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As the world of financial planning evolves, so too does the technology that supports it. And in the coming years, nothing may evolve in the world of advisor technology as much as financial planning software, as it continues its transition from simply being a ‘calculator’ to project the impact of financial planning strategies and recommendations, into an entire platform for ongoing collaborative financial planning for clients.

Yet the evolution of planning software is creating distinct new challenges from a software design perspective, as the tools are increasingly used in three distinct contexts: an interactive collaborative planning tool between advisors and clients in meetings, an ongoing monitoring and personal financial management (PFM) tool for clients, and an advisor support tool for everything from complex analyses to tracking and alerting which clients need assistance. Not to mention the increasing amount of ‘meta data’ available about the advisory business and its clients as well.

In fact, going forward financial planning software designers may need to increasingly view the use of the software through each of these distinct lenses – advisor, client, and advisor-client interaction, as well as business meta-data – to advance the efficacy of planning software, as each use case for planning software is creating its own unique needs and challenges for advisors to work with clients and enhance client outcomes!

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Monday, June 29th, 2015 Posted by Michael Kitces in Technology & Advisor FinTech | 12 Comments

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the announcement of Schwab's new "Institutional Intelligent Portfolios" solution for RIAs, which will allow advisors on the Schwab platform to provide "robo"-style services for their own clients alongside with Schwab's direct-to-consumer robo offering.

From there, we have several articles on marketing and practice management issues, from a look at the marketing best practices of the "standout" growth firms in the latest FA Insight benchmarking study, to a review of an interesting flat-fee investment model being offered by advisor James Osborne of Bason Asset Management (allowing him to grow $100M of AUM in under 2 years!), a look at the best way that advisors can differentiate themselves (hint: by doing whatever best fits your own personality style and passions!), a discussion of whether adivsory firms should hire a "Director of Client Success" to really aim to improve client retention rates and referrals, and a look at the so-called "pratfall effect" and whether advisors can actually build more credibility by not being perfect and instead committing - and admitting to - making small mistakes with clients.

We also have a few investment articles this week, including: a critique of the validity of smart beta and whether factors can really be anticipated in advance or are nothing more than data-mining; a discussion of the ongoing "buyback extravanganza" and why it may not actually be as problematic as some critics suggest (at least, not right now); and a study of whether the benefits of risk parity strategies have been understated by viewing them as an alternative to a traditional investment portfolio, when instead their greatest benefit may be as a complement to a traditional portfolio for a small slice of the total allocation.

We wrap up with three interesting articles: the first is a review of the recent book "Misbehaving" by economist Richard Thaler, a combination of personal memoir of Thaler's own career and also an interesting historical look at the rise of behavioral economics; the second is an article from the Wall Street Journal suggesting that the time may be coming for the value of financial planning to become separated from the 'traditional' AUM business model; and the last is a fascinating look from the Harvard Business Review as how the doctor-patient relationship is being disrupted by technology, in a manner that may be a harbinger of both the risks and opportunities that could play out in the coming years as technology impacts the advisor-client relationship as well.

And be certain to check out Bill Winterberg's "Bits & Bytes" video on the latest in advisor tech news at the end, including the rollout of Schwab's new Institutional Intelligent Portfolios, the latest advisor updates for Advent's Black Diamond portfolio performance reporting tools, and highlights of the TD Ameritrade Institutional technology summit!

Enjoy the reading!

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Friday, June 26th, 2015 Posted by Michael Kitces in Weekend Reading | 19 Comments

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Understanding The IRD Deduction That Inherited IRA Beneficiaries Often Miss

Pre-tax assets like IRAs can face a significant income tax burden as their value grows, a challenge that is only made worse for those who are subject to estate taxes on those assets as well. In the extreme, the combination of the two can consume the majority of the value of an inherited IRA bequeathed to a beneficiary.

To help mitigate the combined income-and-estate-tax effect, the Internal Revenue Code allows for an “Income in Respect of a Decedent” (IRD) deduction under Section 691(c). Claimed by the beneficiary of an inherited IRA to the extent of any estate taxes that were caused by the account, the deduction can be material – as much as 40% of the value of the account!

Yet despite its size, beneficiaries in practice often “miss” the IRD deduction, not realizing it was there to claim, or perhaps “losing track” of it when changing accountants or tax preparation software. Fortunately, an amended tax return can be filed to claim a missed IRD deduction from recent years – but only the past 3 years. Which means going forward, anytime an inherited IRA appears with a new client, a good best practice for all advisors is to ask: “did the decedent who left you this account pay any estate taxes?” and if so, be certain the IRD deduction is claimed properly!

And notably, in the end the IRD deduction applies not only to inherited IRA accounts, but also other employer retirement plans, inherited non-qualified annuities, employer non-qualified stock options, deferred compensation, employer NUA stock, and more!

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Wednesday, June 24th, 2015 Posted by Michael Kitces in Taxes | 18 Comments

For much of its history, financial planning software was basically just an elaborate calculator. Advisors could gather client data, feed it as input to the calculator tool, and the software would spit out the projected results… which were then used to facilitate the sale of a product.

As financial planning has evolved to be primarily about the delivery of advice itself – not just for the sake of a product sale – so too has the software evolved, from a calculator to illustrate the outcome of a product or strategy recommendation, to a collaborative tool that can be used to formulate the client’s plan itself. After all, given the complexity of an uncertain future, it’s hard to really understand what path to pursue, until the client first analyzes a range of scenarios to understand the opportunities. Accordingly, financial planning software has increasingly become a tool for real-time collaborative scenario planning.

In the future, though, financial planning software can and will progress further, from a tool that supports collaboration at a single point in time, to one that truly supports continuous planning for the reality of continuous change we face in our lives. Imagine a holistic personal financial management (PFM) solution for clients, that simultaneously operates as financial planning software for the advisor, all continuously updated from external data flows, making it feasible for the advisor and client to see the milestones and recommendations that have already been accomplished, and whether the client is on track in progressing towards goals of the future.

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Monday, June 22nd, 2015 Posted by Michael Kitces in Technology & Advisor FinTech | 17 Comments

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with an interesting article from Investment News, highlighting that while there's a growing discussion of how advisors can use "big data" to improve their businesses, asset managers may already be using "big data" insights by tracking every metric they can about us as advisors, to figure out which might be interested in using their company's investment products!

From there, we have several technology-related articles this week, including: a new "platform" bundled-technology partnership between portfolio reporting software Black Diamond and financial planning provider MoneyGuidePro; a review of one advisor's good (and some challenging) experiences using the eMoney Advisor account aggregation portal with clients; issues for advisors to consider as Windows 10 rolls out later this summer; a review of an emerging new financial planning software provider called WealthMinder; and a first look at a coming "Financial Health/Wellness" app coming out soon from FinanceLogix.

We also have a few more technical-competency articles this week, from a discussion of key issues to consider when clients become eligible for Medicare (e.g., when it is, and is not, ok to delay enrolling in Medicare!), to the issues that must be raised with clients who are thinking about retiring abroad, to a first look at how estate planning strategies may change if recent White House proposals are enacted that would eliminate the stretch IRA.

We wrap up with three interesting articles: the first looks at how financial planning services should be offered to younger clients, who actually experience a high volume of major life transitions that necessitate planning advice (from job changes to starting businesses to starting families) but may have little need for "traditional" planning software and its retirement-centric Monte Carlo projections; the second looks at a new open-source "robo" platform called Wealthbot.io, which would allow any advisory firm to hire a developer and adapt the platform for the needs of their particular practice and clientele (think "Wordpress for robo-advisors"); and the last is a call-to-action from FPA National board president Ed Gjertsen that financial planners need to step up and get more involved with the Financial Planning Coalition's advocacy efforts, especially as the Department of Labor fiduciary proposals loom large, and FPA prepares for its National Advocacy Day on Capitol Hill this coming Wednesday, June 24th.

Enjoy the reading!

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Friday, June 19th, 2015 Posted by Michael Kitces in Weekend Reading | 19 Comments

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CE quiz will become available at the end of the month,
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Strategies And Tactics When Using Donor-Advised Funds For Charitable Giving

The primary benefit of a donor-advised fund (DAF) is that it allows someone to donate assets for charity today – and receive a tax deduction now – even though the actual funds may not be granted to the final charity until some point in the future. In other words, the donor-advised fund essentially functions as a conduit, where the donor receives a tax deduction when the money goes into the DAF, but has discretion about when the assets will finally leave the DAF and actually go to the charity… and in the meantime, assets inside a donor-advised fund grow tax-free.

Given the potential of a donor-advised fund to separate the timing of the contribution and tax deduction, from the final donation to the charity itself, the most common strategy for using a donor-advised fund is to “front load” charitable contributions in a high income year – when the tax-deduction threshold for charitable contributions will be higher – and then use the DAF to make subsequent distributions to the charities themselves in the future. By using the strategy, the donor can maximize the value of the tax deduction in a high-income year, but retain the flexibility to decide in the future to which charities the funds will actually go.

Notably, though, the donor-advised fund as a vehicle provides a mechanism for other charitable giving tactics as well. For instance, the donor-advised fund can facilitate giving anonymously, or creating an “In Memoriam” fund. The DAF can also help facilitate donating appreciated securities to a smaller charity that doesn’t have the means of handling the donation directly. And for some families, the donor-advised fund can function as a less expensive alternative to a private (non-operating) foundation, providing a means for the whole family to engage in the process of charitable giving, while allowing the tax-free growth of a family’s charitable legacy.

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Wednesday, June 17th, 2015 Posted by Michael Kitces in Taxes | 22 Comments

Wealth management – a combination of investment management and holistic financial planning advice, typically for affluent clientele – has become an increasingly dominant model in recent years. The transition to wealth management has spurred a massive shift to fee-based accounts, the explosion of independent and hybrid RIAs, and the success of a growing number of providers to independent advisors, from custodial platforms like Schwab and Fidelity to asset managers like Vanguard and DFA.

Yet an emerging transition appears to be underway, as a growing number of asset management platforms are no longer just providing support services to financial planners, but are entering the business themselves. From Schwab’s growing number of managed-account solutions (including its new Schwab Intelligent Portfolios) paired with increasingly-CFP-based branch consultants, to Fidelity’s acquisition of financial planning software and push for hiring CFP professionals as well, to Vanguard’s massive launch of its Personal Advisor Services platform - and TD Ameritrade announcing they plan to expand both their Amerivest and "Private Client Services" programs that blend technology with humans providing financial advice - the trend of “insourcing” financial planning has begun.

And what’s notable about this trend is that, given the existing size of these asset managers, their transition to offering financial advice allows them to immediately offer services at a size and scale beyond even the largest independent advisory firms. This gives the companies not only the potential to compete aggressively on price, but to utilize their massive marketing budgets and already-nationally-recognized brands to rapidly scale their marketing and drive growth even faster.

The end result is that independent advisors may increasingly find themselves in competition in the future with a number of large companies who also serve them as asset managers and RIA custodians. This will not necessarily undermine the existing clients of advisory firms – there are lower-hanging fruit for the new players to pursue, including converting retail clients already on their platforms – but presents a significant new headwind and challenge for future clients and growth, unlike anything independent advisors have ever seen before.

And perhaps most notable of all will be the rise of Vanguard’s personal financial advice solution. Not only because Vanguard is already the largest asset manager with the largest existing client base to solicit for planning services, but because its unique “mutual” company structure means it may simultaneously become the largest financial planning firm, and the first to operate solely in the interests of the clients who implicitly own it, without having a separate corporate profit motive. Welcome to the new disruption – the first “mutual financial planning” company has arrived.

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Monday, June 15th, 2015 Posted by Michael Kitces in Planning Profession | 25 Comments

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the news that now TD Ameritrade is joining the "robo" race with a direct-to-consumer offering that will expand its current Amerivest program to compete against the likes of Vanguard and Schwab, including a new "Private Client Services" that may potentially compete against the RIAs who use TDA's custodial services, too. And also in the news this week was the announcement that Pershing is launching its own robo-advisor-for-advisors solution, partnered with newcomer Marstone.

From there, we have a few technical planning articles this week, from a look at important IRA-rollover-related "goofs" to avoid, to a discussion of the potential crackdown coming on Family Limited Partnership (FLP) valuation discounts via new Treasury Regulations that may soon be issued, and also a discussion of how income annuities may better support the fixed-income portion of a retirement portfolio over just using traditional bonds.

We also have several practice management articles, including: how advisors are increasingly adopting "virtual" location-independent business models that serve clients through telephone, email, and video conferencing technology; a discussion of how advisors operating as a sole proprietorship or single-member LLC could be creating client continuity planning problems; a look at the benefits of "reverse mentoring" (where experienced advisors take on a Millennial to get their own mentoring about today's 20- and 30-somethings); how employees at many advisory firms are actually quite unhappy, and why the fix is not just to pay them more; and a discussion of best practices to try to minimize employee turnover and retain to advisory firm talent.

We wrap up with three interesting articles: the first is a look at whether the whole concept of monthly "budgeting" is overrated or outright impossible, as research increasingly shows the reality is simply that our income and expenses are not as stable and consistent as a typical budgeting process would imply; the second is an in-depth look at how a credit bureau "security freeze" works and why advisors might consider it for themselves and their clients; and the last is a discussion of whether Wall Street's threat to abandon small investors if the DOL's fiduciary comes to pass may be both an empty threat, and one that is irrelevant because if Wall Street does abandon small investors, there are other organizations like Garrett Planning Network, XY Planning Network, and more, ready and waiting to fill the void.

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 of Pershing's new partnership with robo-advisor-for-advisors Marstone, recent major growth milestones for advisor-client PFM solution Wealth Access, and a new open-sourced wealth management platform that advisory firms might develop for their own use, called Wealthbot.io.

Enjoy the reading!

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Friday, June 12th, 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.

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Building Your Own Low-Cost Equity-Indexed Annuity Or Structured Note

Given the market volatility of the past 15 years, with both the “tech wreck” and the financial crisis, a growing number of consumers are seeking more safety for their investment portfolios, through everything from more proactive risk management strategies, to using products like equity-indexed annuities and structured notes that explicitly provide for "some" upside participation in bull markets, but with downside protection in a bear market.

Yet the reality is that constructing downside protection and a principal guarantee over time doesn’t actually require products like equity-indexed annuities and structured notes. They can actually be constructed with relatively simple combinations of bonds and either stocks or equity index options. In fact, just buying a portfolio of bonds and using the interest to buy at-the-money call options is sufficient to produce a partial upside participation rate in equities with a downside guarantee!

Unfortunately, though, creating such pairings can be especially difficult in low interest rate environments, as there simply isn’t enough yield to afford very many options contracts, which in turn results in relatively low equity participation rates. Yet given that annuity companies and structured note providers are subject to the same constraints, in the end investors will likely suffer from low returns in such solutions, regardless of which vehicle is used… and in fact may have the greatest upside potential by simply constructing the strategies themselves, and avoiding the internal costs of such products in the first place!

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Wednesday, June 10th, 2015 Posted by Michael Kitces in Investments | 26 Comments

While buying into an advisory firm can be an incredible opportunity in the long run, there are also some very important caveats and potential problems to consider, in terms of both the financial terms of the succession deal, and also the more nuanced challenges of participating as one of several partners in a multi-owner firm.

In some cases, the problem is as “simple” as the fact that the business is not actually very profitable, especially once accounting for a reasonable salary to the existing owners of the practice (given that if/when they retire, a comparable salary must be paid for their replacement to do the same job duties!). Similarly, sometimes the problem is just that the valuation of the business is unrealistic, especially when it is valued based on a multiple of revenues but does not have very healthy profit margins to support that multiple.

On the other hand, some of the most challenging problems that crop up when buying into an advisory firm are more nuanced; for instance, if the timing of profit distributions won't line up to when the required loan payments are due, or when there are significant disagreements between the (new and existing) owners about how much to withdraw from the practice versus reinvest for the future. Often, it’s feasible to work through these conflicts – or even bring in an outside expert – but unfortunately, sometimes the only resolution is to raise the issues in advance, negotiate where possible, and if the challenges can't be resolved, to walk away from the deal.

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Monday, June 8th, 2015 Posted by Michael Kitces in Practice Management | 18 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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Tuesday, July 14th, 2015

*Expanding the Framework of Safe Withdrawal Rates @ Private Event

Saturday, July 18th, 2015

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

Tuesday, July 28th, 2015

*Generating Alpha Tax with Effective Asset Location *Social Security Benefits Planning For Couples @ MetLife Annual Symposium

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