Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with a rather scathing article by NAPFA Chairman Ron Rhoades on why FINRA not only shouldn't be the SRO for investment advisors, but is failing its original charter and should be disbanded altogether. From there, we look at two technical estate planning articles - one on the different ways that incapacity is defined for trigger powers of attorney or even the competence to sign a Will or trust in the first place, and the other on how beneficiaries can potentially try to "bust" trusts that are no longer working as desired. We look at three practice management articles this week, including Mark Tibergien's latest offering on the importance of managing expenses as well as revenue growth, reporting on the recent FA Insight study showing firms with more widely distributed ownership are consistently better performers, and results from an Investment Advisor / ActiFi study at what practice management issues are most important to advisors and where they're currently getting help (surprising result - broker/dealers may be stepping up far more than custodians). We also look at an interesting retirement income analysis from Joe Tomlinson suggesting that SPIAs might be particularly effective for retirement portfolios despite - and in fact, because - of low current rates, and an analysis by Geoff Considine about why advisors may be giving short shrift to Master Limited Partnerships in their portfolios. We finish with a sharp analysis by John Hussman about what's really at the heart of the ongoing global economic malaise, an interesting write-up by Bob Veres about several presentations about trust at the recent FPA Retreat conference, and a lighter article by Abby Salameh on RIABiz abuot how to take a breath and relax to avoid being overwhelmed as a busy advisor. Enjoy the reading!
Cash reserve strategies that hold aside several years of spending to avoid liquidations during bear markets are a popular way to manage withdrawals for retirees. In theory, the strategy is presumed to enhance risk-adjusted returns by allowing retirees to spend down their cash during market declines and then replenish it after the recovery. Yet recent research in the Journal of Financial Planning reveals that the strategy actually results in more harm than good; while in some scenarios the cash reserves effectively allow the retiree to "time" the market by avoiding an untimely liquidation, more often the retiree simply ends out with less money due to the ongoing return drag of a significant portfolio position in cash. As a result, the superior strategy for those who want to alter their asset allocation through market volatility (the effective result of spending down cash in declines and replenishing it later) appears to be simply tactically altering asset allocation directly, without the adverse impact of a cash return drag. Nonetheless, this still fails to account for the psychological benefits the client enjoys by having a clearly identifiable cash reserve to manage spending through volatility - even though the reality is that it results in less retirement income, not more. Does that mean cash reserve strategies are still superior for their psychological benefits alone, even if they're not an effective way to time the market? Or do total return strategies simply need to find a better way to communicate their benefits and value?
Benchmarking is a standard tool for investors and investment professionals to evaluate the results of an investment manager. In a world of investing within asset classes and style boxes, the benchmarking process is relatively straightforward – any particular investment offering can be easily matched to an appropriate benchmark. In a world of unconstrained, “go-anywhere” style managers, though, the benchmarking process is less certain. Common methods to determine an appropriate benchmark – such as an ex-post regression of what the fund was invested in – can obscure the actions of the manager, for better or for worse. Is the only solution to simply select an arbitrary benchmark and proceed accordingly? Can we eschew a benchmark altogether?
Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with two articles about the ongoing debate in Washington on the Investment Advisor Oversight Act of 2012 (the so-called "Bachus SRO legislation"), including a scathing report from the Project on Government Oversight on why FINRA would be a poor choice of SRO, and a second article about why in the end there probably won't be any action on the Bachus legislation until next year anyway but it's still important to take it seriously now. From there, we look at a few practice management articles, from an interesting look at how young Generation Y agents are changing marketing and business development in the insurance industry, to the importance of having a good first-six-weeks process in your firm to ensure that your own new Generation Y hires will stick around for the long run, to the importance of choosing the right name for your firm, knowing how to sell to develop your business (even as a professional!), and that the key to growing your business is to deliver an experience that is remarkable - as in, literally, something worth remarking about. There's also an article about whether Veralytic is really a useful tool for advisors evaluating life insurance on Advisors4Advisors (a response to a post on this blog from a few weeks ago), an examination of how advisors have shifted their investments before and after the financial crisis, and a look at how the due diligence burden on really evaluating ETFs has become far more complex with the proliferation of ETF innovation. We wrap up with Bill Gross' latest missive from PIMCO about the Wall Street Food Chain, and how the 1% at the top may be disrupted more than they expect as the global deleveraging process continues. Enjoy the reading!
As the retirement income research evolves, an increasingly common question is whether the popular safe withdrawal rate approach is better or worse than an annuity-based strategy that provides a guaranteed income floor, with the remaining funds invested for future upside.
Yet the reality is that as it's commonly applied, the safe withdrawal rate strategy is a floor-with-upside approach, too. Unlike the annuity, it doesn't guarantee success with the backing of an insurance company; yet at the same time, the annuity is assured to provide no remaining legacy value at death, while the safe withdrawal rate approach actually has a whopping 96% probability of leaving 100% of the client's principal behind after 30 years!
Which means an annuity is really an alternative floor approach to safe withdrawal rates - one that provides a stronger guarantee while producing a similar amount of income, but results in a dramatic loss of liquidity, upside, and legacy. Does the common client preference towards safe withdrawal rates and away from annuities indicate that in the end, most clients just don't find the guarantee trade-off worthwhile for the certainty it provides?Read More...
Enjoy the current installment of "weekend reading for financial planners" - this week's edition starts off with a discussion of the latest shot fired in the SRO debate, as BCG and the Financial Planning Coalition respond to the latest FINRA estimate of SRO costs.
From there, we look at three significant articles on retirement income planning, including: the latest thoughts from Bill Bengen showing that the 4.5% withdrawal rate is still working just fine, even for a 2000 retiree; an article from the Journal of Financial Planning showing how holding several years of the portfolio in a cash reserve INCREASES retirement failure rates; and a discussion from Bob Veres in Financial Planning magazine about whether we need to change our retirement spending assumptions.
Beyond that, we have a number of interesting markets and investment pieces this week, including highlights from James Montier's opening keynote speech from CFA Institute earlier this month, a look at how 'adaptive' asset allocation holds more promise than traditional strategic allocations, a prediction from Mauldin that Germany is waving the white flag and clearing the way for the ECB to print Euros to solve the Eurozone problems, and ongoing worries from Hussman that we may be dancing at the edge of an investing cliff.
We wrap up with three interesting articles: a scathing 'anonymous' insider letter to Mark Zuckerberg shining a light on the investment bank realities of the IPO marketplace; an article by Angie Herbers about how the greatest problem in most advisory practices is the owner (and how to better get out of your own way for your firm's success); and tips for stressed-out advisors to try to (re-)gain a hold of some balance and efficiency in their practices. Enjoy the reading!
Enjoy the current installment of "weekend reading for financial planners" - this week's edition leads off with a proposed change by the CFP Board to develop sanction guidelines to that financial planner wrongdoing can be disciplined more consistently, as the organization continues to refine its enforcement efforts. From there, we look at a review of the FPA's Financial Plan Development and Fees study, and some regulatory discussion about the Financial Planning Coalition's recent effort to push the SEC forward on fiduciary rulemaking, along with an article where Don Trone explores the importance of discernment - to ability to know between right and wrong - in applying a fiduciary standard. The Journal of Financial Planning has several interesting articles around long-term care issues for clients, ranging from a contributions article on continuing-care retirement communities, a look at how advisors are dealing with rising LTC insurance costs, and an interview with doctor-turned-financial-planner Carolyn McClanahan. We continue the look at elder planning issues with Ed Slott's review of the new proposed Treasury regulations to allow longevity annuities inside of retirement accounts (although the products have yet to gain any momentum outside of retirement accounts, either!). Wrapping up includes a look at why Mark Hanson thinks the housing market still may not be a bottom (despite calls for it during the spring season for the fourth year in a row), why Hussman thinks 5-year forward returns for stocks are negative and that a bear market may be coming soon, and an interesting story from NPR about the psychology of fraud and new research to suggest that an important way to keep people from wrongdoing is to make sure they stay in an ethical frame of mind when evaluating their own actions. Enjoy the reading!
Most planners are familiar with the 4% safe withdrawal rate research, first established by Bill Bengen in 1994 and based upon a 30-year time horizon. However, a common criticism of the research is that many clients don't necessarily have a 30-year time horizon - it may be longer or shorter, depending on the client's individual planning needs and circumstances. Yet in reality, there is nothing about safe withdrawal rates that must apply only to a 30-year time horizon. In fact, research exists to demonstrate the safe withdrawal rate over a range of time horizons as short as 20 years (where the safe withdrawal rate rises as high as 5% - 5.5%) or even less, to as long as 40 years (where the safe withdrawal rate falls to 3.5%). And in turn, changing the time horizon and the withdrawal rate also affects the optimal asset allocation, making it slightly more equity-centric for longer time horizons, and far less equity-centric for shorter time horizons. In the end, this means that there is no one safe withdrawal rate; instead, there is a safe withdrawal rate matched to the time horizon of the client, whatever that may be! Read More...
Over the past few years, the Department of Labor has been working to bring transparency of fees and pricing to qualified plans, culminating in new regulations going into effect this year that will require new disclosures of direct and indirect compensation of service providers to the plan and the plan participants. While generally targeted at the segment of qualified plan consultants and advisors who regularly work with qualified plans, the reality is that any financial planner who has even just one qualified plan may be subject to the new rules - a fact that many are unaware of.
Yet with the new 408(b)(2) rules set to go into effect in just 2.5 months, financial planners who provide any consulting, investment advisory, or other services have very little time to get up to speed on drafting and preparing the appropriate disclosures, or deciding whether to just walk away from their qualified plan clients. The decision may vary from firm to firm, but inaction is no excuse - especially since if the disclosures aren't provided in a proper and timely manner, the plan fiduciary will actually be required by the Department of Labor to fire the advisor!Read More...
Enjoy the current installment of "weekend reading for financial planners" - this week's edition highlights two good technical articles; the first is from the Journal of Financial Planning on how the decision to delay Social Security isn't just about increasing benefits, but extending the overall longevity of the client portfolio as well; and the second is from Morningstar Advisor about the continued growth of alternative investments in portfolios. From there, we look at an interview with the CFP Board's new Director of Investigations as it steps up enforcement, and a review of the highlights from this week's Tiburon CEO Summit. We also look at three articles focused on the current state of practices, from the plight of the solo advisor, the changing focus of RIAs, and how to enhance the long-term value of your practice. We wrap up with a great article about how to craft an effective blog for your firm, an interesting perspective on the evolution of the variable annuity business, and a striking article from the Harvard Business Review blog that makes the point that ultimately, the best businesses are defined not by the products or services they sell, but the beliefs that guide the firm, its culture, what it delivers, and how it delivers it. Enjoy the reading! 752NXY7TM54P