As 2016 comes to a close, I am so thankful to all of you, the growing number of readers who continue to regularly visit this Nerd’s Eye View blog, and have been kind enough to share the content with your friends and colleagues as well (which I greatly appreciate!). Over the past year, the cumulative readership of the blog has grown yet another 35%, with more than 160,000 unique readers coming to Nerd’s Eye View last month. The continued growth has meant more reinvestments into features and even staffing, to continue to build this platform for the benefit of advisors. And we’ll be announcing a number of major new initiatives in early 2017 as well!
Yet notwithstanding how many of you have made reading the Nerd’s Eye View a weekly habit, I realize that the sheer volume of articles can feel overwhelming at times, and that it’s not always possible to keep up with it all. And blog articles, once published, are usually quite quickly left in the dust as the next new article comes along.
Accordingly, just as I did last year and in 2014, I’ve compiled for you this Highlights list of our top 20 articles of 2016 that you might have missed. So whether you’re new to the blog and haven’t searched through the Archives yet, or simply haven’t had the time to keep up with everything, I hope that some of these will (still) be useful for you! And as always, I hope you’ll take a moment to share articles of interest with your friends and colleagues as well!
In the meantime, I hope you’re having a safe and happy holiday season. Thanks again for another successful year in 2016, and I hope you enjoy all the new services we’ll be rolling out in 2017, too!
Don’t miss our Annual Guides as well – including our list of the “15 Best Conferences for Financial Advisors in 2017“, our “2016 Reading List Of Best Books For Financial Advisors“, and also our popular new “Advisor’s Guide To The Best Financial Planning Software (For You)“!
2016 Best-Of Highlights Categories: General Financial Planning | Insurance/Annuities | Investments | Practice Management/Marketing | Personal/Career Development | Industry/Profession Trends | Retirement Planning | Tax Planning | Advisor Technology/FinTech |
General Financial Planning
The Importance Of Creating Small Financial Planning Goals – Financial planning is focused heavily on establishing and working towards very big long-term goals, from saving for a child’s education to accumulating the assets to fund a multi-decade retirement. Yet the fundamental problem of “big” goals – financial planning or otherwise – is that they can seem so big and overwhelming that it’s actually demotivating. In the extreme, the goal may feel so distant and unachievable that it simply leads the person to give up on pursuing the goal at all! Accordingly, the reality is that to really make long-term financial planning goals achievable, the key is to break them down into smaller pieces first. As the saying goes, the best way to eat an elephant is “one bite at a time”. And the research on behavior change and motivation is increasingly finding that the “small wins” of successfully achieving small goals may actually be the key to helping us rewire our brains to stick with the new behavior in the long-run! Unfortunately, though, financial planning education provides little in the way of training on how to break down big goals into small ones, and most financial planning software does a poor job of helping clients to track short-term goals! Nonetheless, in the world where the actual implementation of goals – i.e., into saving and investment accounts – is becoming increasingly commoditized, arguably it will be the process of helping clients break down big financial planning goals into smaller SMART goals that are Specific, Measurable, Achievable, Relevant, and Time-bound, and then providing them the tools to track progress and serving as an accountability partner to ensure follow-through, that may be the greatest financial planning value-add of all!
The End Of History Illusion And The Problem With Goals-Based Investing – The very essence of financial planning is about gathering information about client goals, and then providing recommendations for how the client can best achieve them. There’s just one problem: research suggests that we’re not actually very good at figuring out what our future goals will be in the first place! The fundamental challenge is that, despite recognizing how much we change over time (think back on how different you were 5, 10, or 20 years ago!), we just don’t know how to envision the ways we’ll be different in the future. In fact, researchers have dubbed the phenomenon the “End Of History Illusion” – we just don’t know how to project a future that’s any different than the today (which is the end of our personal history as we know it). From the perspective of financial planning, and the rising popularity of goals-based investing, the implicit challenge of the End Of History Illusion is that we may be encouraging retirees to save towards a vision of a particular retirement home, vacations, a boat on the lake, or a certain lifestyle, that they won’t actually care about when retirement comes! Which means investors should actually be cautious about tying their saving and investing habits in a way that over-commits to a particular and specific long-term goal. Instead, if we recognize the uncertainty of future goals themselves, planning for flexibility to adapt to future goals may be more effective than investing for the goals themselves!
How Life Insurance Loans Really Work And Why It’s Problematic To “Bank On Yourself” – A popular feature of permanent life insurance is that it accumulates cash value that can grow over time – ensuring that if the policy is surrendered, the policyowner will still have something to show for it that cannot be forfeited. However, this “non-forfeiture value” of a life insurance policy has an important secondary benefit as well: it gives an insurance company the means to provide policyowners a personal loan at favorable interest rates, because the cash value provides collateral for the loan. And since the cash value remains invested, there’s even a possibility that the cash value growth can out-earn the stated interest rate of the loan, allowing the loan to compound ‘indefinitely’. The caveat, however, is that in the end, this kind of “Bank On Yourself” strategy still relies on a life insurance policy loan that is really nothing more than a personal loan from an insurance company, using the life insurance cash value as collateral. Which means even if the net borrowing cost is low because the cash value continues to appreciate, that’s still growth that the investor might have enjoyed for personal use, if the loan was never taken out in the first place. Or viewed another way, trying to bank on yourself doesn’t work very well when ultimately the loan interest isn’t actually something you pay back to yourself, it simply repays the life insurance company instead! And of course, there’s still the risk of highly adverse tax consequences if the loan compounds out of control, forcing the policy to be “rescued” or causing a taxable lapse.
Could A Tontine Be Superior To Today’s Lifetime Annuity Income Products? – Despite the popular fear that retirees have of potentially outliving their money, and economics research that has long shown how leveraging mortality credits through annuitization is an “efficient” way to buy retirement income that can’t be outlived, the adoption of guaranteed lifetime income vehicles like a single premium immediate annuity purchased at retirement remains extremely low. In a recent new book entitled “King William’s Tontine: Why The Retirement Annuity Of The Future Should Resemble Its Past”, retirement researcher Moshe Milevsky makes the case that perhaps the primary blocking point of immediate annuitization really is its cost, and that guaranteeing mortality credits takes an unnecessary toll on available retirement income payouts. As an alternative, Milevsky advocates for a retirement income vehicle called a tontine. Similar to an annuity, a tontine provides payments for life that include both a return on capital and mortality credits stacked on top. The difference, however, is that with a tontine the mortality credits are not paid until some of the other tontine participants actually pass away – which eliminates the guarantee of exactly when mortality credits will be paid, but also drastically reduces the reserve requirements for annuity companies that offer a tontine (improving pricing and payout rates for consumers). Ultimately, it remains to be seen whether consumers would be willing to adopt a payment structure that involves getting more money for outliving your tontine peers. Yet Milevsky’s look through history reveals that tontine agreements have actually been very popular in the past, and nearly 100 years ago the use of tontines by Americans for retirement was similar to the widespread adoption of IRAs today. Which means it really may not be much of a stretch to suggest that they should be brought back as a new form of retirement lifetime income vehicle for the 21st century as well!
Finding The Optimal Rebalancing Frequency: Time Horizons Vs Tolerance Bands – Rebalancing plays a crucial role in ongoing portfolio management, both to ensure that the overall risk of the portfolio doesn’t drift higher (as risky investments can outcompound the conservative ones in the long run), and to potentially take advantage of sell-high buy-low opportunities. The caveat: it’s not entirely clear how often a portfolio should be rebalanced, in order to achieve these goals. The conventional wisdom is to rebalance a portfolio at least once per year, and possibly even more frequently, such as quarterly or monthly. A deeper look, however, reveals that more frequent rebalancing will on average have little impact on risk reduction, even less benefit from a return perspective, and just racks up unnecessary transaction costs along the way. Instead, the research suggests a superior rebalancing methodology is to allow portfolio allocations to drift slightly, and trigger a rebalancing trade only if a target “rebalancing tolerance band” threshold is reached (and if the investments grow in line and the relative weightings don’t change, no rebalancing trade occurs). The one caveat to the process of tolerance band rebalancing is that it requires ongoing active monitoring of the portfolio itself, to ensure that you know when a threshold has been reached. Fortunately, though, a growing number of rebalancing software tools are available to help advisors track each investment, its rebalancing thresholds, and even automatically calculate and queue up the rebalancing trades necessary to bring the portfolio in line again!
Replacing The Data Gathering Meeting With A “Get Organized” Client Experience – Creating a financial plan starts with gathering the client data, which many advisors request by providing new clients with a “data gathering form”, typically structured in a manner that makes it easy to input the data into their financial planning software. The caveat, however, is that in practice clients often don’t fill out the data gathering form! For some, they feel it’s too much work. For most, the problem is simply that they aren’t organized enough to provide all the requisite information in the first place! And some may even feel guilty or embarrassed about the fact that they’re “failing” in the very first step of the financial planning process! So what’s the alternative? Ditch the data gathering meeting, and have a “Get Organized” meeting instead. In other words, make the first meeting with the client about getting new clients financially organized in the first place. Have them bring in their jumbled files, and give them a file box with sorted folders to organize the information. Scan the key documents and statements and put them into a newly created client vault. Set up a client PFM portal, show them how to use it, and help them to begin connecting their accounts on the spot. By having the Get Organized meeting, the financial planner still has the opportunity to collect all the data that’s needed to move forward with the financial planning process – but done in a client-centric manner that recognizes the client’s challenges and provides them an immediate, tangible benefit. In fact, for some people, a “Get [Financially] Organized” service might be so valuable, advisors could even charge for it separately and get paid to market and demonstrate their value to prospective clients!
The Death Of Referrals And The Future Of Business Development For Financial Advisors – It is “accepted wisdom” that the best way to grow an advisory firm is through referrals. Except that in the latest Investment News 2016 benchmarking study of the Financial Performance of financial advisors, it turns out that COI and client referrals aren’t actually the primary driver of AUM growth for RIAs anymore. Instead, it’s now all about external business development and marketing strategies instead! Notably, though, while advisory firms are driving more growth from non-referral strategies, and are indicating plans to ramp up non-referral business development even more in the coming years, there’s little consensus about what the ‘best’ marketing strategies are. Nonetheless, the shift away from referrals appears to be on, in what may be driven by the underlying challenge that most advisors get new clients by taking on self-directed investors who decided to work with a financial advisor for the first time, but in today’s environment there just aren’t very many “unattached” clients left to be referred! Which means in the future, financial advisors may have to figure out how to not just bring in referrals, but do outbound marketing to persuade a client already working with an advisor to switch… a tough challenge, given the ongoing crisis of differentiation amongst most financial advisors today!
How To Turn Your Financial Advisor Website Visitors Into Prospect Leads – In the early years of the internet, a website was like a digital business card or a marketing brochure… a place for consumers to look up basic information to contact a (financial advisory) business. In today’s world, however, consumers use websites in a far more sophisticated manner – gathering information and ‘studying’ a number of businesses for an extended period of time, before ever being ready to contact the advisor and engage his/her services. The question, then, is how to take casual visitors to an advisor’s website, and connect with them in a manner that ensures they will come back when they’re ready? The answer: to use the first website visit as an opportunity to make a “digital connection” by persuading the visitor to opt into joining your mailing list – a lesson I had to learn the hard way! – which gives you the opportunity to stay connected with the prospect until they’re actually ready to do business. In fact, notwithstanding the massive growth of social media in recent years, marketing studies find that email still drives business 40X more effectively than social media. And a proliferation of new tools have made it easier than ever for advisors to use such solutions in their own marketing process. Notably, in the end, such marketing strategies are really no different than the drip marketing strategies that many financial advisors have engaged in for years, simply delivered – and leveraged – with the power of the internet!
My 6 Top Tips For Handling A High Volume Email Inbox – With the ongoing proliferation of email, it’s now estimated that we collectively send around more than 200 billion emails per day, and the number grows exponentially every year. Of course, the reality is that a lot of those emails are spam or irrelevant, yet with a growing volume of “real” emails from clients and staff and business contacts as well, there’s more and more pressure to come up with new ways to keep control of your email inbox. In this article, I share my 6 top tips for how I handle my own high-volume email inbox. From setting up a clear file folder system to sort through, to using the “Rules” systems in email software to sort incoming messages for me, creating autoresponders and custom alias email addresses, and more. Unfortunately, the reality is that for most advisors, regaining control of your email inbox may take a while, especially if you’ve felt so overwhelmed in the past you’ve just allowed it to go from bad to worse. But the good news is that the tips I provide can be done incrementally over time. Start with one step, do the next, and then another. If you commit just a minute or two a day to make small changes, you’ll find in a month that your email inbox is a lot more manageable than it ever was before!
Why I’ll Spend $100 On #FinTech That Saves Me One Minute A Day – One of the great virtues of technology is its ability to make us more personally productive. Yet in a world with more and more paid apps and software-as-a-service solutions, it’s easy to quickly spend a lot of money on technology tools. Even though many solutions are really built to solve problems so minor, it may save you no more than a minute or two a day. Nonetheless, the reality is that even with just a miniscule improvement in efficiency, I will still happily spend $100 for a technology tool that saves me as little as one minute a day, because it actually generates a 900% Return On Investment! The key is making such investments in personal productivity is to recognize that saving as little as one minute a day is actually 5 minutes a week, or 20 minutes a month, or a non-trivial 4 hours a year. That’s a half a day’s additional productivity, eeked out a minute at a time. And the real opportunity is not just to spend money to save a minute a day, but the cumulative impact of buying multiple tools, that cumulatively save 15 minutes a day… which is suddenly 75 minutes a week, or 5 hours a month, or more than a week per year! That’s an entire extra week that could be a family vacation, or taking on an extra client (or for me a chance to accept another speaking engagement or two!). In this post, I share some of the paid productivity tools that have helped me in particular, but the bottom line is simply to recognize that often the biggest breakthrough for being more productive is not about making a “big” change that frees up a lot of time, but the cumulative impact of little changes that add up to a lot over time.
How Financial Planning Retainer Fees Are Going Beyond AUM Fees Rather Than Replacing Them – With the ongoing rise of technology commoditizing pure investment management, a growing chorus of critics are raising the question of whether the AUM model is “toast”, or at the least that financial planning fees may soon need to be unbundled from AUM fees. Yet a look at the most recent Investment News and FA Insight benchmarking studies reveals the exact opposite trend: the most profitable and highest growth firms continue to be those that embrace the AUM fee, and are not adopting standalone financial planning project or retainer fees en masse. And in fact, the larger the advisory firm, the more likely the top performers are to focus solely on the AUM model! To the extent that standalone financial planning fees are being adopted at all, it’s actually amongst the smallest “solo” advisor firms who tend to serve the least affluent clientele – for whom planning fees may be effective simply because their clients don’t have the assets to fit an AUM model in the first place (and also because they don’t have the overhead demands of large firms). More broadly, what this data suggests is that to the extent there is any rise in the use of standalone planning fees by advisory firms, it is primarily being done by firms serving clients who can’t even be reached as effectively by the AUM model anyway (i.e., they don’t have a large amount of assets available to be managed), rather than competing in a losing head-to-head battle with the largest AUM firms that continue to be more profitable and capable of reinvesting more to outgrow their non-AUM competitors!
How Financial Advisors Can Differentiate On Great Service With A Client Service Standard – In an increasingly competitive landscape, most financial advisors have succeeded by providing quality service that retains their existing clients, with the average financial advisor retention rate at 94%. Yet the challenge is that while offering great service may keep clients on board, it’s incredibly difficult to use “great service” as a differentiator. In fact, according to one recent study, 72% of all advisors differentiate on client service. And by definition, when the majority of advisors differentiate on the same point, it’s not differentiating anymore! In addition, differentiating on service is also difficult because there’s no clear and consistent definition of what “great service” even is. Especially since what is great service to one client may not be to another. Which means at a minimum, for advisors who do want to differentiate on great service, it’s necessary to craft a “Client Service Standards” document that explicitly states what “great service” really means, at least from the advisory firm’s perspective in trying to serve its ideal clients. Of course, if you commit to it, be certain you’re really ready to deliver it, too!
Advisor’s Guide To DoL Fiduciary And The New Best Interests Contract (BIC) Requirement – On April 6 of 2016, the world of professional financial advice took its first step into the future with the issuance of a Department of Labor (DoL) fiduciary rule. The DoL’s new rule declared that brokers can no longer earn commissions and other forms of conflicted advice compensation from consumers, unless they agree to do so pursuant to a Best Interests Contract (BIC) agreement with the client. The BIC, in turn, commits the Financial Institution to a fiduciary standard of giving advice in the “best interests” of the client, earning “reasonable compensation”, and providing appropriate disclosure and transparency about the products and compensation involved. In this article, we provide an in-depth look at the keystone of the new fiduciary rule as it pertains to advisors working with individual retirement accounts: the new “Best Interests Contract Exemption” (which most broker-dealers and insurance companies will rely upon in their future attempts to provide conflicted advice to IRAs for commission compensation), and the creation of the new “Level Fee Fiduciary” safe harbor, that may (and I strongly suspect, will) eventually become the standard by which all retirement advice is delivered. With the clock ticking for the onset of the new fiduciary rule – key provisions of the rule take effect on April 10, 2017, with a transition period for the remaining rules by January 1, 2018 – a lot of advisory firms will be scrambling in the first quarter of 2017 to bring themselves into compliance, especially as the Department of Labor continues to successfully defend the lawsuits aiming to halt the rule, and despite having been adopted along partisan lines (with Democrats supporting and Republicans against), it’s not clear that President Trump will necessarily intervene to stop the rule, either.
Who Watches The CFP Board Watchers? – In the nearly 10 years since Kevin Keller took over as the CEO of the CFP Board, the rolls of CFP certificants have grown by over 35%, even amidst a global financial crisis and an advisor demographics challenge that has contributed to a nearly 15% decline in advisor headcount over that time period. In Keller’s early days, the CFP Board’s focus was squarely on rebuilding trust with its various stakeholders, from a relationship that had suffered greatly from a string of 6 CEOs in the preceding 6 years before Keller took over. It was a time filled with growing communication from the CFP Board to CFP certificants, where initiatives were extensively vetted for stakeholder opinion and feedback, and more than half a dozen different public comment periods for various rules changes. Yet since the CFP Board “lost” an initiative due to negative feedback during the public comment period in 2012, it’s been a full 4 years without the CFP Board announcing a single public comment period at all, despite engaging in numerous – and several unpopular – rules changes in the interim. Of course, ultimately any organization is accountable to its stakeholders who can “vote with their feet” to take their business elsewhere. Yet the growing dominance of the CFP marks as the financial planning designation of choice means financial planning practitioners have never had fewer real alternatives to choose from, particularly when the CFP Board’s ongoing Public Awareness Campaign and its “Certified = Qualified” message implicitly impugns any CFP certificant to their clients if that individual decides to walk away from the CFP marks. While some might suggest this is all the more reason to step away from the CFP marks and find an alternative designation, I still believe that the CFP Board and its certification are still the best chance we have to become a recognized and bona fide profession. But it does mean that perhaps it’s time to recognize that the CFP Board’s success in growing the adoption and prominence of the CFP marks is fundamentally changing the stakes and its relationship to CFP certificants as stakeholders, and that perhaps it’s time to re-evaluate the governance and accountability mechanisms the organization relies upon.
Reinventing The Broker-Dealer Business Model To Survive A DoL Fiduciary Future – The modern broker-dealer structure was created in the aftermath of the Crash of 1929, as the Securities Exchange Act of 1934 set forth new rules and registration requirements for the financial intermediaries that either were dealers in securities from their own investment inventory, or brokered securities transactions for their customers (including in subsequent decades the distribution of securities products, like mutual funds). Yet in the coming years, the broker-dealer business model is under threat from the looming rollout of the Department of Labor’s fiduciary rule, which at best will likely reduce upfront commissions and drive a shift towards more levelized compensation for advisors, and some predict may eventually eliminate product commissions altogether. Notably, a world without commissions is not necessarily the death knell for advisors, as the reality is that the non-commissioned RIA segment of advisors has already been experiencing the greatest growth in recent years, and even the majority of brokers have indicated that they think it is reasonable to be required to give advice in the best interests of their clients. However, the ongoing evolutionary shift of “financial advisors” from securities product salespeople to actual advisors is creating an existential crisis for broker-dealers – after all, in a future fiduciary world where advisors are paid directly by their clients for advice, what is the purpose or need for a broker-dealer intermediary at all? Which means in the long run, for broker-dealers to survive and thrive, they will be compelled to reinvent their business (and revenue) models altogether, to remain relevant in a world of financial advisors that rely on them not as financial intermediaries to facilitate the distribution and sale of third-party or proprietary securities products, but financial advisor support platforms that help to facilitate the success of advisors who are actually paid for their financial advice!
The Portfolio Size Effect And Using A Bond Tent To Navigate The Retirement Danger Zone – The final decade leading up to retirement, and the first decade of retirement itself, form a retirement danger zone, where the size of ongoing contributions and the benefits of continuing to work are dwarfed by the returns of the portfolio itself. As a result of this “portfolio size effect”, the portfolio becomes almost entirely dependent on getting a favorable sequence of returns to carry through. And because the consequences of a bear market can be so severe when the portfolio’s value is at its peak, it becomes necessary to dampen down the volatility of the portfolio to navigate the danger – a strategy commonly implemented by many lifecycle and target date funds, which use a decreasing equity glidepath that drifts equity exposure lower each year. Yet the reality is that the retirement danger zone is still limited – after the first decade, good returns will have already carried the retiree past the point of danger, and bad returns at least mean that good returns are likely coming soon, as valuation normalizes and the market cycle takes over. Which means while it’s necessary to be conservative to defend against the portfolio size effect, it’s not necessary to reduce equity exposure indefinitely. Instead, the optimal glidepath for asset allocation appears to be a V-shaped equity exposure, that starts out high in the early working years, gets lower as retirement approaches, and then rises again through the first half of retirement. Or viewed another way, the prospective retiree builds a reserve of bonds in the final decade leading up to retirement, and then spends down that bond reserve in the early years of retirement itself (allowing equity exposure to return to normal). Ultimately, further research is necessary to determine the exact ideal shape of this “bond tent” (named for the shape of the bond allocation as it rises leading up to retirement and then falls thereafter). But the point remains that perhaps the best way to manage sequence of return risk in the years leading up to retirement and thereafter is simply to build up and then use a reserve of bonds to weather the storm.
Tax-Efficient Spending Strategies From Retirement Portfolios – For most retirees, the tax efficient liquidation of a retirement portfolio requires coordinating between both taxable brokerage accounts and pre-tax retirement accounts like an IRA or 401(k), and sometimes tax-free Roth-style accounts as well. The conventional view is that taxable investment accounts should be liquidated first, while tax-deferred accounts are allowed to continue to compound. Except in practice, it’s possible to be “too good” at tax deferral, where the IRA grows so large that future withdrawals (or even just RMD obligations) actually drive the retiree into higher tax brackets, resulting in less long-term wealth! As a result, a more tax-efficient liquidation strategy is to tap IRA accounts earlier rather than later. Not so much that the tax bracket is driven up now, but enough to fill lower brackets now while reducing exposure to higher tax brackets in the future. However, the optimal approach is actually to preserve the tax-preferenced value of retirement accounts, and to fill the tax brackets early on by doing systematic partial Roth conversions of the pre-tax IRA while funding retirement spending from taxable investment accounts. The end result is that the retiree will tap investment accounts for retirement cash flows in the early years, a combination of taxable IRA and tax-free Roth accounts in the later years, and in the process avoid ever being pushed into top tax brackets, now or in the future!
Understanding The 2017 Income Tax Reform Proposals: President Trump Vs House Republicans – With the Republican clean sweep of both the White House and both houses of Congress, momentum is building for 2017 to be a major year of tax reform, both for corporations, and for the individuals that financial advisors work with. In this blog post, we delve in depth into both the likelihood of individual tax reform itself, and the details of the proposals from both President Trump, and the House Republicans. Both proposals would drastically simplify the tax brackets, from the current 7 tiers of tax rates, down to just three: 12%, 25%, and a top rate of 33% that kicks in at $225,000 (for married couples, or $112,500 for individuals). And both would still keep preferential rates for capital gains and qualified dividends, although President Trump would retain the current 3 brackets (0%, 15%, and 20%), while the House GOP would simply make the rates 50% of the ordinary tax bracket (which means investment income would be taxed at 6%, 12.5%, and 16.5%). However, when it comes to deductions, the proposals diverge substantially, with the House GOP suggesting the elimination of virtually all individual tax deductions except the mortgage and charitable deductions (paired with an expanded standard deduction), while President Trump would keep all the current itemized deduction rules, but cap itemized deductions (at $100,000 for individuals, or $200,000 for married couples) while also expanding the standard deduction even more. Ultimately, the significant differences in both the style of tax reform between the President and House GOP proposals, as well as the deficits they imply, could prove a stumbling block to getting legislation passed. Nonetheless, a flurry of end-of-2016 tax planning has been underway, in anticipation of the possibility that 2017 is finally the year for major income tax reform!
The B2C Robo-Advisor Movement Is Dying, But Its #FinTech Legacy Will Live On! – While several of today’s leading “robo-advisor” companies were founded in the aftermath of the financial crisis, it wasn’t until early 2012 that they finally converged on a common low-cost “automated investment service” model… which, coupled with a surge of media coverage, quickly suggested that they could become the future of financial advice (or at least investment management) for consumers. However, in the year since established players like Schwab and Vanguard launched ‘competing’ services, a fresh look at the robo-advisor landscape reveals that their growth rates are falling rapidly, to just 1/3rd their levels of one year ago. Their apparent demise: an inability to scale their marketing to sustain growth rates in the face of increasing competition and challenging client acquisition costs, coupled with a similar inability to materially grow their average account sizes. Accordingly, it’s not surprising to see many of the early robo-advisor players pivoting in other directions, using their long runway of available dollars to try to find greater growth traction, with at best one or two that might manage to build a viable brand that survives. Nonetheless, in the long run we may still look back at this moment as one of significant transition for the industry, not because robo-advisors disrupted human advisors, but because the emergence of robo-advisors was the needed catalyst for the industry to reinvest into the future of financial advisor technology, just as online brokerage in the late 1990s didn’t disrupt financial advisors but instead became the technology backbone of how we execute our businesses today!
How The Internet & Early #FinTech Destroyed Actively Managed Mutual Funds – The rise of Vanguard and ETFs in the past decade has been nothing short of astonishing, with trillions of inflows to ETF assets, and Vanguard adding more assets in the past 5 years than they did cumulatively in their first 35. Yet the question arises: what was it that made this past decade the one that drove a major rise in passive investing? Why didn’t it happen sooner? In this article, I posit that the real catalyst that changed the flows from active to passive funds was the internet. Because the reality is that before the internet, passive index funds may have often beat active managers, but the average investor didn’t have the tools to know that so many actively managed mutual funds underperformed their benchmarks! With the rise of the internet, though, investors could actually do real performance benchmarking and cost comparisons for the first time, shining a bright light on relative mutual fund performance, and easily identifying the laggards. And the trend may only be accelerated further by the DoL fiduciary rule, which could force tremendous consolidation of the entire ETF and index fund world. Because the reality is that with transparent tools to make it easier than ever to find the best fund – which when it comes to commoditized index funds, is often nothing more than a comparison of which is the cheapest – there’s no longer a need for 100 ETFs to track an index, nor 10, nor even three. Instead, these are “winner takes all” markets – which is exactly why the ETF and mutual fund price wars are underway, and are likely to continue for the foreseeable future.