Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with an article about the FPA, its declining membership, and prospective organizational changes as the CEO retires in 2014. From there, we look at a number of practice management articles, including an overview of the emerging niche of firms that provide quality lead generation for financial advisors, how to sustain a study group, the importance of e-delivery of documents not only for your firm but for your clients, a new software package to help with investment advisory fee billing, and two marketing articles - both emphasizing the value of being unique and different and having a niche to grow the business effectively. From there, we look at an interesting interview with Jeremy Grantham about investing opportunities, a striking article that suggests the giant pile of cash corporations are sitting on may be a bad sign and not a good sign, an article from the Journal of Financial Planning about a new way to manage tail risk for client portfolios, and coverage of an emerging new product called a "stand-alone living benefit" designed to provide all the lifetime income guarantees contained in today's variable annuities but wrapped around a client's own investment account instead. We wrap up with a slightly more light-hearted list of investing tips and maxims that would probably be a good reminder for almost any planner and his/her clients. Enjoy the reading!

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Friday, June 29th, 2012 Posted by Michael Kitces in Weekend Reading | 0 Comments

In the ongoing effort to differentiate, many financial planners are engaging in a "race to the top" to assert themselves as delivering the best quality advice subject to the highest standards. At the same time, the financial planning membership organizations are similarly competing to attract more quality members by implying their existing members are of the highest quality due to the organization's high Standard of Care. Yet the reality is that most of the major financial planning organizations now have an almost identical standard of care... and as a result, the real differentiation is not what the standard of care is, but whether the members really adhere to it, even though most associations have no feasible way to monitor the activity of their members. Which raises the question - what's the point of even claiming a standard of care as a differentiator, if the organizations can't enforce those standards to deliver on the promise anyway? Continue Reading...

Thursday, June 28th, 2012 Posted by Michael Kitces in Planning Profession | 4 Comments

The variable annuity industry has a long history of criticism, generally stemming from the relatively high cost of their guarantees relative to less expensive investment alternatives. To burnish their value, in the past 15 years variable annuities have stepped up the guarantees that they provide, delivering a far wider range of income and death benefit features. However, in the face of wild market fluctuations – especially the 2008 financial crisis – many critics now also point out that the new guarantees of variable annuities pose new risks about whether the company will even be able to make good on its guarantees when the time comes. Yet the reality is that suggesting that variable annuities are risky and that the companies might not be able to pay on their guarantees would suggest that they’re not charging enough – implying that actually, variable annuities are too cheap, not too expensive! Alternatively, if the reality is that the current world of variable annuity guarantees really are too expensive, then there should be no risk at all, as the companies would have more than enough excess profits to handle the risks. So which is it at the end of the day? Are annuities really too expensive, or are they actually too cheap?  Continue Reading...

Wednesday, June 27th, 2012 Posted by Michael Kitces in Annuities | 14 Comments

Since the beginning of 2011, clients who pass away and leave their assets to their spouse have been able to bequeath not only their property, but also their unused estate tax exemption. As a result, bypass trusts are no longer necessary to preserve the estate tax exemption of the first spouse to die. Unfortunately, though, the portability of the estate tax exemption is only temporary, and is scheduled to expire at the end of the year. Recently, though, the Treasury put forth Proposed and Temporary Regulations, intended to clear up some areas of confusion around portability, and invite public comments to further press towards Final Regulations. While the regulations bring some welcome clarification - and a few positive changes for planners as well - the fact that the Treasury went through the trouble of working on regulations also suggests that they, too, expect portability to ultimately become permanent. While most planners aren't counting on the change yet, the new regulations do provide a good opportunity to better understand the details of portability and how it may play out in the future. Continue Reading...

Tuesday, June 26th, 2012 Posted by Michael Kitces in Estate Planning | 1 Comment

As the visibility of social media continues to grow, many advisors have become skeptical about whether it represents a new trend for growing a business that's here to stay, or simply a fad that will soon be gone. Yet the reality is that when done best, social media isn't really a new strategy for growing a business at all, it's simply a new medium to facilitate the same strategy advisors have always engaged in: to become someone that people know and trust, to whom they would be comfortable to refer, and cultivating a network of prospective referrers. The difference is that with social media, the potential exists to reach both a larger and more focused network of potential target clientele, allowing the growth strategy to be implemented even more effectively.  Continue Reading...

Monday, June 25th, 2012 Posted by Michael Kitces in Practice Management | 3 Comments

Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with an editorial from Bob Veres about whether the Financial Services Institute is going to find itself on the wrong side of history, defending the status quo broker-dealer model against the underlying trend towards fiduciary advice. From there, we look at a recent announcement of FPA's new PlannerSearch tool for consumers, a new CRM package for smaller advisory firms, a nice article about how to select the right CRM package for your firm, and some tips about how to run a seminar marketing strategy effectively to grow your practice. We also look at an interesting article about important conversations to have with your clients, that includes a lot of stuff financial planners already know but a few good tips as well, and a nice article by Roy Diliberto pointing out that the best way to get extraordinary results from your firm is to make your employees extraordinary by giving them the opportunity to succeed and making sure you, the business owner, aren't being part of the problem. This week's reading also includes three investment articles: one that suggests the fate of municipal bonds may be more tightly linked with equity returns than we realize; the second providing a nice primer on the European crisis and how we got to where we are; and the last suggesting that Europe's moment of truth may be arriving, and that they will not be able to substantively kick the can further down the road. We wrap up with a nice article from Robert Shiller - a prospective commencement speech for finance graduates that provides a nice reminder of both the challenges that finance must tackle in the coming years, and the underlying social purpose for why the finance sector exists in the first place. Enjoy the reading!

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Friday, June 22nd, 2012 Posted by Michael Kitces in Weekend Reading | 0 Comments

While the safe withdrawal rate research provides useful guidance to understand how much clients can safely spend as a baseline, it is based on historical index returns - even though in reality, clients cannot even invest directly in an index without incurring some investment costs, and many pay for the cost of a financial advisor in addition. As a result, many planners recommend that clients adjust their spending downwards to account for the costs and fees. Yet the reality of the research is that while investment expenses do have a real cost, it has far less of a spending impact than most assume; a 1% expense ratio might reduce a 4% withdrawal rate not to 3%, but instead to 3.6%. This surprising result occurs because of the self-mitigating impact of investment expenses that are recalculated based on the client's account; when accounts are declining, the fees decline as well, while inflation-adjusted spending rises. The end result is that while financial planners should not ignore the impact of expenses on sustainable spending, it's important not to overstate the impact, either, or clients may unnecessarily constrain their spending when they could be safely enjoying more of their money! Continue Reading...

Thursday, June 21st, 2012 Posted by Michael Kitces in Retirement Planning | 8 Comments

The foundation of investment education for CFP certificants is modern portfolio theory, which gives us tools to craft portfolios that effectively balance risk and return and reach the efficient frontier. Yet in his original paper, Markowitz himself acknowledged that the modern portfolio theory tool was simply designed to determine how to allocate a portfolio, given the expected returns, volatilities, and correlations of the available investments. Determining what those inputs should be, however, was left up to the person using the model. As a result, the risk of using modern portfolio theory - like any model - is that if poor inputs go into the model, poor results come out. Yet what happens when the inputs to modern portfolio theory are determined more proactively in response to an ever-changing investment environment? The asset allocation of the portfolio tactically shifts in response to varying inputs! Continue Reading...

Wednesday, June 20th, 2012 Posted by Michael Kitces in Investments | 16 Comments

Although the tax laws have technically always required that, when investments are sold, the specific lots and their associated cost basis are identified to determine the amount of any gains or losses, in practice most clients have simply chosen after the fact - when the tax return is prepared - which shares were sold, selecting the lots that produce the most optimal tax result. However, under new laws coming into effect, brokers and custodians will begin to automatically report transactions - including which lots were sold, the cost basis, the amount of gain/loss, and the date of acquisition and character of the loss - directly to the IRS, with sales locked in at the time the transaction settles. As a result, clients and their advisors must make proactive decisions regarding a proper method of accounting for portfolios, or run the risk that the "wrong" lots will be sold, with no way to remedy the situation after the fact! And while the IRS does provide a default method of accounting that will apply, in reality most clients will find the default a sub-optimal solution. Which means the burden really shifts to clients and their advisors to put the optimal method in place... which first requires making the right decision about whether it's better to harvest gains or losses in the first place, depending on the client's situation! Continue Reading...

Tuesday, June 19th, 2012 Posted by Michael Kitces in Taxes | 11 Comments

As the baby boomers move inexorably closer to the point where they begin to retire en masse out of the workforce, so too does financial planning move closer to the point where the majority of experienced practitioners and firm owners will begin to exit the business. Industry guru Mark Tibergien estimates that as many as 2/3rds of all financial advisors may look to exit in the next 10 years, requiring more than 200,000 new planners to enter the industry just to keep the total number of practitioners even. Yet the reality is that so far, the industry appears to be woefully behind. As a result of this prospective workforce distortion, financial planning will potentially undergo significant changes in the coming years, and not necessarily for the good. In a "seller's market" for talent, large firms that can compete with both training and resources, and that have the profit margins to absorb higher compensation costs, will survive and grow; on the other hand, smaller firms may find themselves in a plight of being "stuck" small, unable to attract or even afford the young talent necessary to grow. And in the process, the greatest loser may be the majority of the American public, who simply will not be served when a dearth of planners inevitably causes the few practitioners that remain to be attracted to the most lucrative high net worth clients. Continue Reading...

Monday, June 18th, 2012 Posted by Michael Kitces in Planning Profession | 15 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, October 7th, 2015

*CPWA Training on Retirement Planning @ IMCA

Wednesday, October 7th, 2015

*Cutting Edge Tax Planning Developments & Opportunities *Social Security Benefits Planning for Couples *Life & Death Tax Planning for Annuities @ Dupage County Estate Planning Council

Tuesday, October 13th, 2015

*Understanding Longevity Annuities and their Potential Role in Retirement *Generating Tax Alpha with Effective Asset Location @ FPA Southern Wisconsin