the current thing is working just fine). Enjoy the reading!

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As the baby boomers move inexorably closer to retirement, many have lamented the plight of the generation, which appears to have dramatically undersaved and therefore is ill prepared for retirement. Yet the reality is that given how spending fluctuates through the working years - especially when raising a family - it may be entirely normal for couples to save less during the bulk of their working years, and instead save substantially in just the final years before retirement when the cost of raising children winds down. In turn, savings in the early years can actually be less effective than reinvesting into the individual's "human capital" and increasing lifetime earnings.  And in such an environment, the real issue is not effectively saving in the early years, but instead is to proactively manage spending to ensure it does not ramp up too rapidly in the later years. Combined together, this suggests that the reality may be that back-loading retirement savings into the final years before retirement doesn't mean baby boomers are "behind" but instead that they have been following a remarkably normal and even "optimal" path! Continue reading "Are Baby Boomers Actually ... »

As financial planning practices grow and become more focused, they generally establish a minimum for new clients. Depending on the nature of the firm, that might be a minimum of investment assets, a minimum net worth, or simply a minimum fee amount; the fundamental purpose is to ensure that the firm can generate an appropriate minimum amount of revenue per client to maintain its financial viability and profitability given its costs. Yet many firms do not actually state their minimums on their website or other marketing materials; instead, advisors wait until a prospect comes in to the firm for a first meeting or "approach talk" and then assess on the spot whether the potential client is "qualified" to work with the firm. While this may seem like it makes the process easier and affords the ultimate flexibility for the advisor to make a judgment call about whether the prospect is a good fit, the reality is actually the opposite. It's an extremely expensive and wasteful process for the firm, it discourages new prospects from contacting the firm, and perhaps worst of all, it makes referral sources less willing to refer prospects at all! Continue reading "3 Reasons Why Your Minimums ... »

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with a number of surprise announcements in industry news, including the early retirement of FPA CEO Marv Tuttle due to family reasons, the decision by incoming NAPFA chair Ron Rhoades to resign his leadership position due to a compliance infraction, and a letter by the CFP Board to the Consumer Financial Protection Bureau suggesting the creation of a ratings system for advisor designations and certifications to help reduce elder abuse. We also look at an article explaining some of the upcoming changes with the CFP Board's new sanction guidelines, a discussion from Advizent's Steve Lockshin about how all advisors must help to raise the industry's low minimum standards, and the conclusion of the Investment Advisor/ActiFi study examining how advisors are being served on practice management issues. Wrapping up, there's an(other) article on the rise of the so-called "Robo Advisors", a discussion of how some stress in your business can actually be a positive but it's important to handle the stress so it doesn't become too much, and a technical discussion of some of the unique tax burdens of MLPs, along with a look at how advisors are adjusting investments for a potential inflationary cycle, and a striking article from Texas Tech's Michael Finke about how aging of the brain may reduce financial literacy in later years. Enjoy the reading!

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"Save a healthy portion of your income every year from the start of your working years to the end" is a standard of retirement planning advice. Although we may debate about whether the exact number is 10%, 15%, or 20%, or more, the focal point is the same - as long as you save a sufficient portion of your income, you'll have enough savings to fund your retirement. However, it can actually be even more effective to not save in the early years, and instead invest in one's "human capital" by trying to boost earnings instead of the retirement account balance. In order to make this work, though, it's crucial to keep future spending from rising as fast as future income. Consequently, the reality is that maybe baby boomers are "behind" in their retirement savings not because they failed to save a percentage of their income, but instead because saving "just" a percentage of income allowed them to consume the rest and increase their spending to unsustainable levels. In turn, this suggests that in the future, the better path to retirement success may not be to save a flat percentage of income every year, but instead to target an appropriate standard of living, raise it conservatively, and save all the rest, however much that may be! Continue reading "Is A Goal To Save A ... »

You have an appointment with a client who has already elected Social Security and now realizes he has made a mistake. Whether because he didn’t think about how his election would affect his spouse, or he was unaware of the options, or for some other reason, he has now changed his mind. What are his options? While the so-called "Social Security withdraw and reapply" option is mostly gone as a strategy, there are actually still several ways to "undo" benefits, including choosing to pay back benefits within the first 12 months, going back to work to deliberately cause the Social Security Earnings Test to apply, voluntarily suspend benefits after full retirement age, or adjust the timing that a spouse starts benefits.  Continue reading "Options For When Your Client ... »

For the first time in almost 20 years, the CFP Board has proposed a broad range of changes to the CE requirements that apply to all CFP certificants. The new rules would include an increase in the total number of CE credits required from 30 hours every 2 years up to 40 hours, an increase in the required Ethics education from 2 hours to 4 hours (but half of those hours can be earned from general ethics content, not only "ethics" content on the CFP Board's own Standards of Professional Conduct), and the opportunity to earn up to 4 hours of CE credit from pro bono services and/or practice management content. The changes under consideration address virtually every area for which the CFP Board has been criticized in recent years, although some areas - notably, CE credit for practice management - will be debated more actively than others. At this point, the proposed changes are only a proposal - and open for comment - but unless significant objections arise, it seems likely that these new requirements could be in place as soon as next year!

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Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with an interesting idea from Don Trone - that as the fiduciary standard gets codified by regulators, it will be diminished, and that the next gold standard beyond fiduciary will become "stewardship" to raise the bar again. From there, we look at an article discussing how the wirehouses are rebuilding their training programs into something that looks a lot like what many independent planning firms would do (but with much larger numbers!), a discussion of some lesser known tools and resources for the investment aspects of a firm, a review of a new software package that estimates client health care expenses in retirement, a summary of the tax law changes coming with the fiscal cliff at the end of the year, and a very personal story of how one financial planner got a first-hand look at the value of having proper documents regarding end-of-life medical care after her brother was diagnosed with pancreatic cancer. There are also a number of interesting investment and economic articles out this week, including Mauldin's latest where he suggests that Europe may not break up (Plan A) nor unify (Plan B) in the coming years but instead will take a slower crisis-by-crisis approach (Plan C) to eventually grind towards unification, an article from GMO suggesting that "reports of the death of equities have been greatly exaggerated" (in response to the recent Bill Gross article) and looking at the components of equity returns, and some fresh research from the New York Fed suggesting that municipal bonds actually may default at a far higher rate than most believe (but the ones defaulting may not be the ones your clients own). We wrap up with two lighter articles, one by financial planner Carl Richards about how we could probably all stand to purge some of the stuff from our lives (good advice for both our clients and ourselves!), and the other discussing the value and importance of a good night's sleep and how our sleep patterns as a society have changed dramatically in the past century. Enjoy the reading!

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As retirees and their planners adjust to the 'new normal' - a world of lower-than-average returns for the foreseeable future, many have questioned whether the historical safe withdrawal rate research is still valid. After all, if returns will be below average in the coming years, doesn't that imply safe withdrawal rates must be below average as well? In point of fact, though, safe withdrawal rates do not depend on average returns in the first place; the worst safe withdrawal rates in history that we rely upon are actually associated with 15-year real returns of less than 1%/year from a balanced portfolio! Accordingly, given current bond yields, dividend yields, and inflation, if the current environment for today's retirees will result in a "new record low" safe withdrawal rate, the S&P 500 would still have to be no higher in 2027 than it was in 2007 or even 2000! On the other hand, merely projecting equities to recover to new highs by the end of the decade or generating a mid-single-digits return would actually represent an upside surprise, allowing for higher retirement spending than 4.5% safe withdrawal rates! Continue reading "What Returns Are Safe ... »

Although operating a business that delivers financial planning services is called a "practice" the reality is that most financial planners do little to actually practice their skills outside of the ongoing work they do for clients. Yet while this is standard in the financial planning world, it seems almost absurd in other contexts; if a professional athlete only practiced during the time that actual games were played, he/she wouldn't last long. In fact, looking at the history of top performers in most fields, from sports to business, shows that those who are most successful have an ongoing process for effortful practice and a deliberate strategy for self improvement. Nonetheless, financial planners do little to hone and practice their own skillsets, especially once meeting the experience requirements for the CFP certification. Is the problem simply that most financial planners, like most people, aren't entirely comfortable with criticism and feedback - even if it's purely constructive - and would rather avoid the situation entirely? Or is there some other reason why financial planners don't actually do much to practice? Continue reading "Why Don't Financial Planners ... »

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with a look at the big news on the regulatory front - an expected op-ed article from Congressman Bachus in the Wall Street Journal, just after it looked like the Baucus legislation for an investment adviser SRO was dead. From there, the rest of weekend reading takes a deep dive into a long series of practice management articles, including an article on shifting from AUM fees to retainers by Bob Veres, a look at how financial planners are serving the middle market, an examination of ways to maximize the efficacy of your website besides using social media (through search engine marketing and search engine optimization), a look at how many firms fail because the business owner has a strong vision but fails to communicate it effectively to staff, and the benefits of being involved with a study group. We also look at an article sharing some general "pearls of wisdom" and tips for success, an intriguing look at how the best way to generate more referrals may be to stop asking for them, and a caution not to undervalue the work that you do for clients. We wrap up with two more personal/productivity-oriented articles, one on how scheduling time windows for yourself to do various tasks can improve your efficiency, and another on how it's crucial to always be reading and maintaining intellectual curiosity to be an effective leader in your business (hopefully supported by this weekend reading column!). Enjoy the reading!

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Traditionally in the financial services world, services offering "lead generation" for advisors were typically used to deliver prospects who might want to buy a particular financial services product - not necessarily people who were looking for advice. For consumers who wanted to actually find a real advisor, the primary option was to seek one out through the financial planning membership associations. In recent years, though, there has been a dramatic rise in the number of platforms providing prospective clients for financial planners, following a wide range of business models, from a "registry" of qualified planners to choose from, to companies that give away some basic planning for free in the hopes of drawing some prospects in to go deeper, to advisor review sites. While many remain skeptical about the value of such services, the reality is that the process of "sales" - converting a prospective client into an actual client - is very specific to an individual firm and its advisors, but the process of "prospecting" to find prospective clients is a marketing function that really is much more conducive to size and scale. Thus, while not all the companies competing in this space will be winners - many will likely be gone in a few years - it appears that outsourcing prospecting may be an emerging trend as yet another way for some financial planning firms to get more efficient and grow, especially for firms that don't yet have the size and scale to effectively market themselves.

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Financial planners seem to increasingly agree we may be in a "new normal" - an environment where returns are lower, due to a combination of high market valuation, low interest rates, debt deleveraging, and the associated lower economic growth. Accordingly, it has become increasingly popular to reduce long-term return projections for clients from their historical standards. Yet the reality is that while returns may be reduced for the next decade, it doesn't necessarily mean clients will experience low returns for the entirety of their multi-decade retirement, just as those who retired in prior low-return environments like the 1970s may have had a bad decade of returns but an average or even above-average 30-year result. A better alternative may be to model retirement as a sequence of "investment regimes" - extended periods of time that have specific risk and return expectations, followed by subsequent periods of time that have their own expectations. For instance, instead of reducing 30-year returns, clients might look at the impact of having an average return of 5% for the first half of their return, and 15% for the second half, reflecting the market cycles seen throughout history. Could this actually represent a better way to project the risks and opportunities of retirement and develop appropriate spending recommendations? Continue reading "Are Regime-Based Retirement ... »

In the financial planning world, it's not uncommon to "fire" clients that are especially difficult to work with, not merely because the clients are unprofitable, but simply because they are so unpleasant for you and your staff even if they ARE profitable. In fact, many practice management consultants would suggest it's a best practice to systematically fire some of your most unpleasant clients, as it helps to create a more positive workplace for you and/or your employees. Yet the reality is that often clients who are difficult to work with are also those in greatest need - and in virtually all other helping professions, it's a requirement of the profession to help everyone in need, not just those who are the most pleasant to work with. Of course, the reality is that right now, there aren't enough financial planners to serve everyone out there, but nonetheless it raises the question: is firing the most difficult clients in a financial planning practice a best practice, or a sign of an immature profession?

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Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with a review of the recent legislative shift on investment adviser oversight, suggesting that RIA lobbying was the successful driver that staved off the Baucus bill, and an article from the Journal of Financial Planning examining how the fiduciary standard should be properly applied by financial planners. From there, we look at two articles that challenge the traditional planning world, one suggesting that the next stage of financial planning may shift away from AUM to standalone planning fees (and highlighting a firm that is pushing this trend), and another focusing on some of the ways that financial planning in practice diverges from the theory. We also look at a few practice management articles, one about how young planners are being integrated into firms, another about how firms are getting creative in the benefits they provide to build employee morale and connections, and a third about how older clients and older staff members can diminish the value of a financial planning practice. This week's summary also includes a few technical articles, including one suggesting that HSAs may become less popular starting in 2014 with the new Obamacare-mandated insurance plans, how advisors may start getting questions from clients soon about crowdfunding investment opportunities, and how using a reverse mortgage as a part of a "cash reserve" strategy can boost retirement income sustainability. We wrap up with two recent controversial articles - one from Bill Gross suggesting that "the cult of equities" is dying and exploring the ramifications of a low-return environment, and the other from the Harvard Business Review suggesting that you should never hire an employee who makes grammar mistakes. Enjoy the reading!

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