Enjoy the current installment of "weekend reading for financial planners" - this week's edition highlights an array of industry practice management articles, leading off with a new discussion of "super ensemble" firms - the emerging regionally dominant wealth management firms with $5 billion or more of AUM that are challenging both small local firms and big institutional competitors. We also look at articles about the quickening pace of consolidation, the rising trend of large firms hiring career changers to replace retiring advisors as there aren't enough young people entering the industry, a prediction that flat fees will soon replace AUM as the primary method of advisor compensation, and a look at a new advisor firm offering from a Wharton professor seeking to provide a client-centric platform for new advisors to build their businesses. We finish with a good article from economist Gregory Mankiw in the New York Times about what carried interest really is and why it's so hard to figure out how to tax it, an intriguing look at the risks that western civilization faces from which it must emerge or face a risk of collapse, and a fascinating look at how the popular 60/40 portfolio may actually be far more risky than we commonly believe. Enjoy the reading!Read More...
Running a successful planning firm means not only being an effective financial planner, but also having the support of an effective staff. While a good hiring process can help to ensure that the right people are on board, the reality is that providing appropriate compensation with the right incentives can greatly facilitate the success of the firm. Yet there is much disagreement about the best way to provide incentives: should it be based on individual merit, or the revenue of the firm? Many suggest the former, noting that staff can control their individual merit more than they can impact the growth in the firm's revenue. But is it really true that staff - who are not out on the streets trying to find and develop new prospective clients - have so little impact on the revenue of the firm? Recent research suggests otherwise, as firms with revenue-based incentives nearly tripled their revenue growth from the bottom of the markets in 2008, compared to firms with merit-based bonuses. Which means in reality, your staff may impact the planning firm's revenue far more than you realize!Read More...
As social media continues to take the world by storm, advisors are increasingly under pressure to begin using social media in their own practices. Yet the advisory community has generally been slow to adopt, due both to the compliance challenges involved, and a general wariness about whether prospective clients would really make a decision to trust and work with an advisor based on social media marketing. In fact, a recent study by the Aite Group suggested that "the bloom is off the rose" when it comes to advisors adopting social media to bring in new business. Yet at the same time, a new social media trend is emerging - using social media not to develop new clients, but to better communicate and interact with existing clients. And the good news is that this approach to social media potentially has far fewer compliance headaches, too, because it's less about talking, and more about listening.
Enjoy the current installment of "weekend reading for financial planners" - this week's edition highlights an interesting interview with Geoff Davey of FinaMetrica about risk tolerance, some practice management issues on how economies of scale impact the client experience and moving your technology to the cloud, and a few articles exploring the big recent news from the Department of Labor regarding both finalized rules on 401(k) fee disclosure and new proposed rules about how (primarily immediate and longevity) annuities might be integrated into qualified plans. There's also an interesting look by John Mauldin at some of the economic difficulties and choices the US faces in the coming years, and a fascinating look at the problems the US faces (and some of the causes that got us to where we are) by the brilliant Woody Brock. We finish with a controversial article by Blaine Aiken of Fi360 suggesting that advisors aren't true professionals because they need a code of professional conduct similar to accountants, and a lighter piece by Angie Herbers about why a lack of confidence is not a career death knell but simply a challenge to overcome. Enjoy the reading!
In recent years, the financial planning profession has been focused on the development of a fiduciary standard for financial advice, to protect the public from the harm done by those who claim to act in their clients’ best interests but actually make recommendations to benefit themselves. However, the reality is that the recent challenges of fiduciary have extended beyond just the delivery of financial advice; since the financial crisis of 2008, the issue has also extended to the duty that Wall Street investment banks owed to those they sold securities to (even when the company “knew” the investments were dogs at best, or at worst actually bet again their customers for profit). Other fiduciary concerns that preceded the financial crisis have also been highlighted in recent years, such as the obligation of investment managers to vote the proxies for stocks they hold in the interests of shareholders. The good news in all of this is that the public backlash against a wide range of damages the financial system and corporations have inflicted upon the public is raising the focus on fiduciary simultaneously across multiple channels. The bad news is that the fact the fiduciary is so wide in scope appears to be making it extremely difficult to implement with practical regulation.Read More...
Enjoy the current installment of "weekend reading for financial planners" - this week's edition highlights a nice technology article for the new year, a great summary of recent retirement research, two notable regulatory actions this week, and some interesting investment and economic discussions for the coming year. We finish with a striking blog post that puts a good perspective on what the Occupy Wall Street movement is about - not resenting the wealthy and successful, but "just" those who profit at the expense of others. Enjoy the reading!Read More...
While the tax code offers a deduction for investment management fees paid by an investor, it is a less than ideal tax deduction. Characterized as a miscellaneous itemized deduction subject to the 2%-of-AGI floor, in practice it is not deductible unless the taxpayer both itemizes deductions in the first place, and has enough miscellaneous itemized deductions in total to exceed the required threshold. In addition, all such miscellaneous itemized deductions are disallowed for AMT purposes - especially problematic since the AMT is somewhat more likely to affect those with sufficient income and assets to be paying such fees in the first place.
To avoid this tax result, some clients and their accountants have been going an alternate route: capitalizing the investment management fee into the cost basis of the assets being managed, which at least provides some tax benefit, by increasing the cost basis and reducing future capital gains (or increasing the losses). Unfortunately, though, the IRS has already responded to the strategy: Just Don't Do It.Read More...
In the ongoing debate for the fiduciary standard, supporters of fiduciary have suggested that everyone in financial services should be subject to the standard, while those opposing have responded that consumers deserve a choice between fiduciary and suitability; in essence, they simply suggest that we should let consumers choose whatever method of financial services they prefer, and may be the best model win.
But to me, the choice presented is a false one: the real choice is not between fiduciary advice and suitable advice, the difference is between fiduciary advice from an advisor and suitable product sales from a broker. In other words, the real choice we should present to consumers is between advice and product sales, and the real goal of the planning profession should be to focus on who is and is not qualified to deliver advice, and really call themselves an advisor in the first place!Read More...
In the nebulous space where financial services firms decide what to call themselves and how to hold themselves out to the public, there's not necessarily a very clear distinction between a "financial planning" firm and a "private wealth management" advisor. Often, the difference is little more than the perceived marketing distinction of the labels to certain target clients.
Nonetheless, there is some evidence to suggest that the services delivered to very high net worth clients can be quite different than those provided to the average American, and accordingly may require a different set of knowledge and skills to deliver effectively.
As a result, there is an effort underway to try to study the real differences between what it takes to be a successful financial planner versus a private wealth management advisor, in order to develop certification that is unique and appropriate to the distinct specialization.Read More...