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 | 0 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 | 9 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 | 18 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 | 40 Comments

For the past decade, the growth of advisory firms has led to a wave of hiring new planners, many of whom are ultimately anticipated to be the successor to the founding owner. And as time has passed, more and more are reaching the moment of transition when the successor actually does begin to buy into the practice; in fact, even in firms where the owners aren’t looking to exit anytime soon, it is increasingly common to add “junior partners” who will help to grow the firm going forward.

However, while a great deal has been written about the ways to sell some or all of an advisory firm from the founding owner’s perspective, there is remarkably little written to guide the prospective buyer of an advisory firm – which is especially problematic, as younger buyers are often in a position of more limited negotiating power and have less knowledge and experience in analyzing an offer (and may struggle even to just gather all the appropriate information!).

Accordingly, in today’s article, we look at the dynamics and issues to consider from the buyer’s perspective when evaluating an offer to buy in as a partner. If you’re in the position of being someone’s successor, hopefully this will be a helpful primer for you on the issues to consider. And even if you’re the one looking to sell your practice, the buyer’s perspective may be helpful as well!

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Monday, April 6th, 2015 Posted by Michael Kitces in Practice Management | 10 Comments

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a recent industry benchmarking study, finding that not only are advisors enjoying record levels of productivity (as measured by assets and revenue), but the average AUM fee actually ticked slightly upwards last year, despite the explosion of media coverage about "robo-advisors" and the alleged fee/pricing pressure they would begin to put on traditional advisory firms.

From there, we have a few interesting investment articles this week, including a fascinating discussion of investment liquidity (and a warning against assuming that any ETF will remain liquid if its underlying investments are not), the first blog post by former Fed chairman Ben Bernanke about why he thinks interest rates remain low (hint: it's not Fed actions, but sluggish economic growth that the Fed is merely mirroring), a look at how the popular Shiller CAPE ratio can be adjusted for changing historical trends in dividend payout rates (although the conclusion is still that markets are expensive even after the CAPE is adjusted), and a look at how due to bad market timing even the average value investor (in a value mutual fund) fails to capture the value premium (which in turn suggests it won't be arbitraged away anytime soon!).

We also have several more technical articles this week, including: a look at how the concept of retirement is evolving as the rather-arbitrary "traditional" retirement age of 65 comes increasingly into question; a look at how to decipher financial aid letters and what to watch out for to determine if a student's aid package is really a "good deal" or not; new estate planning tips and strategies for clients who once were exposed to potential Federal estate tax but are no longer (due to higher exemption amounts); and a discussion of Deferred Income Annuity (DIA) products and how they can be superior to more traditional Single Premium Immediate Annuity (SPIA) solutions.

We wrap up with three interesting articles: the first looks at the rise of Zenefits, a "robo-broker" in the employee benefits world that really does appear to be disrupting the status quo, though it is actually building its business with a strong technology component overlaid on top of human brokers who still consult directly with clients; the second looks at how the explosion of smart beta ETFs is also a trend of increasing robo-advised investment management as the majority of smart beta funds are implemented using computer algorithms; and the last is a lighter look at how to nail an email introduction in a world where most people are increasingly bombarded by a high volume of email.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including 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 3rd, 2015 Posted by Michael Kitces in Weekend Reading | 14 Comments

At Nerd’s Eye View, the continued goal is always to make this an ever-more-valuable resource for our readers, and the financial planning profession at large. And over the years, your reader feedback has shaped everything from the look of the site, to the frequency of the content, the topics being covered, and more.

And in response to your continued feedback, we’re excited to announce today the launch of several new features and benefits for readers, including the availability of CFP CE credit for reading Nerd’s Eye View blog posts! That’s right, you will now be eligible for CFP CE credit for the content you’re already reading!

In addition, today marks the launch of a new premium Members Section of Nerd’s Eye View. Many of you have already long been subscribers of our newsletter service, The Kitces Report, providing in-depth advanced financial planning content (also eligible for CFP CE credit). Going forward, we will be slightly decreasing the frequency of The Kitces Report newsletter issues, but wrapping it into a broader Members Section, that will also include webinars and additional member resources you can use in your practice!

I hope you enjoy the new features and benefits! Thank you for your continued readership!

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Thursday, April 2nd, 2015 Posted by Michael Kitces in Industry News | 7 Comments

For retirees who don’t wish to take any market risk, one of the most straightforward retirement income strategies is to simply purchase a bond ladder that will provide the desired cash flows in each year of retirement. Ideally, the payments are secured out to an advanced age, “just in case” the retiree lives that long… with the obvious caveat that if the retiree doesn’t actually live that long, there will be a lot of money left over that “could have” been spent but wasn’t. But that’s simply the risk of an “unknown” retirement time horizon.

In the case of a (lifetime) annuity, on the other hand, the time horizon is known, at least in the aggregate – because with enough people, the mortality rate actually becomes highly predictable, even if it isn’t known exactly which people will pass away from one year to the next. Yet by knowing that at least some people will die each year, an annuity can pay out a portion of the funds that will have been left behind by those decedents, effectively providing larger guaranteed payments for the group than any one individual could have generated on his/her own.

These “excess” payments are known as “mortality credits”, and represent a unique contribution of (lifetime) annuities that simply doesn’t exist with an individual bond ladder. In fact, the potential for mortality credits means that, for any given maximum potential life span, annuities can actually pay out significantly more than what any individual could enjoy on his/her own, as the contribution of principal and interest and mortality credits will always be greater than the underlying principal and interest alone! Conversely, though, the benefit of mortality credits exists only by virtue of the fact that the other annuitants – and not the annuity owner’s heirs – will benefit from any unused funds that are left over; in fact, trying to protect against an annuity loss in the event of early death, and protect heirs, actually eliminates much of the benefit that annuities are meant to provide in the first place!

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Wednesday, April 1st, 2015 Posted by Michael Kitces in Annuities | 17 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

Tuesday, April 21st, 2015

*Understanding the Role of Longevity Annuities In Retirement Income @ FPA Retreat

Wednesday, April 22nd, 2015

TBD @ CUNA Mutual - Program Leaders Institute

Thursday, April 23rd, 2015

*Joint Session with Alan Moore *Panel on Succession Planning @ Shareholders Service Group