After completing the public comment period, NASAA has just implemented a new “Model Rule” that will require investment advisers to adopt a “Business Continuity and Succession Plan” for the RIA practice. Notably, the rule would apply only for state-registered investment advisers, although the SEC has recently announced it is considering a parallel rule for SEC-based RIA firms as well.

The ultimate requirement of the Model Rule is that advisors would be required to establish a written plan about how they will handle the transition of everything from books and records of the firm, to ongoing servicing of clients (or at least, an orderly wind down), along with an alternate means of communicating with clients, in the event of either a natural disaster, or the unexpected death or disability of the advisor. In other words, how will the RIA fulfill its fiduciary duty and ensure continuity of service for clients, in light of recent natural disaster events like Hurricanes Katrina and Sandy, or the simple fact that with a sole proprietor advisor the clients might not even know the advisor had passed away and that no one was looking after their assets anymore!

Ultimately, the Rule will not actually have the force of law until it is adopted by individual states in the coming months, but nonetheless the pressure is on now for advisors to begin to prepare their written plan, which state examiners will likely want to see the next time the RIA is audited.

Fortunately, many of the continuity provisions can realistically be achieved by adopting cloud-based services that have a robust backup and disaster recovery process of their own. However, the requirement for “[unexpected] succession planning” in particular may be a challenge for many advisory firms, who must ensure continuity for clients (or at least an orderly wind-down) but may not want to sell the practice now. Will NASAA’s new Model Rule spawn an increase in the number of providers who offer an “exit planning” arrangement for advisors who do want to remain in their practice, but need a continuity solution in the event of death or disability?

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Monday, April 27th, 2015 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 the announcement that NASAA has finalized its model rule that, as states adopt the rule, will require state-registered investment advisers to create a written "succession" plan for their business.

From there, we have a number of practice management articles this week, including: strategies to effectively delegate tasks to staff; why it's best to build out the staff infrastructure supporting your advisory firm by building roles around people, rather than trying to fit people into roles; a profile of several advisory firms that have been successful in creating a strong culture that supports the firm; a guide of what to do if you find out you're being terminated by your broker-dealer; and a look at where advisors get their best ideas (from peers and conferences) and how they create the accountability to follow through on them (using coaches and study groups).

We also have a few marketing-related articles, from a look at how being less available to prospective clients can actually help to close them, to strategies to invoke an emotional connection with prospective clients to get them interested in doing business with you, and a discussion of how the world of wealth management is changing as the (younger) emerging affluent have different expectations of what they'd like to see in a "good" wealth management service in the first place.

We wrap up with three interesting articles: the first looks at some of the ways that investment advisers misreport investment performance (from skewed benchmarks that create an illusion of alpha to buying premium bonds that make yield appear higher than it will be over time); the second is a message from a Millennial working in financial services about how mismatched most of today's providers are to the true needs and desires of younger investors; and the last looks at the CFP Board's public awareness program after nearly five years, and the progress the CFP Board is really making in advancing awareness of the CFP marks.

Enjoy the reading!

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Friday, April 24th, 2015 Posted by Michael Kitces in Weekend Reading | 20 Comments

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CE quiz will become available at the end of the month,
once CE credit is approved by the CFP Board.

Asset Location For Stocks In A Brokerage Account Versus IRA Depends On Time Horizon

In an environment where generating portfolio alpha is difficult, strategies like managing assets on a household basis to take advantage of asset location opportunities to generate “tax alpha” are becoming more and more popular. The caveat, however, is that making effective asset location decisions is not easy, either.

For instance, while the traditional “rule of thumb” for asset location is that tax-inefficient bonds go into an IRA, while equities eligible for preferential tax rates go into a brokerage account, the reality is that for investors with long time horizons the optimal solution may be the opposite. Once stock dividends and portfolio turnover are considered, the ongoing “tax drag” of the portfolio can be so damaging to long-term returns that placing equities into an IRA may be more efficient, even though they are ultimately taxed at higher rates!

In fact, it turns out that almost any level of portfolio turnover will eventually tilt equities towards being held in IRAs given a long enough time horizon (and especially while today’s low interest rates result in almost no benefit for bonds to gain tax-deferred growth inside of retirement accounts). Which means in the end, good asset location decisions depend not only on returns and tax efficiency, but an investor’s time horizon as well!

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Wednesday, April 22nd, 2015 Posted by Michael Kitces in Investments | 18 Comments

For any service professional, time is the ultimate constraint. There’s just only so many hours you can work and deliver your services, before you run out of time. For those who own their service business – like many financial planning professionals – that capacity is even further limited by the time it takes to run and manage the business as well, not to mention finding the clients who will pay for your time.

As a result, maximizing your economic value as a professional is all about maximizing the value of your time. In the early years of a practice, there’s more time available than clients to service, so the focus is simply on getting more clients to work with in the first place.

Yet eventually, an advisor hits the capacity wall, and suddenly the growth of the business stalls. At that point, the only way forward is to either get paid more for the time (e.g., by improving your expertise and skillset), or figure out how to free up time through delegation and using technology to make the business more efficient.

Ultimately, though, focusing on the economic value of your time itself can actually be an effective guide in how to maximize its value. By recognizing the value of your time, it becomes easier to judge the value of technology tools for efficiency, what tasks to delegate, and what you need to do to ensure that you spend all of your time focusing on your highest and best (and most valuable) use!

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Monday, April 20th, 2015 Posted by Michael Kitces in Practice Management | 19 Comments

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the big news that the Department of Labor has released the latest update to its proposed fiduciary rule, which would expand the scope of ERISA fiduciary rules to IRA rollovers and require advisors (including brokers acting as such) to act in the best interests of their clients, but does not necessarily limit the nature of the compensation those advisors can receive and permits commissions to continue as long as they are paid pursuant to implementing best-interest advice. Perhaps not surprisingly, fiduciary advocates are saying the new rules may be too weak, while the brokerage industry is already objecting the new rules would be too stringent.

From there, we have a number of technical planning articles this week, including a look at the latest rules for income-based repayment (IBR) and public service loan forgiveness (PSLF) options for those with significant (Federally-based) student loan debt, a look at the new once-per-year IRA rollover rules that took effect at the beginning of January, a review of the Windfall Elimination Provision (WEP) rules that can reduce Social Security benefits for those who receive a pension based on "non-covered" earnings (i.e., wages not taxed under the Social Security FICA system), and some of the compliance and practical issues that advisors must consider as clients age and potentially face cognitive decline and diminished (financial and other) mental capacity.

We also have a couple of technology-related articles, including a look at Orion Advisor Services and some of its recent initiatives, a discussion of the latest research on cybersecurity risks in financial services and how safe client assets really are, and a broader overview of the major trends currently underway in technology providers for financial advisors (from M&A activity to an explosion of robo-advisor-for-advisors solutions).

We wrap up with three interesting articles: the first looks at some recent market research on how advisors advertise their services, suggesting that the "traditional" views like lighthouses and walks on the beach may feel nice and comforting to consumers, but are failing to differentiate advisors or generate much interest for consumers to explore further; the second is a somewhat amusing look at the "bubble in bubbles" as the "bubble" label is increasingly applied to everything from actual potential bubbles (which are rare) to anything that might just be overvalued or is even just a short-term fad; and the last is a look at how regardless of the ongoing potential for regulatory reform about the standards to which advisors are held, that perhaps the primary elephant in the room to address is simply the confusing ways that (genuine) advisors, insurance agents, and registered representatives all hold out to consumers as "advisors" instead of requiring them to use more accurate titles and labels to describe what they actually do.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including major new updates to the Grendel CRM the announcement by Schwab that its "robo-advisor" platform Schwab Intelligent Portfolios already has $500M of AUM, highlights of a recent review of Orion Advisor Services, and the LinkedIn acquisition of popular app Refresh.

Enjoy the reading!

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Friday, April 17th, 2015 Posted by Michael Kitces in Weekend Reading | 12 Comments

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CE quiz will become available at the end of the month,
once CE credit is approved by the CFP Board.

Liquidate Appreciated Securities Tax-Free For College Funding By Avoiding the Kiddie Tax

The “kiddie tax” rules were created to limit the ability of families to save on taxes by simply shifting income – especially investment income – from higher-income family members (like parents) to lower income family members (such as children) to take advantage of their lower tax brackets.

Yet while the kiddie tax rules are unavoidable for young children, it is often possible to avoid their reach for college students, who are not subject to the kiddie tax if they also generate enough earned income from wages and self-employment, or choose to attend school part time.

Of course, working to generate income should hopefully be its own reward, but by avoiding the kiddie tax, parents can subsequently gift (or liquidate previously gifted) appreciated investments, and allow the child to take advantage of what is currently a 0% Federal tax rate on long-term capital gains for those in the bottom two tax brackets. Repeated over the span of several years, this can add up to a material amount of tax savings for the family, especially when coupled with other tax savings opportunities of a financially-self-supported child, including a larger standard deduction, personal exemptions, and the American Opportunity Tax Credit!

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Wednesday, April 15th, 2015 Posted by Michael Kitces in Taxes | 14 Comments

For the second time in just three years, yet another leader of the CFP Board’s Board of Directors has resigned – this time, it’s Chair-Elect Joseph Votava, who is stepping down to dedicate more time to his financial planning practice and his two new grandchildren.

And what’s odd is that while it does happen from time to time that a volunteer leader changes his/her mind about the commitment to leadership, Votava has a 20+ year history of volunteer leadership, as a former chair of the IAFP in the final year before its merger to become the FPA, a chair of the NEFE Board of Trustees, and more. So why would a veteran leader of the financial planning profession choose to capstone his volunteer career with an abrupt resignation as the Chair-Elect of the CFP Board, and was the CFP Board was trying to bury the announcement by quietly revealing it in the second paragraph of its monthly update email?

In fact, Votava’s resignation marks just one of a string of high-profile departures of CFP Board staff and volunteer leadership in the past two years, including its Director of Investigations, its Managing Director of Legal, and the lead counsel of its ongoing lawsuit with the Camardas. Which ultimately raises the question – was Votava’s decision really just triggered by a change of heart and a desire to spend more time with family, or is the reality that there is still trouble brewing with the Camarda case, and no one wants to be in the position of responsibility when the final verdict comes?

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Monday, April 13th, 2015 Posted by Michael Kitces in Industry News | 8 Comments

While the launch of direct-to-consumer “robo-advisors” hasn’t exactly disrupted the existing AUM of (human) financial advisors, the technology tools of robo-advisors have done much to highlight the inferiority of many of the technology solutions available to advisors today. So much, in fact, that a number of robo-advisors are beginning to pivot and offer their tools for advisors to use with their own clients.

This robo-advisors-for-advisors trend, though, raises interesting questions about how exactly advisors should position themselves and their own value proposition. What is the value of an advisor offering a largely self-service automated investment solution? Is it still in portfolio design and investment selection? Or managing the behavior gap? Or simply an opportunity to focus on other financial planning advice and value-adds instead? And does a robo-advisor-for-advisors solution support AUM pricing, compress it, or force advisors to unbundle instead?

Ultimately, it seems that the adoption of robo-advisor solutions will vary depending on the nature of the advisory firm. For newer startup advisors, the robo-advisor trend may simply be an opportunity to build a more efficient firm from scratch, especially in a world where many investment custodians aren’t welcome of new advisors with no AUM anyway. For other financial-planning-centric advisors, the robo-advisor platforms may simply be a new form of TAMP solution with superior technology. And for existing investment management and wealth management firms, the end point for robo-advisor platforms may be a form of marketing and “feeder” system for clients below the firm’s minimums to start themselves, and then “graduate” to higher level services of the firm as their investment assets, net worth, and financial complexity grow. Though in the long run, robo-advisors that continue to iterate towards new ways to implement investment management through technology – such as Indexing 2.0 solutions – may ultimately present the potential for advisors to offer clients entirely new and previously unseen investment solutions to clients!

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Monday, April 13th, 2015 Posted by Michael Kitces in Technology & Advisor FinTech | 24 Comments

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the launch of a new "outsourcing" partnership between Fidelity and FirstPoint Financial (a subsidiary of Mariner Holdings), where advisors can refer clients below their asset minimums to be invested and receive financial planning advice... for which the advisor can be paid a referral/solicitor fee of 35bps.

From there, we have a few interesting investment articles this week, including: an in-depth look at the various ways to invest in an S&P 500 index fund and how not all mutual funds and ETFs are the same; a look at whether legendary value-investor Benjamin Graham would have been a supporter of index funds (hint: yes!); a discussion of how, after several years of poor performance, this may be a breakout year for actively managed US equity funds because the necessary three preconditions for them to excel are present (at least after the first quarter); and an overview of the rapid rise of "liquid alternatives" as the hot new asset class, even though the reality is that most are actually not a new asset class at all but merely an active manager trading existing asset classes!

We also have several practice management articles, from a look at using client advisory boards to gather better feedback from clients to improve your practice, to the idea of using a "positioning statement" to explain why your business is unique/different instead of an elevator speech, to ways to find and leverage interns in your practice, and a wide-ranging interview in the Journal of Financial Planning with Caleb Brown of New Planner Recruiting about the current state of hiring, career tracks, and new financial planners entering the industry.

We wrap up with three interesting articles: the first explores how over the past 15 years, the number of jobs doing routine work has been in steady decline as technology and automation take over, but job growth continues to be robust for non-routine jobs that can't be easily automated (a bullish sign for financial planners working directly with individual clients!); the second looks at how technology is not only changing the world of financial advice, but also the advice we give to clients, as in the coming years we may no longer need to own cars (thanks to self-driving cars) or spend much on college (thanks to disruption from MOOCs) and estate planning could become a 5-generation-affair if longevity increases continue; and the last looks at a study of some of the common characteristics of the most successful advisors, including their focus on not only business goals but also the development of the team that supports them.

Enjoy the reading!

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Friday, April 10th, 2015 Posted by Michael Kitces in Weekend Reading | 18 Comments

Get CFP CE Credit for reading this article!

CE quiz will become available at the end of the month,
once CE credit is approved by the CFP Board.

Valuing Social Security Benefits As An Asset On The Household Balance Sheet

As a guaranteed income stream that cannot otherwise be liquidated or reinvested, most retirees don’t think of their Social Security benefits as an asset. Nonetheless, its value actually can be calculated, given known payments and reasonable assumptions regarding interest/growth rates and life expectancy.

And in fact, the payments are significant enough that it would take several hundred thousand dollars just to replicate the average Social Security retirement benefit for an average life expectancy. For many retirees, that would be a material portion of their total net worth, it not the largest asset on their balance sheet!

Yet unlike most other assets, the value of Social Security is uniquely impacted by its assumptions… where unlike traditional assets, the value is actually higher when inflation rises, and is greater when interest rates are low. As a result, viewing Social Security as an asset actually reveals that it is a highly desirable asset for a retiree, uniquely capable of hedging many risks in retirement that traditional portfolios cannot… and making it all the more appealing to preserve the Social Security “asset” for its diversification by delaying benefits as long as possible!

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Wednesday, April 8th, 2015 Posted by Michael Kitces in Retirement Planning | 41 Comments

Michael E. Kitces

I write about financial planning strategies and practice management ideas, and have created several businesses to help people implement them.

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Wednesday, April 29th, 2015

*Future of Financial Planning in the Digital Age *Estate Planning in 2015 & Beyond *Generating Tax Alpha with Effective Asset Location @ FPA Greater Phoenix

Monday, May 4th, 2015

*Future of Financial Planning in the Digital Age @ Private Event

Wednesday, May 6th, 2015

Understanding Longevity Annuities & their Potential Role in Retirement @ Private Event