kitces.com | Nerd's Eye View - Comments

Stephen Wershing: State Farm backs away from CFP designation

nospam@example.com (Stephen Wershing) — Tue, 10 Feb 2009 12:57:29 -0500

Michael, I am troubled by the direction I see some organizations taking in response to the Board's interpretation, and worry the Board may also begin moving the same way. I agree the "two-hat" approach is fundamentally flawed - clients cannot and should not be expected to keep straight what the responsibilities are under the two different roles. Like keeping track of the pea in the "two-shell" game. But I worry that the desire to keep to a fiduciary standard will begin precluding commission business for anyone carrying the CFP designation. I have a hybrid practice. I charge for planning. And all my serious investment accounts are managed for a fee. And there are plenty of times the right solution for my client lies squarely in the commission domain. Life or health insurance. 529 plans. Small Roth IRAs for children of clients. Some bond ladders. Can I find solutions in the no-load environment for most of these needs? Sure. But generally it is just plain more effective to pull them from the commission environment. I disclose the costs to the client, and the money that will come to my organization as a result. Sometimes, if the costs or income are large, I offset fees. The client is in a position to make an informed decision. Losing that ability to maintain my designation will not serve the clients' best interests.

Sam H. Fawaz: FPA Slashes Away - At Staff and Conference Prices

nospam@example.com (Sam H. Fawaz) — Wed, 04 Feb 2009 23:31:30 -0500

At $225, I went back and looked at the agenda of the FPA Business Solutions Conference and I still don't see much in the way of compelling content or enough of the speakers I want to see. When you add in the time and out-of-pocket costs of going to suburban Chicago in the cold weather, those are more strikes against it (plus they didn't invite me to speak ). And Bill makes good additional points above. I'll be skipping this one, although I just renewed my membership despite the price increase.

Bill Winterberg: FPA Slashes Away - At Staff and Conference Prices

nospam@example.com (Bill Winterberg) — Mon, 02 Feb 2009 12:19:50 -0500

Hi Michael, FPA Business Solutions has tough competition from other technology-oriented conferences. NAPFA ran a tech conference in Las Vegas back in October 2008 and it was less than $200 for 2 days of dual-education tracks plus vendors. Then this month, the T3 conference (the Technology Tools for Today) spearheaded by David Drucker and Joel Bruckenstein heads to Dallas, TX. Its registration is also very competitive at $325 (less for members of FPA DFW). So Business Solutions is struggling to remain price-competitive for the type of content it delivers. I'm happy to see the price reduction, because $800+ was too much compared to the others.

Pat: IRS Expands Investment Flexibility for 529 Plans - For 2009 Only!

nospam@example.com (Pat) — Thu, 08 Jan 2009 13:00:43 -0500

Is there any hope on the horizon to be able to use 529 funds to pay off student loans? We would like to be able to wait to use our 529 since it has lost so much in 2008.

Rathna: A new way to promote visibility for a fiduciary standard?

nospam@example.com (Rathna) — Wed, 31 Dec 2008 04:04:07 -0500

I think this is the most simple way to bring visibility to the issue, and Yes,this be the right way to make the call for fiduciary standards better heard in Washington.

Bob: IRS Expands Investment Flexibility for 529 Plans - For 2009 Only!

nospam@example.com (Bob) — Fri, 26 Dec 2008 12:32:43 -0500

Why doesn't the IRS remove the income limitation for Coverdell accounts? Why the emphasis on 529 plans where the tax benefits are geared toward the wealthy. Parents should have investment flexibility, low cost alternatines and not limited to 529 plans that have high administrative cost, state controlled investment options and limited switching flexibility...Twice a year! In Fact, think about it, why do we need 529 plans? An unrestrictive Coverdell would be better for most of us.

Jonathan Leidy: IRS Expands Investment Flexibility for 529 Plans - For 2009 Only!

nospam@example.com (Jonathan Leidy) — Wed, 24 Dec 2008 15:15:16 -0500

Michael, Good point RE: the added trading opportunity. I too feel it is not very valuable. On a separate yet related note, you mention age-based or target-date investments as perhaps the most attractive option for 529s. Those funds have come under fire lately for being less effective at auto-risk reduction than previously thought. Do you have any thoughts about that criticism?

Stephen Wershing: Are We Really Ready for true Standards of Care?

nospam@example.com (Stephen Wershing) — Wed, 29 Oct 2008 07:22:01 -0400

I agree that moving toward a standard of care will bring with it the necessity that recommendations gradually become more consistent across the industry (is that a charitable enough way to put it?) and that we all would become more accountable to our recommendations. I do not believe that it means moving toward a model that is as "cookbook" as you fear it might be. The medical example is an extreme one. And not inappropriate, though it does not match the specificity of your financial scenario. If a doctor recommended to the patient you describe "take two aspirin and call me in the morning" his survivors would obviously have grounds for a malpractice case. Your financial example, though, is far more general than that. Translating it into medical terms, it might be more like "I want to lose 10 pounds over the next year" or "I need to bring my cholesterol into a healthy, normal range". And, if this is an acceptable comparison, the medical advice considered acceptable would not be so clear cut. Any one of a range of recommendations would fall well within professional guidelines. Everyone might agree that exercise was an important part of a treatment plan, but how much and what type would be open to professional discretion. And recommendations for diet could be all over the map, with different regimens relying on significantly different and even somewhat contradictory research studies. (Does fat intake really matter? Would a patient be better of limiting caloric intake or simply watching the balance of proteins and carbs?) For extreme examples, I think there are generally accepted standards in investing just like in medicine. If the client has set aside $40,000 for college and the tuition is due in 6 months, I think we can all agree that any investment besides cash is irresponsible. For other situations in which more variables may come into play, there are a range of possible recommendations, both in planning and in medicine. I think this direction is productive, and a necessary one if we are to move more in the direction of becoming a profession.

Eric: Is the Safe Withdrawal Rate too safe? Or too aggressive!?

nospam@example.com (Eric) — Tue, 14 Oct 2008 21:42:57 -0400

I authored a spreadsheet, TIP$TER, which I've hosted at www.prospercuity.com, that takes mortality rates into account in estimating shortfall risk. TIP$TER is a valuation-based monte carlo simulator. It asks the user to enter the "expected risk premium" for a broad stock market index. Logically, the more richly stocks are valued, the less the expected risk premium. TIP$TER also compares the retirement expenditures that a simulated equity portfolio would be likely to sustain with the retirement expenditures a 100%-TIPS portfolio (in tax-sheltered vehicles like IRAs or 401Ks) would sustain. This, I believe, provides some very helpful insight. Often, retirees are advised to invest aggressively, but spend defensively (e.g., a 4% or less SWR), even though it would require the retiree to live a more frugal lifestyle than a 100%-TIPS portfolio could sustain.

Vig Oren: Is the Safe Withdrawal Rate too safe? Or too aggressive!?

nospam@example.com (Vig Oren) — Tue, 30 Sep 2008 20:44:55 -0400

I continue from my post above [mentioning Moshe Milevsky’s Retirement Ruin Formula (RRF)] Mike wrote above: “It's worth noting that Russell's work is still only hypothetical, although there is a FASCINATING RETIREMENT CALCULATOR based on his work that projects the safe withdrawal rate in any particular valuation environment.” The calculator can be seen at this site: http://www.passionsaving.com/stock-valuation.html Question: if we could use the calculator to enter a probability distribution for the expected portfolio return, into Moshe Milevsky’s RRF, wouldn’t we achieve a more accurate retirement ruin prediction? Explanation: In the formula for the retirement ruin probability, the parameters are:  Portfolio’s expected return (take from the calculator)  Investment volatility (SD) [doesn’t change much over time for same allocation]  Mortality rate (from probability distribution)  Initial nest egg $s per dollar of desired spending For those unfamiliar with the formula please check this report: http://www.qwema.ca/pdf_research/2007JULY_RRQ.pdf

Vig Oren: Is the Safe Withdrawal Rate too safe? Or too aggressive!?

nospam@example.com (Vig Oren) — Mon, 29 Sep 2008 15:27:59 -0400

. . . Hi Mike, what’s your take on the two recent articles in the SEP 2008 FPA Journal: "When Should Retirees Retrench?" By Gordon Pye Link: http://www.fpajournal.org/CurrentIssue/TableofContents/WhenShouldRetireesRetrenchLaterThanYouThink/ And "Data Dependence and Sustainable Real Withdrawal Rates", by the Blanchettts Link: http://www.fpajournal.org/CurrentIssue/TableofContents/DataDependenceandSustainableRealWithdrawalRates/ Also, why your discussions so far, relate to SWRs from a portfolio without references to the investors' withdrawal horizons such as per Moshe Milevsky’s Gamma Distribution "Retirement Ruin formula?"

Doug Keegan: Is the Safe Withdrawal Rate too safe? Or too aggressive!?

nospam@example.com (Doug Keegan) — Tue, 23 Sep 2008 16:40:56 -0400

Michael, Very interesting. And if I could add another wrinke here, during this time of horrible stock market returns since 2000, we have had rising inflation as well! This combo makes it extremely tough. Even Bengen talked about this combo back in 1994. We know that stocks underperform during inflationary times. I know that some will argue that we are not in an inflationary period, but I ask: can you really trust government headline inflation? Apart from that, if you take a look at the type of inflation retirees face, there is no question that perhaps we overestimate "real" returns for this cohort. For example, seniors typically do not buy the types of products and services that experience "deflation", like consumer electronics etc. Instead, they spend their money on products and services that tend to experience high inflation, like medical care, etc. To account for this, as you know, most retirees just spend less in other areas. In other words, the assumption is that retirees just rearrange their basket of consumption. I think it is more realistic to treat these high inflationary items more as a "tax" that people have to pay in addition to maintaining their regular consumption. I'm just talking off the top of my head, but it seems to me that if you are experiencing high inflation in food and energy (the staples) while at the same time experiencing high inflation on other items, the reusult will be a reduction in purchasing power over time and that the compounding long-term effect of that will be devastating, particularly during a period of low stock market returns (and I may add, low fixed income returns!). Doug

Vig Oren: Using average cost accounting for Exchange-Traded Funds?

nospam@example.com (Vig Oren) — Sun, 14 Sep 2008 11:37:37 -0400

Thanks Mike for the report. I have entered a link to it at Index Universe website.

Dylan Ross: The plight of the independent RIA

nospam@example.com (Dylan Ross) — Wed, 27 Aug 2008 12:25:53 -0400

Michael, thanks so much for bringing stuff like this to the attention of the financial planning community through your blog. You are often the initial source for topics that I might not have otherwise become aware of, and this is one of them.

Bill: Is the Military Leading the Cutting Edge of Financial Planning?

nospam@example.com (Bill) — Wed, 20 Aug 2008 11:19:58 -0400

The Personal Financial Counselor Network is a good attempt of connecting our men and women in the armed forces with financial planners. I'm somewhat skeptical what the level of interest will be from qualified financial planners. You make a good point that the compensation is below the median of that earned by experienced planners. Will the charitable and altruistic aspect of this program attract the numbers of needed qualified planners to the program? I'd like to think so, but I think the reality will be that the program simply cannot pay enough to planners. Bill - FPPad.com