Nerd's Eye View blog

MailBag: Intra-Plan And In-Service Roth Conversions Of A 401(k) Plan

August 4, 2015 07:01 am 22 Comments CATEGORY: MailBag

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 two questions related to the increasingly popular strategy of making after-tax contributions to a 401(k) plan and subsequently converting them to a Roth, either via an intra-plan conversion to a Roth 401(k), or using ongoing in-service distributions from the 401(k) to convert to a Roth IRA!

Sales Training And Business Development Skills For The Next Generation Of Financial Advisors

August 3, 2015 07:01 am 20 Comments CATEGORY: Personal/Career Development

The first generation of financial planners rarely started out as financial planners; most were initially insurance agents or stockbrokers in the business of selling a product, who later evolved their business to get paid for advice instead (after they already learned how to sell). By contrast, financial planners entering the profession today often come to the table to be paid for their advice from the start, and subsequently struggle due to their lack of business development experience and sales skills.

After all, the reality is that even if someone comes into financial services to be paid for their advice – not the products they sell – it is still necessary to learn how to sell in order to convince potential clients to pay for that advice. Yet unfortunately, relatively little exists in the way of sales training for financial advisors who actually want to be paid for their advice – historically (and still), most “sales training” was/is available from the product firms who train their “advisors” how to sell their products.

Nonetheless, even if they must pursue it on their own, whether by reading, hiring a sales coach, or experience from the "school of hard knocks", it’s crucial for today’s new advisors to recognize that selling - and developing their sales technique - is an essential skill for success. From being ready to “ask for the business” and “go for the close”, to crafting a sales process, managing a sales pipeline, and monitoring business development metrics – in the end, it doesn’t matter how great your advice actually is if you can’t convince anyone to pay you for that advice in the first place!

Weekend Reading for Financial Planners (Aug 1-2)

July 31, 2015 02:26 pm 13 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with the release of Judge Leon's opinion memorandum in the case of Camarda vs CFP Board, which reveals that the Judge's decision in favor of the CFP Board was based not on the merits of the case, but simply that the courts wouldn't intervene in the 'private internal affairs' of the CFP Board's disciplinary process... raising the concern that no CFP certificants may have any recourse in a court of law to hold the CFP Board accountable in situations where there is a future disciplinary dispute. Also in the news this week was the announcement that Schwab is aiming to significantly expand its branch office network and ramp up hiring of its own advisors, raising questions of whether it may increasingly find itself competing with the RIAs using its platform. And rounding out the news this week is an article by Knut Rostad offering suggestions of how the Department of Labor can improve its "BICE" rules to ensure the fiduciary standard is not undermined.

From there, we have a few technical planning articles this week, including a discussion of whether managed payout funds are better retirement income vehicles than immediate annuities (the results don't look good for those who top priority is retirement income!), a look at how most people with access to an Employee Stock Purchase Plan (ESPP) are underutilizing them and leaving "free" profits on the table, and some suggestions on how to modify the way Power of Attorney documents are used to cut down on the rising trend of elder financial abuse.

There are also a few practice management articles, from a reminder that the slow summer season is a good time to do strategic planning for your advisory business (or personal career!), to a look at the rise of "advisor blogging" as a means to market and grow an advisory firm, and a discussion of the issues that advisors should consider when it comes to compliant storage of digital client documents (from encrypting your computer, to the encryption capabilities of your cloud storage service, and how to ensure secure transmission of the data between the two!).

We wrap up with three interesting articles: the first is a good reminder that to really help clients, advisors need to focus on what really motivates them (i.e., clients aren't necessarily motivated by setting goals; instead, figure out what motivates them, and help them to direct that energy towards achieving their goals!); the second is a high-level look at how the entire financial services industry is in transition, driven by both top-down regulatory changes still being implemented since the financial crisis, plus the bottom-up impact of the rising Millennial generation and the increasing intrusion of Silicon Valley and the world of FinTech; and the last is a fascinating roundtable interview with "next generation" advisors, suggesting that the primary problem advisory firms have with retention of younger advisors is not that they're all looking for a handout, but that firms are simply failing to articulate clear goals for young advisors to pursue and then also failing to reward the young advisors with advancement when those goals are achieved.

Enjoy the reading!

One Insurance Agent’s Transition To Fee-Only RIA, In Just A Few Months…

July 30, 2015 07:01 am 47 Comments CATEGORY: Practice Management

Making a big change in your advisory business can be scary, and there's perhaps nothing more scary than breaking away from where you started your financial services career to go out on your own as an independent RIA. From wondering whether your clients will come with you, to facing the burdens of being the business owner responsible for everything, to just the transition process itself, there's a lot to deal with.

In this guest post, Daniel Wrenne - a former Northwestern Mutual agent turned fee-only independent RIA - shares the story of his own transition process, and the surprisingly fast 6-month timeline it took from when he first had the idea to go out on his own, until his independent RIA was approved by the state of Kentucky and his new business was launched. And Daniel shares everything he went through along the way, from the key software tools and technology he chose, to how many clients actually transitioned (fewer than he hoped, but all the best clients he really wanted!), and the niche he's chosen to pursue going forward, supporting by an inbound marketing strategy to grow his business in the future.

So if you're an existing insurance agent or broker thinking about breaking away to start your own independent RIA, this should be helpful to you as you consider what it may take to move forward from here, as well as recognizing the realistic challenge you're up against (Daniel notes that even in transitioning existing clients, he'll be waiting a full year before taking any salary out of the business for himself!).

How Has The 4% Rule Held Up Since The Tech Bubble And The 2008 Financial Crisis?

July 29, 2015 07:01 am 50 Comments CATEGORY: Retirement Planning

The 4% rule has been much maligned lately, as recent market woes of the past 15 years – from the tech crash of 2000 to the global financial crisis of 2008 – have pressured both market returns and the portfolios of retirees.

Yet a deeper look reveals that if a 2008 or even a 2000 retiree had been following the 4% rule since retirement, their portfolios would be no worse off than any of the other "terrible" historical market scenarios that created the 4% rule from retirement years like 1929, 1937, and 1966. To some extent, the portfolio of the modern retiree is buoyed by the (only) modest inflation that has been occurring in recent years, yet even after adjusting for inflation, today’s retirees are not doing any materially worse than other historical bad-market scenarios where the 4% rule worked.

Ultimately, this doesn’t necessarily mean that the coming years won’t turn out to be even worse or that the 4% rule is “sacred”, but it does emphasize just how bad the historical market returns were that created it and just how conservative the 4% rule actually is, and that recent market events like the financial crisis are not an example of the failings of the 4% rule but how robustly it succeeds!

MailBag: Offering Insurance Solutions As An RIA, And How To Handle Life Insurance With An Outstanding Loan At Death

July 28, 2015 07:01 am 13 Comments CATEGORY: MailBag

In this week's MailBag, we look at how to structure an advisory firm that is aiming to be an RIA and help clients to implement their insurance needs (using an insurance broker general agent relationship to avoid working with a broker-dealer), and the tax consequences of a life insurance policy when the insured dies while there is still an outstanding loan against the policy.

How Video Conferencing Can Put The Face-To-Face (Back) Into Distant Financial Planning Client Relationships

July 27, 2015 07:01 am 27 Comments CATEGORY: Practice Management

Financial planning is a relationship business, but in our increasingly mobile and time-stressed society, it’s harder than ever to maintain face-to-face relationships. Not just because it may be difficult to find a time to schedule an in-person meeting with clients, but also because many clients relocate and aren’t even in the area for a face-to-face meeting!

Yet with the rise of broadband internet access, it is now increasingly feasible to use video to connect with clients at a distance. Of course, many advisors already communicate with clients at a distance via emails and telephone calls, but the significance of video is that it literally puts the “face-to-face” back into a distance-based relationship. You can see the client, the client can see you, and all the non-verbal communication that is lost in a telephone call or an email comes back into the conversation.

And notably, video is relevant not just for maintaining face-to-face relationships with existing clients, but as a means to build a relationship with new clients as well. In fact, arguably it may be even more feasible than ever for advisors to build relationships with new clients at a distance, as video allows even those who have never “met” in person to get to know each other, face to face!

Weekend Reading for Financial Planners (July 25-26)

July 24, 2015 02:39 pm 22 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition kicks off with a look at the landscape for the Department of Labor's fiduciary proposal, now that the public comment period has closed (with a whopping 775 comment letters submitted!), and moves on to public hearings, potential revisions of the rule... and a looming deadline of implementation in 18 months or risk having the rule derailed by the next administration.

From there, we have a few technical planning articles this week, including a look at the woes of energy-related MLP investments that have tumbled this year amidst declining energy prices, a discussion of how lifetime income annuity payouts may soon take a hint as the industry prepares to implement updated RP-2014 actuarial tables, and some tax issues to consider in retirement when coordinating between IRAs (and their prospective RMDs) and the taxability of Social Security benefits.

There are also a few practice management articles, from the latest Schwab benchmarking study for RIAs showing that the typical firm has doubled its revenues since 2009(!), the dynamics for advisors working in wirehouses as the large firms seek to fight the breakaway broker record as post-financial-crisis retention bonuses start to expire, and some issues to consider when running client appreciation or prospective client marketing events (especially from the compliance perspective).

We have a couple of technology-related articles this week too, from practical tips on cybersecurity for advisors, to a look at the big industry news that SS&C has decided to start pushing Advent Axys users over to Black Diamond, and some tips from financial advisor Dave Grant on new technology tools for advisors to check out (including website design providers, new planning software, and more).

We wrap up with three interesting articles: the first is a profile of SigFig, a firm in the "robo-advisor" category that has a whopping $350B of assets loaded into its analytics tools but only a paltry $69M of AUM, as the company begins a pivot towards working with established financial services firms (e.g., banks) to find growth; the second is an interesting new study from the Journal of Financial Planning, which finds that extroversion and agreeableness are (modestly) correlated to higher levels of net worth; and the last is a profile of 29-year-old financial planner Pamela Capalad, who engages clients by meeting over brunch (with a business literally called "Brunch & Budget") and has been able to build a base of almost 100 clients, mostly "hard-to-reach" Millennials, in just the past 3 years.

Enjoy the reading!

How To Evaluate The Pension Versus Lump Sum Decision, And Strategies For Maximization

July 22, 2015 07:01 am 51 Comments CATEGORY: Retirement Planning

While the use of pensions as an employee benefit is on the decline, many of today’s workers nearing retirement have participated in a pension plan for the past several decades, and have already accumulated a significant pension benefit. And as those individuals begin to retire, they are faced with the classic decision of whether to keep the lifetime pension payments, or choose a lump sum instead.

While there are several factors that go into the pension-vs-lump-sum decision, ultimately the trade-off can be boiled down to calculating the internal rate of return (IRR) of the promised pension cash flows, which reveals the “hurdle rate” of return that a lump sum portfolio would have to earn to generate to reproduce those same payments over the same time horizon. Of course, the longer the retiree is expected to live, the greater the number of anticipated pension payments, and the greater the portfolio hurdle rate will be.

Ultimately, though, because life expectancy will vary by the individual, and in practice the size of a lump sum relative to a pension payments will also vary from one plan to the next (and also over time, as the GATT rate used to discount the pension payments fluctuates from month to month and year to year), the decision of whether to keep a pension or convert it into a lump sum will vary from one person to the next. In some cases, choosing a lump sum will clearly be best (e.g., when life expectancy is short or the hurdle rate is especially low), while in others there will be no way for a portfolio to generate similar cash flows without a significant amount of risk – at least, as long as the pension plan itself remains secure and isn’t facing a potential default or being forced to rely on PBGC backing!