The first quarter of 2015 has been a record-breaking flurry of merger and acquisition activity in the world of financial advisors, not just amongst advisory firms buying each other, but with acquisitions of the technology companies that serve advisors. In fact, 2015 continues to shape up as a breakout year for advisor FinTech.

The latest news is this week’s announcement that “robo-advisor” LearnVest is being acquired by traditional insurance company Northwestern Mutual for an undisclosed sum. Yet for all the buzz about the robo-advisor movement, the reality is that LearnVest’s business model was actually built around human advisors – it was not a true robo-advisor – and the Northwestern Mutual purchase may have actually been focused more on the software tools that LearnVest built for itself, in particular its Personal Financial Management (PFM) solution.

In fact, with details emerging that LearnVest may have only had a few million dollars of revenue and been far from profitability (or even scaling to profitability) after 6 years of growth, its free PFM app for consumers and supporting integrated planning software for its advisors had a whopping 1.5 million users, giving Northwestern Mutual both a powerful technology tool to leverage across its existing advisor base, and a treasure trove of data on 1.5 million prospective clients to which it can cross-sell financial services products in the future. Which means in the end, LearnVest may simply finish as an example of a company that started out to disrupt the financial services, raised too much capital and created expectations that couldn't be fulfilled, and ended up being sold (out?) as a technology solution pivoted to serve the financial services establishment and its traditional manufacturing and distribution of financial products instead. And now the only question is: which advisor FinTech solution – PFM or otherwise – will be bought out next?

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Thursday, March 26th, 2015 Posted by Michael Kitces in Industry News | 0 Comments

While the Internal Revenue Code does allow those who donate funds to charity to receive an income tax deduction to offset a portion of their income, in practice the two rarely offset perfectly. Income is counted “above the line”, increasing Adjusted Gross Income and impacting a wide range of tax credits and deductions, while charitable contributions only apply for those who itemized deductions in the first place and face further charitable contribution deduction limits. As a result, there is often some “tax slippage” between the two.

In recent years, retirees who have “more than they need” in their IRA have been able to utilize the “Qualified Charitable Distribution” (QCD) rules to donate directly from an IRA to a charity, achieving a “perfect” pre-tax contribution and avoiding any tax slippage. Unfortunately, though, the QCD rules have come and gone several times since they were created in 2006, and after being briefly reinstated at the end of last 2014, the rules for QCDs have lapsed once again for 2015, raising doubt for those who want to do QCDs about how to proceed.

However, as it turns out, the best strategy to handle the uncertainty of whether QCDs will be extended or not is just to do them anyway! At worst, if the rules are not reinstated, the outcome will be no worse than just being forced to take an RMD and making a charitable contribution anyway. However, if the rules are brought back once again, those who make direct charitable distributions from their IRAs will enjoy all the benefits of QCDs… even if the rules are only “fixed” after the fact!

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Wednesday, March 25th, 2015 Posted by Michael Kitces in Taxes | 6 Comments

In a relationship-based service business like financial planning, a lot of work goes on behind the scenes to provide value to clients. On the one hand, this is the whole point of hiring a financial advisor – to delegate at least some of that work to a professional – yet at the same time, when much of the service work becomes invisible “shadow work”, clients may not fully appreciate how much is really done on their behalf.

For existing clients, bringing the shadow work out of the shadows can be as simple as tracking and documenting all the service work done throughout the year, and providing a year-end summary that clearly illustrates just how much the firm has done for them. Yet for prospective new clients, this doesn’t work – it’s not possible to show clients what’s been done when nothing actually has been done yet!

A potential solution to this dilemma is for advisory firms to create what practice management consultant Angie Herbers calls an “annual client service calendar” – a physical document that illustrates all the different financial planning and investment work being done on their behalf, as well as the reports that will be delivered, and the various events the firm makes available to its clients. While the exact details of an annual service calendar will vary by the advisory firm and the services it provides – and may be highly unique for firms with a focused niche clientele – ultimately the goal is simply to turn the “intangible” service work of financial planning into something tangible the client can feel and touch and see, to really understand the value they’ll be getting for the advisor’s cost!

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Monday, March 23rd, 2015 Posted by Michael Kitces in Practice Management | 11 Comments

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the big announcement from SEC chairwoman Mary Jo White that she intends to have the SEC push forward on a uniform fiduciary standard for brokers and investment advisers, nearly 5 years after Dodd-Frank legislation originally authorized the SEC to do so. Of course, the devil remains in the details of what will or will not come forth as the SEC begins its own prospective rulemaking process in the coming months and years.

From there, we have a number of practice management articles this week, including a look from Investment News at how some of the largest ($1B+ AUM) advisory firms seem to be getting more profitable and successful (and growing even faster) as they get larger, a discussion of how increasingly advisory firm owners are attending conferences not for educational content but as an opportunity to network for advisor recruiting, and the issues to consider when deciding whether or not to adopt account aggregation software in your practice.

We also have several more technical articles this week, from an interview with economics professor Laurence Kotlikoff on his new Social Security planning book "Get What's Yours", to a discussion of how long-term care insurance may change as premiums continue to rise and emerging studies find that consumers are more likely to need long-term care than previously thought but the typical duration of claims is actually far shorter than once believed (averaging less than 1 year for men and under 1.5 years for women), and what clients should consider if they're not going to buy long-term care insurance and need to come up with their own plan. There are also two investment articles this week - the first is an look from Bob Veres at how advisors are preparing for the potential "bondmageddon" in the coming years, and the second is a research paper from GMO about how pension funds should manage "valuation risk" by dynamically adjusting equity exposure over time (a strategy that can help individual retirement planning as well!).

We wrap up with three interesting articles: the first is a profile of Luke Landes, who built the Consumerism Commentary personal finance blog into a seven-figure business over the span of a decade; the second is a look at how most people who feel they aren't productive enough are really just struggling with the fact that they're so overcommitted they couldn't possibly do everything they've set forth for themselves (there just aren't enough hours in the day!); and the last is a series of "lifehacks" and tips to manage your own personal efficiency, from how to better handle the never-ending flow of email, to maximizing your productivity by focusing on one task at a time for 25 minutes each.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including a review of this week's Nerd's Eye View article on how to choose technology and start a new RIA on a budget, to the newest "second opinion" tool for consumers from SigFig, and more!

Enjoy the reading!

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Friday, March 20th, 2015 Posted by Michael Kitces in Weekend Reading | 14 Comments

When investors hold investment accounts subject to an ongoing AUM fee, they can clearly see the expense being subtracted from the account on each statement. Similarly, variable annuities have an explicitly disclosed expense ratio that is subtracted from the account balance on an ongoing basis. However, in the case of fixed or equity-indexed annuities, investors only see their contributions into the account, and a return on the account, leading many to believe (and many insurance agents to claim) that such annuities are “free” or have no cost (and that any commissions paid to the agent are “paid by the insurance company, not the client”).

Yet the reality is that fixed annuities do still have an ongoing cost; it’s just that instead of paying the expenses and compensation to the advisor directly out of the end value of the account each year, the costs are subtracted from the annuity company’s gross returns in the form of an interest rate spread before paying the net remaining return to the investor. Or in the case of the indexed annuity, the interest rate spread is subtracted before the remaining yield is invested into options to provide the investor’s participation rate in the index being tracked.

In fact, the whole purpose of surrender charges on annuities is simply to ensure that when an insurance agent is paid a commission upfront, the annuity funds will remain invested long enough with the ongoing interest rate spread extracted from the investor return to allow the insurance company to recover that commission cost (or else the client pays a surrender charge to make up the difference). In the end, this means that not only do fixed and indexed annuities have a cost to the client for compensation paid to the insurance agent… but it’s actually remarkably similar to what investors typically pay brokers and investment advisers as well!

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Wednesday, March 18th, 2015 Posted by Michael Kitces in Annuities | 26 Comments

Launching a business is hard enough in any industry, but getting through the requirements for setting up an RIA and figuring out the necessary technology vendors and software to have in place when starting a firm can be especially daunting. For many potential new advisors we talk to in XY Planning Network, the hardest part (and biggest fear!) of starting a new advisory firm isn't even about getting the first few clients, it's just about the stress of figuring out what to do to actually start a firm and not miss any of the key compliance or other requirements!

In this guest post, financial planner Andrew McFadden shares his own story of what he went through in starting his RIA, from making decisions about office space and who his niche target clientele would be, to handling the compliance requirements for forming the RIA and associated business entity and obtaining E&O insurance, to all of the hardware and software choices that a startup advisor must navigate. All in, McFadden estimates that the startup process cost him only about $7,000 up front, and his practice has on ongoing overhead expense of just $500/month.

And notably, McFadden chose to launch his firm after reading a prior Nerd's Eye View guest post by Sophia Bera about how she set up her RIA and started her practice for less than $10,000 - realizing how feasible it was to get started on a modest budget, he decided to go for it, and is now "paying it forward" with his own story to inspire others.

So if you've been thinking about making your own transition from a broker-dealer to launch an independent RIA, or are wondering what it takes to launch a new financial planning practice from scratch, I hope that you find today's guest post to be helpful and inspirational as you think about how to satisfy the requirements to get started yourself!

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Tuesday, March 17th, 2015 Posted by Michael Kitces in Practice Management | 31 Comments

As the pressures of commoditization on investment advice continue to increase, more and more advisors adopting financial planning and wealth management services for their clients. Yet compared to the world of investing – where an advisor’s value proposition can be clearly articulated and measured in dollars and cents – it’s far more difficult to convey the value proposition of an intangible long-term service like financial planning. Determining whether an advisor provided a good Return On Investment in the portfolio is one thing, but how do you describe the ways an advisor tries to help a client get a better “Return On Life”?

In what may be one of the best clear descriptions of the key value propositions that financial planners provide, financial life planning pioneer Mitch Anthony boils it down to six key phrases: we provide Organization, Accountability, Objectivity, Proactivity, Education, and Partnership. While the words themselves aren’t necessarily new and unique, Anthony’s way of weaving them together into a Return-On-Life value proposition for clients certainly is.

Of course, the caveat is that just saying you can deliver on these value propositions to clients is one thing; actually doing so is another. Yet accordingly, this means that Mitch Anthony’s framework for a financial planner’s value arguably provides not only a good description for clients, but also a guidepost for advisors about where they should focus their own energies. Do you think these 6 key value propositions are a good way to describe the benefits of financial planning to clients? And can you really deliver them?

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Monday, March 16th, 2015 Posted by Michael Kitces in General Planning | 35 Comments

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a review of the latest SEC and FINRA guidance on top areas of concern regarding their oversight of advisors, from cybersecurity to how advisors oversee multi-advisor firms to increased scrutiny on retirement rollovers and advisors with multiple fee schedules (and how clients end out in one versus another).

From there, we have a long list of practice management articles this week, including: a discussion of valuing practices based on a multiple of (discounted) cash flow rather than just a multiple of revenues; whether the recent shift of United Capital from acquisitions to tuck-ins signifies a potential slowdown in advisor mergers and acquisitions; how "acquisition" succession planning is typically structured and implemented in wirehouses; what wirehouse advisors should consider (especially about mundane but important arrangements like office space) if they're planning to break away and go independent; a reminder that clients care less about what you do than why you do it; how clarity about where a business is heading in the long run can help to get staff to stay focused on what they should be working on; the long-term growth problems that emerge for advisors who create an "anti-selling" culture; and a discussion of why, even though it can sting, getting "fired" by a client can be a good thing if the reality was that you weren't really a fit for their needs anymore anyway.

We wrap up with three interesting articles: the first is a discussion by financial life planner Mitch Anthony about how we can help clients "add life to their years" by helping them to consider encore careers rather than just an all-or-none retirement transition; the second is an interview with advisor-to-advisors legend Nick Murray as he shares his wisdom about how to be successful as an advisor; and the last is a discussion of the recent launch of the Schwab Intelligent Portfolios solution and whether Schwab has lost the focus on its core values given the swirling discussions of the conflicts of interest around its "free" solution and its potentially significant (and more-profitable-to-Schwab) cash allocations.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including a discussion of the Charles Schwab and Wealthfront fight, Fidelity's Apple Watch app, and a discussion of how advisors can use screencasting tools like Camtasia!

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Friday, March 13th, 2015 Posted by Michael Kitces in Weekend Reading | 17 Comments

Having a mortgage is often dubbed to be an “inflation hedge”. As the conventional wisdom goes, with a mortgage your monthly payment is locked in (assuming it’s not an ARM), even if inflation goes up and interest rates rise. In fact, rising inflation would just devalue the mortgage in nominal (future) dollars.

Yet the reality is that ultimately, a mortgage may be paid off with inflation-adjusted wages, free up funds to be invested into inflation-hedging vehicles (from TIPS to equities), used to create a reserve for investing in bonds at higher rates in the future (a form of call option on interest rates), or be deployed to purchase a residence that provides a hedge against rising rents. In all of these scenarios, though, it is actually how the mortgage-related funds are deployed, or the income sources used to fund it, that are the actual inflation hedges… not the mortgage itself!

Ultimately, this doesn’t mean that a mortgage can’t indirect lead to beneficial outcomes if inflation (and interest rates) rise. But in the end, the benefits will not actually come from the use of the mortgage itself as an inflation hedge, but the other inflation-adjusted assets and income an individual has to support the mortgage instead! Of course, the caveat is that the use of leverage to hedge inflation can cut both ways, and magnify the unfavorable outcomes in non-inflation scenarios as well!

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Wednesday, March 11th, 2015 Posted by Michael Kitces in Debt & Liabilities | 15 Comments

While the debate rages on about whether robo-advisors will ultimately be a threat to human advisors, or whether the solutions that combined technology and humans will be the ultimate victors, the reality is that to view the battle as one of “technology vs human advisors” may be missing the real “threat” of robo-advisors. As technology platforms, their disruptive potential goes far beyond just impacting financial advisors.

For instance, the ability of software tools to re-create index funds – but without the mutual fund or ETF wrapper – creates the potential for today’s robo-advisors to disintermediate much of the existing index fund industry, aided by the tailwind of a benefit under tax code that uniquely favors these new “Indexing 2.0” robo-platforms over current fund-based solutions. Similarly, robo-advisors as “trading” software creates the potential to eliminate many active management middlemen, allowing a wide range of smart beta and rules-based trading algorithms to be implemented and automated directly.

And as the robo-technology trends shift from a direct-to-consumer focus to offer new robo-advisors-for-advisors solutions instead, the new platforms present the threat to today’s existing RIA custodians, who face the potential of a generational shift as new less-investment-centric financial planners adopt simplified robo-advisor investment platforms, and build a business there for the long run… which means in the end, the greatest threat of robo-advisors may not be their competition with human advisors, but the way that human advisors adopt them to disrupt much of the existing FinTech ecosystem!

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Monday, March 9th, 2015 Posted by Michael Kitces in Technology | 27 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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Out and About

Wednesday, April 15th, 2015

*Expanding the Framework of Safe Withdrawal Rates *Setting a Proper Asset Allocation Glidepath in Retirement @ AICPA

Thursday, April 16th, 2015

*Evaluating Existing Life Insurance Policies @ Private Event

Friday, April 17th, 2015

*Trusts as Beneficiaries of IRAs @ Private Event

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