Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the big news that the world's largest asset manager, Blackrock, decided to buy the #3 robo-advisor FutureAdvisor for $150M, with plans to pivot the company from its current direct-to-consumer focus to instead become a robo-advisor-for-advisors solution for Blackrock's institutional partners (i.e., banks, broker-dealers, insurance companies, and perhaps RIAs).

From there, we have a few articles on this week's market turmoil, including a discussion of the unusual market volatility in ETFs that occurred on Monday morning (when many ETFs traded at materially different prices than their intrinsic NAV), a second article from ETF.com looking at the details of how an "ETF flash crash" occurs (important to understand if market volatility picks up again soon!), and a separate article discussing the unrelated but also problematic technology outage this week at BNY Mellon that left hundreds of mutual funds and ETFs unable to properly price their value for several days this week!

We also have several practice management articles this week, including: a discussion of a smarter marketing (or "smartketing") process that integrates both prospecting and sales efforts in an advisory firm; a look at how some advisors are adopting video as a part of their marketing and/or client communication process; a discussion of some practice management "gotchas" to watch out for that can undermine the value of your business (e.g., remember that unlike talking to a compliance attorney, communication with your compliance consultant is not privileged and can be used against you!); a warning that growth rates, referrals, and profitability are declining at many advisory firms (and how it can be resolved by focusing on a narrower target clientele to differentiate); and a reminder of how important it is to communicate complex concepts to clients visually and not just verbally (and better yet, make a standardized graphic to illustrate key concepts that you can use over and over again!).

We wrap up with three interesting articles: the first provides some good reminder tips of what to do and what to say when market volatility occurs (hint: proactive communication and active listening are essential!); the second provides an interesting look at the history of the Investment Company Act of 1940 (which just recently celebrated its 75th anniversary!); and the last is an article from the Harvard Business Review reporting on an interesting study that finds the rise of technology is actually making social skills more important than ever for career success (and the best jobs are those that require social skills and include high-level cognitive challenges, like financial planning!).

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 that Blackrock is acquiring the robo-advisor FutureAdvisor, the Salesforce launch of their new Financial Services Cloud, and the latest practice management white paper "X-Cell" from Kaleido.

Enjoy the reading!

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Friday, August 28th, 2015 Posted by Michael Kitces in Weekend Reading | 0 Comments

Yesterday, Blackrock announced that it was acquiring FutureAdvisor, one of the three original and “pure” robo-advisors who have been gathering assets and managing ETF portfolios directly for consumers. And despite FutureAdvisor having “just” $600M of AUM, and an estimated $3M of revenues, Blackrock’s purchase was rumored to be in excess of $150M.

However, it appears that Blackrock’s strategy was not simply to buy FutureAdvisor to expand its direct-to-consumer solution, but instead to pivot FutureAdvisor to become a robo-advisor-for­-advisors solution, and license/offer the technology platform to a wide range of broker-dealers, insurance companies, banks, and custodians to turn their human advisors into tech-augmented "cyborg" advisors. In this context, as the world’s largest asset manager and a leading player in the ETF space already, the Blackrock deal appears to be visioned primarily as a means to further grow the size of the ETF pie and the Blackrock (iShares) market share by driving distribution to its ETFs through this new technology platform. The robo-advisor is now a distribution channel.

For financial advisors, the “good” news of the Blackrock deal is that “robo” tools may soon become increasingly available to a wider and wider range of advisor platforms. And ironically, because iShares – like Schwab’s Intelligent Institutional Portfolios – can profit from the underlying ETFs held in the portfolio, the future Blackrock FutureAdvisor solution may even undercut existing robo-advisor platforms, as the established financial services industry players continue to apply more and more pressure to the direct-to-consumer robo-advisor solutions. In other words, advisors and established firms are now driving the cost of robo-technology down to zero, relying on their ability to profit from the ‘traditional’ channels of manufacturing investment products (e.g., ETFs) and delivering personal financial advice, and out-commoditizing the robo-advisor commoditization.

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Thursday, August 27th, 2015 Posted by Michael Kitces in Industry News | 2 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.


Social Security And Medicare Claiming Strategies To Navigate The Looming 52% Medicare Part B Premium Spike

Under Social Security and Medicare rules, the “Hold Harmless” provision is a special rule intended to protect most Social Security recipients from experiencing a decrease in their (net) benefit payments, by limiting the (dollar) amount of the annual Medicare Part B premium increase to the (dollar amount) of Social Security’s cost-of-living adjustment. And due to negative inflation from the recent fall in energy prices, the 2016 Social Security COLA is on tracked to be “floored’ at the minimum 0.0%, which in turn means that Medicare Part B premiums will be locked in for a 0.0% increase in 2016.

However, the "Hold Harmless" provisions only apply to approximately 70% of currently Medicare enrollees for the protection. Which means that the entire magnitude of Medicare's rising costs must be borne by just the other 30% of Medicare enrollees, as well as any who planned to enroll in 2016, resulting in a project 52% spike in Part B premiums next year!

Given the looming Medicare Part B premium increase, those who are not eligible for the Hold Harmless provision - for instance, those enrolled in Medicare but delaying Social Security benefits, or those who haven't yet enrolled in either but could - should carefully consider whether it is really still worth delaying Social Security benefits (and/or delaying enrollment in Medicare), given that those who begin the process by October of this year still have the potential to get started in time to be eligible for Hold Harmless and shelter themselves from the 2016 increase.

And in practice, it appears that slightly accelerating claiming may in fact be appealing, especially for those who otherwise anticipated starting Social Security and Medicare Part B in 2016. On the other hand, higher-income taxpayers who are subject to the Medicare Part B premium surcharge cannot protect themselves (or do anything else about it, since the calculation would be based on income from 2014 and that tax year is long since closed). And for those who still plan to delay Social Security benefits for many years to come, the reality is that delaying Social Security benefits is still so valuable, that even the projected Medicare Part B premium spike is still not nearly enough to deter the long-term value of generating Social Security’s Delayed Retirement Credits for those who anticipate living well past the breakeven period.

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Wednesday, August 26th, 2015 Posted by Michael Kitces in Retirement Planning | 22 Comments

Virtually all financial advisors today follow one of three paths in becoming a financial advisor – either as a registered representative of a broker-dealer, an insurance agent with an insurance company, or an investment adviser representative of an RIA. And each path has its own licensing and exam requirements.

Yet the sad commonality of all paths to becoming a financial advisor is that the actual exam and educational requirements to be an advisor are remarkably low. In fact, the licensing exams for financial advisors do little more than test basic product knowledge and awareness of the applicable state and Federal laws, and none require any substantive education in financial planning itself before holding out to the public as a comprehensive financial advisor who will guide consumers about how to manage their life savings!

Given the roots of financial advising in the world of insurance and investment product sales, this isn’t entirely surprising. The licensing requirements to become a financial advisor, along with the suitability standard to which most advisors are subject, are built around the concept that “advisors” are really just product salespeople. And the bar to determine if someone is "capable" of selling a product isn't very high.

Ultimately, though, if financial advisors hope to actually be recognized as bona fide professionals, the requirements to become a financial advisor must become harder, and require actual education and experience to demonstrate competency as a financial advisor (not just compliance with the laws that apply to salespeople!). Otherwise, the reality is that even if a uniform fiduciary standard is implemented that requires all brokers and investment advisers to act in the best interests of their clients, consumers may still be harmed by advisor ignorance and the sheer lack of competency that would result from raising the fiduciary duty of loyalty but ignoring the equally important fiduciary duty of care – to only give advice in areas in which the professional is actually educated and trained to give advice in the first place!

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Monday, August 24th, 2015 Posted by Michael Kitces in Planning Profession | 41 Comments

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the second edition release of the CFP Board’s “Financial Planning Competency Handbook”, a nearly-1,000-page tome that aims to capture the entire comprehensive financial planning body of knowledge (for both students learning financial planning and practitioners to use as a reference).

From there, we have several practice management and technology-related articles this week, including a review of digital estate planning software solution EverPlans, a first look at a new “matchmaking” site for consumers to find a financial advisor (where advisors pay to be listed and featured on the site), and a review of the new T. Rowe Price “MarketScene” app designed to provide market insights and information that advisors can use with their clients. There’s also an article about time-saving tips and ‘productivity apps’ for advisors, a discussion of the issues to be aware of if you’re looking to merge your advisory firm (from the perspective of other advisors who have gone through the process), and some advice from practice management consultant Angie Herbers about the experience of merging a firm after she merged her own with marketing consultant Kristen Luke to form their new advisor consulting business Kaleido.

We also have a few technical planning articles, from a discussion of the new regulations from the IRS and Treasury Department cracking down on sales of a Charitable Remainder Trust (CRT) income interest, to a look at the recent expansion of the Repaye program that can adjust student loan repayment amounts to be a smaller percentage of (discretionary) income, and a look at the estate planning considerations of the emerging new 529A ABLE accounts for disabled and special needs beneficiaries.

We wrap up with three interesting articles: the first is from Professor Robert Shiller, who explores the concept of the “Financial Singularity” (where markets potentially become perfectly efficient with technology automation); the second is a discussion from experienced angel investor Tucker Max about why angel investing is really not a good idea for most investors; and the last is a discussion from industry commentator Bob Veres about how advisory firms who want to serve younger clients and the middle market must go further than “just” adding in robo-advisor technology tools on their website.

And be certain to check out Bill Winterberg's "Bits & Bytes" video at the end, covering the latest news and developments from this week's LaserApp technology conference!

Enjoy the reading!

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Friday, August 21st, 2015 Posted by Michael Kitces in Weekend Reading | 13 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.


How The Medicare “Hold Harmless” Rules May Spike Part B Premiums By 52% In 2016

For virtually all retirees, Medicare is the core means by which health insurance is obtained in retirement. Coverage is provided via a combination of Medicare Part A (for hospital insurance) that is free, plus Part B (for medical insurance covering doctor’s visits, outpatient procedures, and more) for a subsidized premium, and Part D (for prescription drugs) also paid via a separate premium. Together, the Medicare system goes a long way to stabilizing the unknown of health care costs in retirement into a series of known health insurance premiums.

For most retirees, the Medicare Part B (and potentially Part D) premiums are simply subtracted directly from ongoing Social Security benefits payments, and each (Social Security benefits and Medicare premiums) have their own inflation adjustments each year (with Medicare healthcare inflation higher than general inflation adjustments most years).

Notably, though, the Social Security system also includes two key provisions to help smooth cash flows for retirees. The first stipulates that if inflation is negative, the Social Security Cost-Of-Living Adjustment (COLA) can never be negative; at worst, the Social Security COLA has a floor of 0.0%. The second provision, often dubbed the “Hold Harmless” rule, and applicable to as many as 70% - 75% of Medicare enrollees, states that Social Security benefits payments cannot decrease due to rising Medicare Part B premiums; at worst, the Medicare premium increase is capped at the dollar amount of the Social Security COLA increase.

Except in the coming 2016 year, when the Social Security COLA is projected to be 0.0%, the combination of these two rules means that none of the coming year’s Medicare Part B premium increase can be applied to the 70%+ of Medicare enrollees eligible for the Hold Harmless provision… which means all of the increase must instead be borne by the roughly 25% of Medicare enrollees not subject to the “Hold Harmless” provision. As a result, unless the Secretary of Health and Human Services Department intervenes by October, based on current projections the Hold Harmless provision may result in a spike in Medicare Part B premiums by as much as 52% (or over $600 per person) for those not protected by the rule!

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Wednesday, August 19th, 2015 Posted by Michael Kitces in Retirement Planning | 23 Comments

Many readers of this blog contact me directly with questions and comments. While often the responses are very specific to a particular circumstance, occasionally the subject matter is general enough that it might be of interest to others as well. Accordingly, I occasionally post a new "MailBag" article, presenting the question or comment (on a strictly anonymous basis, of course!) and my response, in the hopes that the discussion may be useful food for thought.

In this week's MailBag, we look at a question of whether it’s better to pursue an MBA degree or a CPA license after completing CFP certification (or whether some other post-CFP education would be even better!), and the problems that can arise when solo advisors try to satisfy the recent NASAA Model Rule on continuity planning by arranging a “criss-cross” buy-sell agreement with each other (when they don’t necessarily have the client capacity to actually execute it!).

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Tuesday, August 18th, 2015 Posted by Michael Kitces in MailBag | 19 Comments

In a world where most advisory firms are relatively small businesses, having a formal business plan is a remarkably rare occurrence. For most advisors, they can “keep track” of the business in their head, making the process of creating a formal business plan on paper to seem unnecessary.

Yet the reality is that crafting a business plan is about more than just setting some business goals to pursue. Like financial planning, the process of thinking through the plan is still valuable, regardless of whether the final document at the end gets put to use. In fact, for many advisory firms, a simple “one-page” financial advisor business plan may be the best output of the business planning process – a single-page document with concrete goals to which the advisor can hold himself/herself accountable.

So what should the (one-page) financial advisor business plan actually cover? As the included template shows, there are six key areas to define for the business: who will it serve, what will you do for them, how will you reach them, how will you know if it’s working, where will you focus your time, and what must you do to strengthen (or build) the foundation to make it possible? Ideally, this should be accompanied by a second page to the business plan, which includes a budget or financial projection of the key revenue and expense areas of the business, to affirm that it is a financially viable plan (and what the financial goals really are!).

And in fact, because one of the virtues of a financial advisor business plan is the accountability it can create, advisors should not only craft the plan, but share it – with coaches and colleagues, and even with prospective or current clients. Doing so becomes an opportunity to not only to get feedback and constructive criticism about the goals, but in the process of articulating a clear plan for the business, the vetting process can also be a means to talk about the business and who it will serve, creating referral opportunities in the process!

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Monday, August 17th, 2015 Posted by Michael Kitces in Practice Management | 16 Comments

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a summary of this week's Department of Labor hearings on the fiduciary proposal. While arguments were heated on both sides (which variously argued that fiduciary duty will either drive costs down for investors by eliminating conflicted advice, or drive them up by raising compliance costs!), the rule still appears to be on track for implementation in 2016, with perhaps just some adjustments to make it more "workable" in practice.

From there, we have several practice management articles this week, including: a look at how despite the rise of technology solutions Cerulli finds that the number of self-directed investors has significantly decreased in the past 5 years and the number of "advisor-reliant" consumers is on the rise; a summary of the latest FA Insight benchmarking study on People and Pay in advisory firms, which finds that RIAs are enjoying record profit margins and productivity, but that the lack of young talent may soon begin to take a toll; a discussion from industry practice management guru Philip Palaveev about how "flat" organizations with little hierarchy sounds good in concept but fails in practice, especially in advisory firms; tips from Mark Tibergien on a different approach to strategic planning; and a look at how the aging advisor population is leading to an increased number of practices that have to fold due to the sudden death of the owner, and how custodians are often compelled to act quickly, especially when the firm lacks a continuity plan, which may include cutting off the advisory firm's staff access to clients, and even shifting clients over to the custodian's self-directed platform, retail branch advisors, or even other firms.

We also have a few technical planning articles, from a look at the rise of "private exchanges" for health insurance in mid- and large-sized firms, the latest research from S&P that finds actively managed funds are so struggling to generate outperformance that they're not just underperforming net of fees but the majority in most categories (especially equities) are even underperforming before fees, and a discussion of the current research on how much retirees really need for retirement income and how the common 70%-80% replacement rate may actually be significantly overstating what most retirees really need (especially those with above-average household income).

We wrap up with three interesting articles: the first covers some of the latest polling research from Gallup, which finds that adoption of financial planning is on the rise across the country, especially amongst those who are still saving and aren't yet retired (perhaps a result of the pressure of technology on commoditizing the value of investment-only solutions for accumulators?); the second is a discussion of the new Schwab Executive Leadership Program, which is taking cohorts of 30-35 future leaders from advisory firms and putting them through a year-long MBA-style program in management (and getting rave reviews for the quality and beneficial impact of the program from its participants); and the last is a discussion of how the market's sustained inability to make materially new highs since last Thanksgiving could be a troubling sign that the positive feedback loop for investors is breaking down, which risks culminating in a fear-driven bear market if the bull market cycle doesn't underway again soon.

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 Envestnet's acquisition of Yodlee, a new integration of up-and-coming financial planning software Advizr with Orion Advisor Services, and a look at whether automated investment services (i.e., direct-to-consumer robo-advisors) are losing their exclusivity as established financial services firms increasingly launch their own.

Enjoy the reading!

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Friday, August 14th, 2015 Posted by Michael Kitces in Weekend Reading | 17 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.


How To Do A Backdoor Roth IRA Contribution (Safely)

Since the income limits on Roth conversions were removed in 2010, higher-income individuals who are not eligible to make a Roth IRA contribution have been able to make an indirect “backdoor Roth contribution” instead, by simply contributing to a non-deductible IRA (which can always be done regardless of income) and converting it shortly thereafter.

However, in practice the IRA aggregation rule often limits the effectiveness of the strategy, because the presence of other pre-tax IRAs and the application of the “pro-rata” rule limits the ability to convert just a new non-deductible IRA. On the other hand, those with a 401(k) plan that allows funds to be rolled in to the plan can avoid the aggregation rule by siphoning off their pre-tax funds into a 401(k) plan, and then converting the now-just-after-tax IRA remainder.

Perhaps the greatest caveat to the backdoor Roth contribution strategy, though, is the so-called “step transaction doctrine”, which allows the Tax Court to recognize that even if the individual contribution-and-conversion steps are legal, doing them all together in an integrated transaction is still an impermissible Roth contribution for high-income individuals to which the 6% excess contribution penalty tax may apply. Fortunately, though, the step transaction doctrine can be navigated, by allowing time to pass between the contribution and subsequent conversion (although there is some debate about just how much time must pass!). But perhaps the easiest way to avoid the step transaction doctrine is also the simplest – if the goal is to demonstrate to the IRS and the Tax Court that there was not a deliberate intent to avoid the Roth IRA contribution limits, stop calling it a backdoor Roth contribution in the first place!

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Wednesday, August 12th, 2015 Posted by Michael Kitces in Taxes | 44 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, September 2nd, 2015

*Understanding Longevity Annuities and their Potential Role in Retirement *Trends & Developments in Long-Term Care Insurance *Understanding the New World of Health Insurance @ FPA Illinois

Wednesday, September 9th, 2015

*Future of Financial Planning in the Digital Age *Modern Portfolio Theory 2.0 @ FPA San Diego

Thursday, September 17th, 2015

*Future of Financial Planning in the Digital Age *Social Media for Financial Planners *Understanding Longevity Annuities and their Potential Role in Retirement Income @ FPA Colorado