News About IRS And Tax: July 2017

Monday 31 July 2017

Tips for Paying Off Summer Credit Card Debt

We’re halfway through the year! How have you been doing with your finances? If you’re behind on some of your goals, that’s okay. There’s plenty of time to get back into the swing of things! One goal many people have...

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source http://blog.turbotax.intuit.com/tax-planning-2/tips-for-paying-off-summer-credit-card-debt-31448/

Financial Advisor Fees Comparison – All-In Costs For The Typical Financial Advisor?

While the standard rule-of-thumb is that financial advisors charge 1% AUM fees, the reality is that as with most of the investment management industry, financial advisor fee schedules have graduated rates and breakpoints that reduce AUM fees for larger account sizes, such that the median advisory fee for high-net-worth clients is actually closer to 0.50% than 1%.

Yet at the same time, the total all-in cost to manage a portfolio is typically more than “just” the advisor’s AUM fee, given the underlying product costs of ETFs and mutual funds that most financial advisors still use, not to mention transaction costs, and various platform fees. Accordingly, a recent financial advisor fee study from Bob Veres’ Inside Information reveals that the true all-in cost for financial advisors averages about 1.65%, not “just” 1%!

On the other hand, with growing competitive pressures, financial advisors are increasingly compelled to do more to justify their fees than just assemble and oversee a diversified asset allocated portfolio. Instead, the standard investment management fee is increasingly a financial planning fee as well, and the typical advisor allocates nearly half of their bundled AUM fee to financial planning services (or otherwise charges separately for financial planning).

The end result is that comparing the cost of financial advice requires looking at more than “just” a single advisory fee. Instead, costs vary by the size of the client’s accounts, the nature of the advisor’s services, and the way portfolios are implemented, such that advisory fees must really be broken into their component parts: investment management fees, financial planning fees, product fees, and platform fee.

From this perspective, the reality is that the portion of a financial advisor’s fees allocable to investment management is actually not that different from robo-advisors now, suggesting there may not be much investment management fee compression on the horizon. At the same time, though, financial advisors themselves appear to be trying to defend their own fees by driving down their all-in costs, putting pressure on product manufacturers and platforms to reduce their own costs. Yet throughout it all, the Veres research concerningly suggests that even as financial advisors increasingly shift more of their advisory fee value proposition to financial planning and wealth management services, advisors are still struggling to demonstrate why financial planning services should command a pricing premium in the marketplace.

Friday 28 July 2017

Summer Cleaning Donations

Now that summer is upon on us, it might be a good time to go through your closets and clear out a little room while you have some more free time. Despite what you may have heard, making donations of property is not as scary or tricky as some have made it out to be.

source http://blog.turbotax.intuit.com/tax-deductions-and-credits-2/summer-cleaning-donations-3382/

Can My Boat or RV be Claimed as a Primary Residence on My Taxes?

Recently, there have been a plethora of stories about folks looking for a simpler life. For some, that simpler life is a tiny house where the upkeep and costs are low, and you strip your residence down to the bare...

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source http://blog.turbotax.intuit.com/tax-deductions-and-credits-2/home/can-my-boat-or-rv-be-claimed-as-a-primary-residence-on-my-taxes-23393/

Weekend Reading for Financial Planners (July 29-30)

Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with the announcement that Golden Gate University has launched the first Master’s in Financial Planning with a concentration in financial life planning, as financial planning education providers increasingly shift to focus on training new financial advisors in the communication and empathy skills needed for future success. Also in the news this week was the announcement that the Treasury is shutting down the MyRA program (after it failed to blossom into a full-blown automatic IRA enrollment solution, and only a lackluster 20,000 households have signed up in the past two years), and for the first time an independent RIA successfully sued a large broker-dealer (for $1.5M!) for poaching one of its advisors who improperly took client information when he left (signaling a new escalation in the growing battle between broker-dealers and RIAs, as in the past it was only broker-dealers suing RIAs for poaching advisors, not the other way around!).

From there, we have a few practice management articles this week, including one about the importance of becoming an “emotionally intelligent CEO” for advisory firm founders who must transition from “just” being the lead advisor into being a leader and executive of the firm, another about what to do if an employee declines a promotion or opportunity for partnership, and why advisors need to be wary of asking “platitude” questions like “What keeps you up at night” when talking to prospects, and instead reframe question to get more concrete responses that help the advisor really understand how he/she can help.

We also feature several more technical articles, from a review of the rules on deducting long-term care expenses (not just LTC insurance, but the underlying expenses themselves for those who aren’t fully insured!), to issues to consider when choosing a (family or corporate) trustee as part of the estate plan, and the rules for Medicaid recovery (where the state files a claim against a decedent’s probate estate to recover state Medicaid expenses against any of the decedent’s remaining assets at death that weren’t already spent down).

We wrap up with three interesting articles, all looking at the connections between happiness, fulfillment, and how we spend our dollars: the first is a review of a recent study finding that spending money on timesaving tasks (e.g., hiring a maid, or ordering takeout for dinner) provides a greater happiness boost than spending on material goods; the second looks at the decline of conspicuous consumption amongst the affluent, and the rise of “inconspicuous consumption” amongst the upper-middle-class (spending on things like services and education), in a manner that doesn’t overtly display social status, but may reduce social mobility; and the third is a fascinating interview about the latest research on positive psychology and what leads us to really feel fulfilled in our lives.

Enjoy the “light” reading!

Thursday 27 July 2017

Is It Really Bad To Name Your Financial Advisory Business After Yourself?

Whenever a financial advisor is starting a new firm – whether it is because they are breaking away to the independent channel, or simply just starting a new firm from scratch – there’s a lot to deal with, but one seemingly simple question that tends to stump most advisors is what to name their new advisory firm. Of course, clients will still be hiring you – the financial advisor – because of your skills and capabilities, not your firm because of its name. But nonetheless, the name represents the identity of the firm, and the brand that you will build. Which raises the question: if you are the primary advisor, should you simply name the advisory firm after yourself? And if you plan to build an advisory business beyond yourself, does that mean you need to avoid having your name on the door of the firm?

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss when it is good idea to go ahead and name your advisory firm after yourself, the scenarios where it can create challenges, and why ultimately whether your advisory firm grows into a business or not is much more about the mindset you have for your business, than whether you put your name on the door (or not)!

From the perspective of getting clients and building business, one of the greatest challenges we face in financial planning is that we sell an intangible: “advice”. Financial advice isn’t something the prospective client can pick up and look at in a store, and consequently he/she has to look to other intangibles to decide whether to work with you as a financial advisor. Large national firms can rely on being a recognized brand to attract new clients, but most advisory firms are too small to rely on national branding alone. Instead, they get their clients by building a personal relationship with them, to become someone the client knows, likes, and trusts. As a result, most solo financial advisors simply put their own name into the advisory firm name… as in the end, if you’re John Smith, and you call your firm Smith Financial Planning, it simply helps connect the consumer to you!

Indirectly, however, this actually illustrates the second key issue when it comes to naming your advisory firm, and whether it’s a problem or not to name it after yourself. The question is: what are you really trying to build? Are you trying to build a real, standalone business? Or is your business simply an extension of yourself? If your firm is meant to be founder-centric, then by all means call it Smith Financial Planning. But if you want to build a business that is bigger than just yourself, do you need to have a more “generic” name? The prevailing view out there is “Yes”, but the reality is that there are a lot of big businesses named after founders, that have had no trouble being successful even though the founder’s name is still the company name – including Ford, Dodge, Chrysler, Deloitte & Touche, Merrill Lynch, Morgan Stanley, Edward Jones, Raymond James, and Charles Schwab, just to name a few. Ultimately, the founder’s name wasn’t just about the founder, but became a brand that represented the company itself… and in most cases, the company named after the founder has already outlived the founder themselves!

What really distinguishes companies that grow beyond their founders into businesses is not whether the founder has their name on the door or not, but whether the founder has a mindset to build a business beyond themselves. In point of fact, many advisors who do want to build big businesses ultimately create a name for the business that is not their own… but not because it’s necessary to build the business and attract talent. It’s simply that the naming decision reflects what is already their mindset to build a business. By contrast, many/most advisors who name the business after themselves have a desire to create an owner-centric practice in the first place… and so naming after themselves is only natural (but it is an outcome of the mindset, not a cause of whether the business grows or not!).

There’s also the common question of whether a founder-named business limits its ability to be sold in the future… and whether an advisor who wants to sell the firm someone needs to not have their name on the door. But the reality once again is that the answer to this question comes down to mindset – in this case, the mindset of the buyer, and what he/she is looking to do. Does the buyer want to build their own owner-centric firm? If so, then they may want their name on the door, and it is possible a generic name will make that transition easier. But if the buyer is interested in buying and growing a business, the reality is, the buyer buys the business, and its brand, not whether the founder’s name is on the door. For instance, Edelman Financial has been bought and sold more than once over the past 20 years. It still has Ric’s name on the door, but that name is not a limiting factor when buying an institutionalized business… and in fact, the brand is the asset to the buyer!

Ultimately, the fundamental point here is that what really matters is not whether the founder’s name is on the door, or whether there is some neutral name instead. But rather, what matters is your mindset as an advisory firm business owner. Are you trying to create a business that’s bigger than yourself? Or are you trying to create a practice that’s built around yourself? For many who are trying to build a business bigger than themselves, they will often pick a neutral name, but it’s really not a necessary factor for success. Instead, it is simply a signal of their intent. Because in the end, if you want to build a business that’s bigger than yourself, you can absolutely do it… “even if” your name is on the door!

Wednesday 26 July 2017

The Complex Motivations Of Money And Retirement As The Freedom To Pursue Non-Monetary Work Rewards

The traditional view of work is that it’s something we wouldn’t otherwise do, without the financial reward of getting paid… such that the whole point of work in the modern era is to earn and save enough to get to the point where you can “retire” and not need to work anymore.

Yet research on what actually motivates us reveals that “money” is a remarkably inferior motivator (both to incentivize and reward desired behavior, and to punish bad behavior) compared to the motivation we derive from interpersonal relationships with other people. To the point that turning social connections into financial arrangements can reduce our motivation to engage in the desired behaviors. Yet due to our inability to judge our own motivations, and what will make us happy in the future, we continue to pursue financial rewards… even as a growing base of research reveals that it doesn’t actually improve our long-run happiness.

The reason why all of this matters is that it implies the whole concept of “retirement” may be predicated on a mistaken understanding of our own motivators… a realization that most people don’t have until they actually retire (or at least, are on the cusp of it), and suddenly discover that “not working” isn’t nearly as enjoyable as expected, despite all the sacrifices of potentially undesirable work that was done to earn the money to retire along the way.

So what’s the alternative? To recognize that work – at least, some work – can be intrinsically motivating and socially rewarding, where money doesn’t have to be the driving factor. Yet at the same time, often such work does at least have some financial rewards… which is important, because if “retirement” is simply about shifting the rewards of work from “mostly financial” to “only partially financial”, then the reality is that most people may not need nearly as much to “retire” in the first place. And that the very nature of “retirement” itself isn’t really about an end to working, but simply reaching the point of financial independence where “work” can be chosen based primarily (though not exclusively) for its non-monetary rewards!

Tuesday 25 July 2017

#FASuccess Ep 030: Self-Publishing A Book To Establish Your Authority (As A 401(k) Expert) with Josh Itzoe

Welcome back to the thirtieth episode of the Financial Advisor Success podcast!

My guest on today’s podcast is Josh Itzoe. Josh is a co-founder of Greenspring Wealth, an independent RIA based in Towson, Maryland, that advises on more than $2.2 billion in 401(k) plan assets.

What’s unique about Josh’s business, though, is not just the success that he’s had in the 401(k) plan niche, but how he built his business: by making himself an expert by sitting down and reading the entire ERISA code himself, and then self-publishing a book to share his newfound expertise with prospective clients… which quickly established him as an authority brought him nearly $80,000 of new revenue within the first 6 months of publishing the book.

In this episode, Josh talks not only about what he went through to self-publish his book to jumpstart his 401(k) consulting business, but also discusses at length the business of being a financial advisor to 401(k) plans itself, how it differs from the traditional model of serving individual financial planning clients, the intensive RFP process it takes to win the business of mid-to-large-sized 401(k) plans, how the pricing model for advising on 401(k) plans is shifting from the AUM model to a flat-fee structure based on the size and complexity of the plan, and how including the stability of 401(k) plan consulting fees was able to smooth out the revenue volatility of the AUM fees in the other half of his advisory firm, which manages more than $400 million in AUM for individual wealth management clients.

We also talk more generally about trends in the 401(k) advisory space, why the real value to most employer retirement plans is not about helping them understand – or scaring them about – their fiduciary duties as plan trustees, but simply helping them avoid the administrative and operational mistakes that really get most plan sponsors in trouble, and why in today’s environment it’s difficult to break into the 401(k) plan space as a financial advisor… unless you’re ready to dedicate your full time to it.

And be certain to listen to the end, where Josh talks about why he thinks the future of serving 401(k) plans better is all about leveraging new technology solutions, and offers up some great resources for those who want to get more active in this space (which you can find in our Show Notes for this episode).

So whether you’ve been thinking about getting into the 401(k) business as a financial advisor, or are simply curious to hear how writing and self-publishing (with a little outsourcing support) your own book can accelerate your marketing efforts and establish you as an expert in your niche, I hope you enjoy this latest episode of the Financial Advisor Success podcast!

Monday 24 July 2017

What Is Supplemental Income and How Is It Taxed?

Are you in line for a bonus at work? Lucky you! But don’t count on the entire bonus amount appearing in your paycheck. We all know that federal taxes will be taken out for part of your bonus, and your...

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source http://blog.turbotax.intuit.com/income-and-investments/what-you-should-know-about-supplemental-income-31429/

Tax Tips for Independent Retailers

If you’re an independent retailer, you may not be fully aware of all of the tax deductions that are available to you. Some are obvious, like inventory and marketing costs, but there are many others that are easy to forget...

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source http://blog.turbotax.intuit.com/self-employed/tax-tips-for-independent-retailers-31299/

What Cyborg Chess Can Teach Us About The Future Of Financial Planning

The recent rise (and subsequent decline) of robo-advisors has generated much discussion about the threat (or lack thereof) that technology poses to human advisors. Yet, as discussed previously on this blog, the man vs. machine framing of the role that technology will play in the future of delivering financial planning advice may be too narrow. Instead, the combination of man and machine (i.e., the “cyborg advisor”) may pose the greatest opportunity to human advisors in the long run… and threat to those who lag behind.

In this guest post, Derek Tharp – our Research Associate at Kitces.com, and a Ph.D. candidate in the financial planning program at Kansas State University – examines how the game of ‘cyborg chess’ provides support for the idea that human-computer teams will remain superior to either humans or computers on their own (even when the intelligence of computers vastly outweighs that of humans), as well as some of the insights cyborg chess can provide about how the skills of cyborg advisors will differ from the traditional skills of advisors today.

‘Cyborg chess’ (or freestyle chess) is a version of chess in which humans can use any resources they want to improve their play… including today’s increasingly-sophisticated computer chess software. One interesting fact about of cyborg chess, as was previously noted by Tyler Cowen in his book Average is Over, is that human-computer duos consistently defeat both the best humans and the best computers. What’s even more interesting, though, is that the humans in some of the world’s best human-computer duos aren’t even all that great at chess themselves! Which means the skills that let humans most effectively assist and execute chess software may be different than the knowledge needed to be a great chess player!

In fact, it turns out that to be skilled at cyborg chess, humans have to be good at letting computers do what they do best, and then excel in areas where humans are more effective. And while there are some obvious applications to financial planning, in areas such empathy and building client relationships (where humans will certainly remain relevant in the future), the same is even true in technical areas of financial planning as well, where computers are typically thought to have an advantage over humans. Specifically, humans can play an important role in areas such as helping computers know where to look for the best solutions, examining inconsistencies generated by different computer programs, helping computers to be more efficient in their calculations and analyses, and knowing the limitations of various programs and when they may generate recommendations that don’t align with the real world. And of course, as technology becomes even more prevalent in financial planning, “finology”-focused soft skills and human aspects of giving financial advice will become increasingly important.

The bottom line, though, is simply to recognize that despite the view that computers will come to dominate certain areas within financial planning, the reality is that there are still ways that computer-human duos can be more effective than computers or humans alone. Additionally, this has some profound implications for the skills and knowledge that are needed to be a great financial advisor in the future, and those skills and knowledge may not necessarily align with what we think of (and currently teach under the CFP Board’s curriculum!) as the core competencies of great financial advisors today!

Saturday 22 July 2017

Studying Abroad This Fall? Make Sure You Know These Tax Implications

If you are planning to study abroad this fall, you have a year of wonderful experiences and adventures ahead of you, and hopefully a little studying in as well. Many students also will be earning a stipend or have employment...

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source http://blog.turbotax.intuit.com/tax-planning-2/studying-abroad-this-fall-make-sure-you-know-these-tax-implications-31385/

Friday 21 July 2017

Weekend Reading for Financial Planners (July 22-23)

Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with the news that robo-advisor Betterment has raised yet another $70M round of venture capital funding, and boosted its valuation up to $800 million… though the company intends to use the dollars primarily to hire more human financial advisors, and launch new products, suggesting that even the leading pure robo-advisor is pivoting away from its roots to try to become a broader wealth management platform and brand.

From there, we have several more articles around the theme of advisor technology, including a fascinating look of how Morgan Stanley is planning to use big data and AI to augment the productivity of its financial advisors (with everything from tools that automatically monitor and provide updated portfolio recommendations to clients, to solutions that pre-draft relevant emails to clients and allow advisors to more easily customize and then send), a review of the advisor technology platforms of some of the smaller RIA custodians (including RBC Advisor Services, TradePMR, and SSG), a new advisor technology solution called “BizEquity” that helps advisors to business valuations for their small business owner clients (either as a value-add, or a prospecting tool), and some tips on how to run an effective internal cybersecurity training session for your advisory firm.

We also feature a few practice management articles this week, from the reason why advisory firms should do less customization of their financial advice as the firm grows and adds more advisors, to how the rise of back-office custodians and technology has powered a growth of independent advisors and made it possible for even small “solo” advisory firms to be very successful (without the resources of a traditional wirehouse), why advisory firms need to focus on building a firm foundation before executing new growth initiatives, and a look at the relative dearth of internship in the independent advisory community (and some steps to take to fill that void).

We wrap up with three interesting articles, all looking at the ongoing evolution of investment theory: the first looks at how, even with the rise of passive index funds at an ever-lower cost, the fact that retail investors can’t effectively own a market-cap-weighted index of global wealth means all investors ultimately have to make some “active” decision when it comes to asset allocation across the available indices and asset classes; the second is an in-depth look at the Adaptive Markets Hypothesis, and how it aims to explain the behavior of markets better than the Efficient Markets Hypothesis; and the last is a good discussion about the fundamental purpose of investing itself, and how a true goals-based approach to investing may entail different kinds of investment choices than asset allocations than the classic diversified equity portfolio (although for very long-term goals, even goals-based portfolios still end out being rather equity-centric!).

Enjoy the “light” reading!

Thursday 20 July 2017

Tips for Customer Relations in the Gig-Economy

These days, it’s not uncommon to have a side gig. In fact, by 2020, part-time, independent and freelance contractors will constitute about 40 percent of the U.S. workforce. Like any business, customers are a key part of making your business...

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source http://blog.turbotax.intuit.com/self-employed/tips-for-customer-relations-in-the-gig-economy-31402/

Switching From Wirehouse To RIA – AUM And Revenue Requirements To Break Away

The breakaway broker trend, which gained momentum in the aftermath of the financial crisis, has been underway for several years now. And in an environment where many 7- to 9-year post-crisis retention deals are expiring at the same time that wirehouses are reigning in their signing bonuses, there is a fresh wave of interest in potentially breaking away from wirehouses and transitioning to the independent RIA channel for the potential of greater income. However, there are many motivations which may lead to a desire to break away, and pursuing a greater “payout” alone is actually not the best reason to break away.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss different motivations for breaking away from a wirehouse to become an independent RIA, as well as the team characteristics – including revenue, AUM, and desire for independence – that tend to lead to better break away outcomes for advisors!

First and foremost, it is important to recognize the different ways that “take-home pay” are calculated in a wirehouse versus an independent RIA. In the wirehouse environment, brokers at the low end might take home 35% of GDC, while the biggest producers and teams may get to 50% to 55% in some circumstances. By contrast, independent advisory firms typically follow a “40, 35, 25 rule”, that 40% of gross revenue goes towards paying advisors and the investment team, 35% goes towards overhead and administrative staff, and 25% is the profit margin left over. For a solo advisor, this may effectively equate to a 65% payout, by paying themselves both the “employee advisor” compensation and the profit margin. For a larger team, the calculation is messier, but in the end advisors are often able to keep 10% to 20% more of their gross revenue after making the switch.

That being said, there’s a really important caveat to the comparison between wirehouses and an independent RIA. When you’re at a wirehouse, a lot of those cost decisions – about staffing, overhead, compliance, office leases, technology, etc. – are made for you. At an independent RIA, though, the responsibility is on you, as the owner-advisor. The flexibility of being able to make those decisions is what gives advisors some more operational leverage as an independent RIA, but it is also a lot of additional work – or at least responsibility – for you as the advisor. That’s the double-edged sword of going independent, and it’s the reason why most advisors who break away don’t do it for the money.

However, if they are independently minded, want to control their own destiny, want to be the owner of their business, and want to make all the decisions that go along with that… then breaking away may just be a small sacrifice to make for the long run. But if you’re happy to have a firm make those decisions for you, then you’re not going to be happier getting a few more points of take-home on your GDC but being required to shoulder the burden of all the responsibilities and decisions.

It’s also worth noting that there are more and more options today for brokers who are breaking away and want assistance with the transition, to reduce the burden of responsibility. From platforms like HigherTower Advisors and Dynasty Financial – who can recreate a lot of the infrastructure advisors are used to from their wirehouse – to consulting firms like Matt Sonnen at PFI Advisors that help with the transition, to technology benchmarking studies and compliance firms to help guide advisors, there are a lot of resources available. And the truth is that larger firms with higher levels of revenue (e.g., $5 million) can afford to hire staff to handle much of the responsibility, while solo brokers can also be successful in the transition, particularly those around the $50M to $100M of AUM level where brokers may be getting a 40% payout whereas successful solo RIAs are taking home 65% to 85% of their revenue (providing ample revenue to cover some additional expenses as an independent).

The key point in all of this, though, is simply to recognize that if you’re considering whether to break away from a wirehouse to an independent RIA, have a clear picture in your head of why you’re breaking away before you do so. And just trying to make a few more points on your revenue is not the best reason. It may work out okay, but the biggest success stories amongst brokers who go to the independent RIA channel are the ones who want to be independent. In other words, ultimately it’s not really a revenue or a size consideration that drives success during a breakaway – as it’s viable at almost any AUM or revenue level – but rather, an advisor’s desire for independence, with the burdens of responsibility and upside opportunity that comes with it!

Wednesday 19 July 2017

Choosing An Appropriate Discount Rate For Retirement Planning Strategies

For most people, making financial planning decisions involves an evaluation of financial trade-offs. In fact, any decision about whether to save (or not) effectively boils down to a trade-off about whether to consume now, or later.

Of course, all else being equal, we virtually always choose to consume now, if we can. Delaying gratification requires at least some kind of incentive, to make it worth delaying. Or viewed another way, we “discount” the value of something in the future – because we have to wait for it – which means waiting must make something more valuable to ever be worth the wait.

Mathematically, we can quantify this “time value of money” as a discount rate, which represents the rate of growth that would have to be earned to make the waiting worthwhile. And the use of a discount rate is especially helpful when trying to compare strategies or choices that are dispersed or occur over time, where it’s not always intuitively obvious which is the better deal in the long run.

For instance, discount rates are used to evaluate whether it’s better to take a lump sum rather than ongoing pension payments, and to determine when it’s preferable to wait for (higher) Social Security payments, rather than starting early… both of which are trade-offs that entail payments over a span of years or even decades, and can be difficult to compare without a common framework. By calculating the “net present value” of the various alternatives, adjusted by an appropriate discount rate of interest, it’s feasible to make better apples-to-apples comparisons.

The caveat, however, is that conducting such analyses still requires an appropriate choice for a discount rate of interest in the first place. In the context of financial planning strategies, the proper discount rate to use is literally the “time value of the money” for that individual – in other words, what return could be generated over time by the money, if it were in fact available today to be invested. Or stated more simply: the discount rate for financial planning strategies should be the long-term rate of return being assumed in the financial plan itself. Because it’s the portfolio to which the money could be added if taken earlier, and/or it’s the portfolio that will have to be liquidated to provide for spending needs if the payments are delayed until later.

Notably, the fact that the proper discount rate is the investor’s expected rate of return, means that the “right” discount rate will vary from one person to the next, based on their investment approach and risk tolerance. For those who are more inclined towards aggressive investments, a higher discount rate may be used, while those who are conservative will use a lower discount rate of interest (and those who hold all assets in cash might well use a discount rate near 0%!). Of course, the caveat is that investors must still be cautious to pick a discount rate that is actually realistic to the portfolio in the first place – otherwise, an unrealistically high discount rate will lead to decisions that turn out to be less-than-optimal after the fact, when the money-in-hand doesn’t actually produce the expected results!

Tuesday 18 July 2017

#FASuccess Ep 029: Attracting Baby Boomers Digitally To A True Retirement Decumulation Specialty with Dana Anspach

Welcome back to the twenty-ninth episode of the Financial Advisor Success podcast!

My guest on today’s podcast is Dana Anspach. Dana is a financial advisor and the founder of Sensible Money, an advisory firm based in Scottsdale, Arizona, that oversees more than $130 million of investment assets for retired – or nearly-retired – Baby Boomer clients.

What’s unique about Dana’s advisory business, though, is that while the industry has been focused on the idea that younger Gen X and Gen Y clients will want to work with financial advisors virtually, Dana has built a firm where all of her 110 virtual clients – from as far away as Hawaii and Alaska – are Baby Boomers, not Millennials. And Dana attracts those virtual Baby Boomer clients to her specialized retirement planning solutions through her online writing on platforms like About.com’s Money Over 55 section, Marketwatch’s RetireMentors, and her own book “Control Your Retirement Destiny”, which collectively are generating over 100 online prospects every year. And those virtual Baby Boomer prospects start by filling out a 40-question pre-meeting data gathering form, just to have the opportunity to talk to someone on Dana’s team about potentially working with the firm!

In this episode, Dana talks in depth about how she attracts prospects, screens them, presents her services to them, and onboards them, all without ever meeting them in person. She also shares the exact 3-meeting financial planning process she uses to generate a nearly-$7,000 average financial planning fee (without needing a separate data-gathering meeting), and why she chose to use a TAMP – a third-party asset management platform – to implement her client portfolios, while charging an overall 1.25% AUM fee for ongoing investment and retirement planning services.

We also talk about what technology tools Dana uses to deliver her services to her fully virtual clients, how she has systematized large portions of her practice – to the point that she’s been able to hand off most her prospects and clients to employee advisors she’s hired into the firm – and why she compensates the advisors in her firm with a base salary plus bonuses instead of the more “traditional” payment of a percentage of client revenue.

And be certain to listen to the end, where Dana talks about how she’s leveraged the value of outside coaches to work through the inevitable challenges that have arisen in her practice, and how she structures her week to allow for the time she needs for client meetings, staff management, and still being able to do all the writing that continues to bring in new virtual Baby Boomer clients to the firm.

So whether you’re trying to have more success getting new clients through online and digital marketing, or simply want some perspective on how a retirement planning niche advisor has built her business, I hope you enjoy this latest episode of the Financial Advisor Success podcast!

Monday 17 July 2017

Finology And Finding The Higher Purpose Of The Financial Planning Profession

In the modern era, “money” is essential for survival, a means of converting our productive labor into a common unit of exchange that can be used to buy whatever we need. Yet at the same time, money is complex, and the incentives and motivations it stirs exerts powerful forces on us… such that, even though money is necessary for survival, many lack the basic “money competency” skills necessary to harness its power effectively.

Yet despite the essential nature of money, there is remarkably little research and understanding in how we relate to it. While economics studies how humans allocate scarce resources, and psychology studies the human mind and behavior, there is a gap at the intersection between the two – an emerging new body of knowledge, that financial planning pioneer Dick Wagner dubbed “Finology”.

The key to understanding Finology is to recognize that there are both interior and exterior aspects to our relationship with money. On the one hand, we can’t make financial recommendations without understanding what someone owns and owes, and how that fits within the current economic environment and existing tax laws. Yet that information alone isn’t enough, without also understanding someone’s personal goals and desires, their relationships with family and cultural beliefs, and their vision of what it takes to live “the good life”.

Unfortunately, though, the history of financial planning and its existing body of knowledge have focused almost entirely on the “exterior” factors of money and how it works, and relatively little regarding the individual and their relationship with money itself. Yet in a world where our ability to have a healthy relationship with money is increasingly essential to survive and thrive – or else, we succumb to a never-ending series of self-destructive money behaviors – Wagner suggests that financial planning itself is likely to emerge as a bona fide profession in the 21^st century… as financial planners themselves become Finologists in the future!

Sunday 16 July 2017

5 Ways to Navigate Amusement Parks Without Breaking the Bank

When we lived in Virginia, one of our favorite spots for a quick getaway was Busch Gardens. We’re not alone: 4.1 million people visited the park in 2016. In fact, U.S. amusement parks see 375 million visits each year. Like many other...

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source http://blog.turbotax.intuit.com/income-and-investments/5-ways-to-navigate-amusement-parks-without-breaking-the-bank-23826/

Friday 14 July 2017

Weekend Reading for Financial Planners (July 15-16)

Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with a new Schwab RIA Benchmarking study, that finds despite the hubbub of robo- and other competitive threats, the independent RIA community has continued to grow assets at 10%/year over the past 5 years, although the fastest-growing firms are increasingly combining referral-based marketing with other forms of marketing and business development beyond referrals alone. Also in the news this week is a Boston Consulting Group study finding that in the aggregate, gross revenues of the asset management industry declined in 2016 (for the first time since 2008), even though total industry assets were up by 7% to $69 trillion, as the shift to low-cost products continues to take its toll. And the SEC has approved the FINRA proposal to revamp its traditional “Series” licensing exams, and roll out a new Securities Industry Essentials (SIA) exam that prospective new brokers can take, even if they’re not yet sponsored with a broker-dealer.

From there, we have several articles on the theme of health insurance and Medicare, including a look at how uncertainty over health care policy in Washington is making it harder for advisors to craft effective recommendations for clients considering early retirement (who are uncertain whether they will still be able to access cost-effective health insurance without being limited for pre-existing conditions in the future), how the Social Security COLA is likely to be 2% this year but will be mostly consumed by the unwind of 2015’s “Hold Harmless” provisions on Medicare Part B premiums, and proactive planning strategies and talking points for (prospective or current) retirees who are approaching age 65 and need to make decisions about Medicare.

We also feature several articles specifically focused on financial advisor marketing, from advice on how to sharpen up your core marketing messages to prospective clients (without needing to spend money on a marketing expert), to a series of marketing tips from a wide-ranging interview of advisor marketing experts, and a look at the concept of a “marketing nest” and how it differs from a “marketing niche” as a way to accelerate near-term growth for the firm (though while the nest may be best in the short term, the niche is still best strategically in the long run).

We wrap up with three interesting articles, all looking at the ongoing evolution of the “soft skills” of financial planners, and what it takes to be successful: the first is a Journal of Financial Planning study, looking at how “behavioral finance” and financial therapy techniques can be incorporated into the 6-step financial planning process; the second is a discussion of “active listening” and how developing the skill (yes, it is a skill) can improve your communication (with clients, and even with your spouse!); and the last is a look at what it takes to gain more confidence as a financial advisor, recognizing that if you don’t truly believe in what you do and that you can help your clients, that lack of confidence means your clients probably won’t believe in your value, either, so building personal confidence is crucial for business success (whether that means finding support at home, joining a study group, gaining education or experience, or whatever else it takes!)!

Enjoy the “light” reading!

Thursday 13 July 2017

How Should You Split Equity And Compensation When Multiple Advisors Partner Together?

One of the “luxuries” of operating as a solo financial advisor is the simplicity of dealing with advisor compensation: the gross revenue of the business, minus your costs, is your net income as the advisor/owner. However, at some point in time, many advisors will consider launching a multi-advisor partnership – either as a means to share (and split) growing overhead costs, or perhaps to try to build a multi-advisor “ensemble” firm that is bigger than what any one advisor can create on his/her own. Yet in the process of shifting to a multi-advisor firm, especially when merging together multiple existing firms with varying numbers of existing clients and revenue, it’s necessary to navigate the messy process of determining how to split equity and partner compensation in the new business entity!

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss ways in which financial advisors choose to split equity and partner compensation when forming a multi-advisor business, and why the structure of the arrangement depends on heavily what type of firm you’re ultimately trying to grow in the first place!

Historically, the most common reason to form a multi-advisor firm – whether as an RIA, or more often on an independent broker-dealer platform – was to share and split overhead costs (e.g., office rent, administrative staff, and perhaps gain some bargaining power to get a better payout rate as a group of advisors). In this context, all of the advisors still took their “own” revenue from their own clients, and the primary or sole purpose of the business was really just to split the costs. As a result, the “equity” split was really just a reflection of how to split the costs themselves, and all partners were compensated based on their own individual client revenue (reduced by those shared costs).

On the other hand, with some multi-advisor firms, the goal is actually to build a true standalone business, in which all the advisors contribute to the growth and success of the business (i.e., an “ensemble” firm) that is larger than any one of them alone. With this type of partnership, equity and compensation dynamics are different: the primary driver of value and wealth creation is not client revenue (less expenses), but net business profits and the (slice of) equity value of the aggregate business. Which means taking uniform salaries based on job descriptions (not revenue-based compensation from clients), plus perhaps a bonus for business development, and deriving most long-term value directly from the equity itself.

If the ensemble firm is being created from scratch, this typically results in an even equity split amongst all the partners. However, in most cases, at least some of the advisors already have existing clients and revenue, which may be uneven when they come to the table. Which means it’s necessary to either set the ownership percentages based on the relative amount of revenue that’s being brought to the table in the first place (e.g., if a partner brings 70% of the revenue they receive 70% of the equity), or to equalize ownership at the start through a buy-out (e.g., if one partner brings 70% of the revenue the other partner buys them out of 20% and each gets 50% equity). The advantage to the latter strategy is that if growth between partners is relatively equal going forward, then each partner has an equal incentive to grow the firm, and receives an equal benefit for doing so.

The key point in all of this, though, is simply to recognize that there’s a big difference between forming a “let’s share the overhead costs” multi-advisor partnership, where each advisor keeps their own client revenue and their goal and upside is to build their own client base, versus a true “ensemble practice” where you’re trying to build the shared equity value and the upside isn’t your client revenue but your participation in the bottom line profits of a growing business entity. Because if you want to build an ensemble business, and the other partners just thought of this as a cost-sharing partnership… the visions are so different that, regardless of how equity and compensation are split, this partnership isn’t likely to go well!

Wednesday 12 July 2017

Can the Self-Employed Have a 401(k)?

The short answer: Yes! If you’re self-employed, have you ever wished that you could have a 401(k) plan, just like salaried employees? Well, you can. It’s called the solo 401(k), and it works just like an employer-sponsored 401(k) except it’s...

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source http://blog.turbotax.intuit.com/self-employed/can-the-self-employed-have-a-401k-31297/

Why The Net Unrealized Appreciation (NUA) Rules Aren’t Always A Great Deal

In many large (publicly traded) businesses, it’s common to reward employees with employer stock, often granted directly in/through a profit-sharing or ESOP plan, or at least by allowing employees to purchase shares themselves inside of their 401(k) plan. The advantage of this strategy is that it helps to encourage an “ownership mentality” of the employees – who literally become (small) shareholders of the business. The disadvantage, however, is that when employer stock is purchased/owned inside of a retirement account, it is ultimately taxed as ordinary income when withdrawn (as is the case for any distribution from a retirement account), and loses the opportunity to take advantage of favorable long-term capital gains rates.

To help resolve the situation, though, the Internal Revenue Code allows employees a special election to distribute appreciated employer stock out of an employer retirement plan, and have the “Net Unrealized Appreciation” (i.e., the embedded capital gain) taxed at favorable capital gains rates outside of the account. However, to take advantage of these special NUA rules, there are specific requirements – that the stock must be distributed in-kind, as part of a lump sum distribution, after a specific triggering event.

The good news of the NUA strategy is that it creates an opportunity to convert unrealized gains from ordinary income rates into lower tax rates on long-term capital gains instead. However, the caveat is that in order to use the NUA rules, the account owner must report the cost basis of the stock immediately in income for tax purposes, and pay taxes at ordinary income rates. In addition, if the NUA stock is quickly sold, that long-term capital gains bill immediately comes due, too.

Which means in reality, the NUA rules don’t merely allow for the gains to be taxed at lower rates. They cause the gains to be taxed at lower rates immediately, when that tax liability might otherwise have been deferred for years or even decades. Which means deciding whether to take advantage of the NUA strategy or not is really more of a trade-off, than a guaranteed tax savings success.

As a result, the best practice for NUA distributions is to really scrutinize the cost basis of the employer stock inside the qualified plan, and if necessary cherry pick only the lowest-basis shares for the NUA distribution to ensure the most favorable tax consequences. Fortunately, the NUA rules do allow such flexibility – to take some shares in-kind, and roll over the rest – but that still means it’s necessary to actually do the analysis to determine whether or how many of the NUA-eligible shares should actually be distributed to take advantage of the strategy (or not)!

Tuesday 11 July 2017

#FASuccess Ep 028: Scaling Up A $6B Independent RIA Using A Full-Time CEO As Chief Inspiration Officer with Michael Nathanson

Welcome back to the twenty-eighth episode of the Financial Advisor Success podcast!

My guest on today’s podcast is Michael Nathanson. Michael is the CEO of The Colony Group, a private wealth management firm based in the Boston area that has nearly $6 billion of assets under management. The Colony Group has managed to systematize its wealth management and investment solutions to the point of driving a whopping 39% profit margin, and nearly quadruple the size of the firm in just the past 5 years alone, through a combination of both a series of major acquisitions, and organic growth across multiple niches – including corporate executives, athletes and entertainers, and an ultra-high-net-worth family office division.

What’s unique about Michael, though, is how he functions as a true CEO of the Colony Group – where as he puts it, his primary job is to be the “Chief Inspiration Officer” that sets the vision for the firm, and tries to get their more-than-100 employees excited about achieving it, with a focused strategy to attract, develop, engage, and retain the top talent in the industry.

In this episode, Michael gives a behind-the-scenes look at how a large independent RIA thinks and operates, where the investment management duties are entirely separated from the wealth managers (who help clients select strategies, formalized in an Investment Policy Statement, but let the investment management team actually run and manage the portfolio), the firm has formalized its career track into a progression from associate to senior associate to financial counselor to senior financial counselor, and partners have formalized criteria to buy units of their LLC entity (with financing arranged by the firm).

We also talk about how Colony Group built its core technology stack with a combination of Tamarac, Junxure, and eMoney Advisor, its compensation policy for all the advisors in the firm, and how the Colony Group differentiates itself with prospective clients its four Es – Expertise, the Entirety of its comprehensive services, its Enhanced open architecture, and its ability to execute as an Enterprise.

And be certain to listen to the end, where Michael talks about what he sees as the true threat for advisory firms in the future – where it’s not about fee-compression, robo-advisors, DoL fiduciary compliance, or the generational shift to Millennials… but instead is all about the ability of the firm to keep its people inspired to achieve the vision of the firm. Because if the team doesn’t believe, then the firm won’t be able to execute.

So whether you’re trying to grow your own advisory firm to become a mega-RIA, or simply want some perspective on what it’s like inside a large independent advisory firm, and the role of a true CEO, I hope you enjoy this latest episode of the Financial Advisor Success podcast!

Monday 10 July 2017

7 Ways to Save When Your Family Goes to the State Fair

With summer in full bloom, many states are ramping up their annual fairs. These family friendly events can be a wonderful way to enjoy the local culture, try out new rides, and of course, eat a ton of food. Before...

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source http://blog.turbotax.intuit.com/income-and-investments/7-ways-to-save-when-your-family-goes-to-the-state-fair-20094/

Optimal Design Of A Financial Advisor’s Office: Insights from the Financial Planning Performance Lab

The traditional financial advisor’s office is setup with a desk that the advisor sits behind, and chairs for clients to sit across. Alternatively, many financial advisors use an office conference room to meet with clients, but the arrangement is similar: a large conference room table, with the financial advisor sitting on one side, and clients sitting on the other. To the extent that any further thought goes into the office design, it’s mostly focused on which type of furniture to buy, what paintings should go on the wall, and other classic elements of office interior design.

Except as it turns out, the look of a financial advisor’s office goes far beyond just setting the interior design decor, and establishing a sense of perceived professionalism for clients. In this guest post, Dr. John Grable of the University of Georgia shares some thoughts, ideas, and research on how to best design a financial advisory office… all the way down to some specifics on the use of light, sound, smell, texture, and temperature to create a more comfortable atmosphere for clients that is conducive to helping them make good financial decisions!

Because it turns out the reality is that how an advisor’s office is arranged really does impact their ability and comfort level to make decisions. In fact, everything from the color of the walls, to the kinds of artwork that hang on the walls, and even the type and configuration of office furniture, has been found to have an impact on client stress levels, which in turn can adversely affect their willingness to make a decision!

So whether you’ve given a lot of thought to your office environment as a tool in the planning process, or none at all (but now realize that perhaps you should have!), I hope Dr. Grable’s exploration of some of the scientific evidence can help guide you to design (or update) your advisory office environment… and that, in turn, can help you make your office more comfortable to clients, allowing them to make better financial decisions, and increase client satisfaction!

Friday 7 July 2017

Weekend Reading for Financial Planners (July 8-9)

Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with the latest of DoL fiduciary news, including the revelation that the Justice Department does not intend to defend the “class action lawsuit” provision of the fiduciary rule in the current Appeals lawsuit that fiduciary opponents have filed, a memo from LPL that indicates it expects the DoL fiduciary rule to stick and will be limiting the ability of its brokers (but those on its RIA platform) to solicit 401(k) rollovers (suggesting that LPL may be pivoting its entire business to be more RIA-centric), and an announcement from Raymond James that it will be converting the payout grid for its independent channel to be entirely “product-neutral” with just a straight revenue-based payout (starting at 81% and rising as high as 90% for top producers).

From there, we have a few practice management articles this week, including a look at when to think about using debt proactively as a business management tool in advisory firms (especially since private equity investors often demand more in dividend payments than lenders demand in interest payments!), when you consider soliciting input from clients when making a potentially significant business decision, and how to create a “Client Retreat” event to deepen the relationship (and the breadth of solutions) for your clients.

We also feature several articles specifically focused on finding work-life balance, whether as an advisory firm owner or an advisor employee, including how to approach the work-life balance question as an employer (it’s all about setting clear expectations of what it takes to succeed in the firm), how to change your situation if you’re an employee unhappy with your balance (it’s all about starting the conversation with your firm/supervisor about what you want to change, and discussing ways to make it work for both parties), and how financially successful “lifestyle practices” can actually be (the idea that a lifestyle practice with good work/life balance can’t also be profitable is a myth… at least when done right!).

We wrap up with three interesting articles, all from people who have experienced early retirement or extended sabbaticals, talking about what they learned that surprised them about retirement (or a “faux retirement” sabbatical) in their first year. Key points included that more time at home makes it far easier to eat healthy and exercise more, but that the “best” days are still the ones where there’s something to “do” when you wake up, that you may find even more opportunities coming to you once you’re retired (which means you need to be careful to figure out what filters you will use to decide whether to say “yes” or “no” when they come along!), and that while you’ll have more time to deepen spousal and other family relationships, don’t underestimate how much you may miss the social environment and camaraderie of your “work family” as well!

Enjoy the “light” reading!

Thursday 6 July 2017

What’s Your Filter For Saying “No” To Prospective Clients?

Being a financial advisor is about helping people with their finances. Which makes it very hard for most financial advisors to say “no” to those who ask for help. Especially given the business reality that at least some growth is usually essential to keep the advisory firm economically viable and sustaining. And for most financial advisors, growth opportunities and new prospective clients don’t come along very often.

Yet the challenge is that we are all constrained to the same limited number of hours in the day, week, month, and year… which means it’s simply not possible to say “yes” to everyone, forever. At some point, continuing to say “yes” simply means we take on so much that we can’t even do everything we said “yes” to. Or we end up saying “no” once we feel overwhelmed and out of time – where there’s no choice but to say “no”. Which means our “filter” for figuring out what to say yes and “no” to is “whoever asks me first gets a yes, and whoever asks me last gets a no”. And when you think about it, “who asks first” is not really a good way to decide how to allocate your precious limited time!

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss why as financial advisors, we need to actively think about what kind of filters we use to say “no” to prospective clients and business opportunities, and how those filters tend to change over the course of our career and business growth as a financial advisor!

Of course, when most financial advisors get started, the reality is… you have a lot of time, and not a lot of clients. As a result, the filter for who to accept is usually little more than “anyone who can actually pay me anything“. However, as an advisory business continues to grow, eventually you reach a point where you’re seeing about all the clients that anyone has time to see (perhaps 75-100 clients?), and once you hit capacity, you simply can’t take on any new clients. At this point, revenue stops growing, and if you want to get it to start growing again, the optimal solution changes: now, it’s about getting paid more for each client you work with. Which means the second filter for deciding what to say “no” to, often becomes “am I getting paid enough for my time to work with this client?” At this stage, advisors typically start to target a value of their time (e.g., $150/hour, or $200/hour, or more), and use that as a filter to decide whether a relationship is profitable.

For a lot of advisors, the filter of “will this client pay me enough to be worth my time” is the last filter they’ll ever use or need (and they simply keep raising the dollar amount over time). But for advisors who are thinking longer term about how to build a business, this isn’t necessarily tje best filter. Because sometimes the client who pays the most or is the most profitable now isn’t necessarily the best long-term value for the business. For instance, clients who pay one-time commissions or planning fees aren’t necessarily as valuable as those who pay smaller-but-ongoing recurring retainer or AUM fees, and clients who have strong referral networks can similarly generate more long-term value for the business (through their referrals) even if they don’t pay as much for your time today. Which means considering that “long-term multiplier effect” of some prospective clients over others becomes an important filter to decide who to say yes or “no” to!

But eventually, the challenge that comes for some advisors is that we get to the point where we have the money we need to have “enough”. And suddenly, these filters about getting paid enough money, or generating long-term business value, stop “working” as effective filters to make us happy with how we’re spending our time. Instead, the filter shifts… often to a focus on an “ideal client profile”… such as those who not only pay you well, but those who are willing and happy to delegate, and actually show their appreciation for the value of your advice. In other words, the filter is no longer about whether it’s an economically viable client, but also whether it’s one who is fun and pleasant to work with in the first place. And some advisors even go a step further, applying an additional filter of their own core values, and filtering out any prospective client who doesn’t fit the advisor’s own core values.

Of course, much of the progression only happens as an advisor’s business becomes successful enough to enable it. Filtering based on core values won’t work very well for an advisor just getting started and who needs to grow their revenue, just as a filter based on revenue doesn’t work very well for those who already have the income they want and need. But ultimately, it is important to acknowledge that our time is limited, and we need some filter to determine what we say “no” to! If we don’t we’ll end up allocating our time based on saying “yes” to whoever asks first, which doesn’t work very well regardless of what stage our business is in!

Buy or Lease Your New Business Vehicle?

Recently I had dinner with friends who run a business, and the conversation turned to buying new cars. The “buy versus lease” question was asked of me, the so called tax expert at the table. As always, I don’t answer...

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source http://blog.turbotax.intuit.com/tax-tips/buy-or-lease-your-new-business-vehicle-67/

Wednesday 5 July 2017

Volunteering This Summer? Find Out if Your Work is Tax Deductible

Besides donating money, one of the best ways you can support a worthy cause is to volunteer. Many organizations are limited by what they can do because they don’t have the support staff and leaders to help them grow. You can...

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source http://blog.turbotax.intuit.com/tax-deductions-and-credits-2/volunteering-this-summer-find-out-if-your-work-is-tax-deductible-31289/

Does Monte Carlo Analysis Actually Overstate Fat Tail Risk In Retirement Projections?

The most common criticism of using Monte Carlo analysis for retirement planning projections is that it may not fully account for occasional bouts of extreme market volatility, and that it understates the risk of “fat tails” that can derail a retirement plan. As a result, many advisors still advocate using rolling historical time periods to evaluate the health of a prospective retirement plan, or rely on actual-historical-return-based research like safe withdrawal rates, or simply eschew Monte Carlo analysis altogether and project conservative straight-line returns instead.

In this guest post, Derek Tharp – our Research Associate at Kitces.com, and a Ph.D. candidate in the financial planning program at Kansas State University – analyzes Monte Carlo projection scenarios relative to actual historical scenarios, to compare which does a better job of evaluating sequence of return risk and the potential for an “unexpected” bear market… and finds that in reality, Monte Carlo projections of a long-term retirement plan using typical return and standard deviation assumptions are actually far more extreme than real-world historical market scenarios have ever been!

For instance, when comparing a Monte Carlo analysis of 10,000 scenarios based on historical 60/40 annual return parameters to historical returns, it turns out that 6.5% of Monte Carlo scenarios are actually worse than even the worst case historical scenario has ever been! Or viewed another way, a 93.5% probability of success in Monte Carlo is actually akin to a 100% success rate using actual historical scenarios! And if the advisor assumes lower-return assumptions instead, given today’s high market valuation and low yields, a whopping 50% to 82% of Monte Carlo scenarios were worse than any actual historically-bad sequence has ever been! As a result, despite the common criticism that Monte Carlo understates the risk of fat tails and volatility relative to using rolling historical scenarios, the reality seems to be the opposite – that Monte Carlo projections show more long-term volatility, resulting in faster and more catastrophic failures (to the downside), and more excess wealth in good scenarios (to the upside)!

So how is it that Monte Carlo analysis overstates long-term volatility when all criticism has been to the contrary (that it understates fat tails)? The gap emerges because of a difference in time horizons. When looking at daily or weekly or monthly data – the kind that leveraged investors like hedge funds often rely upon – market returns do exhibit fat tails and substantial short-term momentum effects. However, in the long run – e.g., when looking at annual data – not only do the fat tails entirely disappear, but long-term volatility actually has a lack of any tails at all! The reason is that in the long-run, returns seem to exhibit “negative serial correlation” (i.e., mean reversion – whereby longer-term periods of low performance are followed by periods of higher performance, and vice-versa). Yet by default, Monte Carlo analysis assumes each year is entirely independent, and that the risk of a bear market decline is exactly the same from one year to the next, regardless of whether the market was up or down for the past 1, 3, or 5 years already. In other words, Monte Carlo analysis (as typically implemented in financial planning software) doesn’t recognize that bear markets are typically followed by bull markets (as stocks get cheaper and eventually rally), and this failure to account for long-term mean reversion ends out projecting the tails of long-term returns to be more volatile than they have ever actually been!

The bottom line, though, is simply to recognize that despite the common criticism that Monte Carlo analysis and normal distributions understate “fat tails”, when it comes to long-term retirement projections, Monte Carlo analysis actually overstates fat tails and the risk of extreme drawdowns relative to the actual historical record – yielding a material number of projections that are worse (or better) than any sequence that has actually occurred in history. On the one hand, this suggests that Monte Carlo analysis is actually a more conservative way of projecting the safety of a retirement plan than “just” relying on rolling historical returns. Yet on the other hand, it may actually lead prospective retirees to wait too long to retire (and/or spend less than they really can), by overstating the actual risk of long-term volatility and sequence of return risk!

Tuesday 4 July 2017

#FASuccess Ep 027: Reaching HNW Prospects Leveraging Targeted Research and Introductions with Amy Parvaneh

Welcome back to the twenty-seventh episode of the Financial Advisor Success podcast!

My guest on this week’s podcast is Amy Parvaneh. Amy is the founder of Select Advisors Institute, a practice management consulting firm with a focus on helping financial advisors to grow through targeted referrals of high-net-worth prospects, and providing them the sales and business development coaching that’s needed to ensure those prospects actually close when the opportunities come.

What’s fascinating about Amy, though, is how she put these techniques to use in growing her own career as a financial advisor. Because Amy started out as a 26-year-old working in wealth management at Goldman Sachs, and managed to grow her asset base to more than $50M in just 18 months, primarily through COLD-calling and COLD-emailing! But Amy didn’t just target anyone with her cold-calling efforts; instead, she spent her Sundays every week preparing to execute a highly targeted, research-based effort to network her way directly to high-net-worth prospects, by figuring out exactly what it would take to reach them, and how to get to them.

In this episode, Amy talks about the exact strategies that she used to succeed in business development with ultra-high-net-worth prospects from such a young age, how she identified the potential prospects she could reach out to, the way she researched them to figure out what the best way was to actually work around their gatekeepers and reach them, how she leveraged not just referrals but targeted introductions from her personal network and growing client base to reach the exact prospects she wanted to reach, and how she used that information to craft a cold message to them that still got a whopping 80% response rate.

And be certain to listen to the end, where Amy talks about how she’s expanded her success in sales and business development with high-net-worth prospects into a program she calls Referralytics, where she trains advisors on how to utilize her system of targeted, research-based referral introductions to grow their own advisory firms.

So whether you’re struggling to figure out how to even reach ultra high net worth prospects, or even where to find them in your local market, or want ideas about how what it takes to actually sell to and close high net worth clients – even and especially when they weren’t already referred to you – I hope you enjoy this latest episode of the Financial Advisor Success podcast!

Monday 3 July 2017

3 Easy DIY Tips for Your Fourth of July Barbeque

One of my favorite things about summer is how easy it is to get your friends and family together for an outdoor evening of grilling. To help you have the best Fourth of July barbeque ever, I've tackled some of the most pressing questions people have on grilling, decorating, and invitations.

source http://blog.turbotax.intuit.com/income-and-investments/3-easy-diy-tips-for-your-fourth-of-july-barbeque-17430/

The Latest In Financial Advisor #FinTech (July 2017)

Welcome to the July issue of the Latest News in Financial Advisor #FinTech – where we look at the big news, announcements, and underlying trends and developments that are emerging in the world of technology solutions for financial advisors and wealth management!

This month’s edition kicks off with the big release of Riskalyze’s new Autopilot platform, which has morphed from “just” a robo-onboarding tool for a TAMP, into a full trading and rebalancing solution that operates as a “Model Marketplace” allowing advisors access to third-party managers and their models for a cost of 10 – 15bps. But the real news is that Riskalyze is also launching a series of its own proprietary “Risk Number Models”, which will be made available for “free” to advisors… because their clients using those models will then be invested at least in part into a series of new Riskalyze “smart beta” proprietary ETFs charging 0.50% to 0.77% expense ratios, as Riskalyze uses its big $20M Series A round to pivot from being “just” a FinTech solution into a proprietary ETF manufacturer that uses its technology to help distribute its own asset management products.

From there, the latest highlights also include a slew of new venture capital announcements, including:

Advizr financial planning software raises a whopping $7M Series A from Franklin Templeton and SEI, despite having only 400 advisory firms and less than $400,000 in estimated annual revenue after 2.5 years of growth.
RightCapital financial planning software raises a second $1.6M seed round, as the upstart gains momentum with 800 advisory firms, a series of new RIA enterprise deals, and positive word of mouth as it earns the top User Rating from the recent T3 Tech Hub Advisor Software survey, and also a TD Ameritrade Advisor Satisfaction Award.
Addepar raises a monstrous $140M Series D round, as the high-net-worth portfolio accounting and performance reporting tool appears to be making a high-stakes bet that the future of high-net-worth investing will increasingly be a combination of publicly-traded securities and hard-to-value private market stocks.
Trizic adds another $2.5M seed investment from PEAK6, the owner of Apex Clearing, as Apex secures its third robo-advisor-for-advisors platform as a distribution channel to compete for RIA custody business against Schwab, Fidelity, and TD Ameritrade.

You can view analysis of these announcements and more trends in advisor technology in this month’s column, including Morningstar’s growing focus on incorporating behavioral finance into its software, a new retirement planning software solution that allows advisors to quickly create a Withdrawal Policy Statement for clients, the use of “video performance reports” to humanize the robo-advisor experience, and the news that beginning in 2019 the CFA Institute will be incorporating a wide range of FinTech topics into its CFA exam and curriculum as FinTech begins to change the very nature of financial services jobs themselves!

I hope you’re continuing to find this new column on financial advisor technology to be helpful! Please share your comments at the end and let me know what you think!

*And for #AdvisorTech companies who want to submit their tech announcements for consideration in future issues, please submit to TechNews@kitces.com!

Sunday 2 July 2017

We Asked, You Answered: How are You Spending Your 2016 Tax Refund? [INFOGRAPHIC]

We all breathe a little sigh of relief once the tax deadline has passed. Taxes. Are. Done! To celebrate, we asked you – our awesome TurboTax community – one of our favorite questions: “How are you spending your tax refund...

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source http://blog.turbotax.intuit.com/tax-refunds/we-asked-you-answered-how-are-you-spending-your-2016-tax-refund-infographic-31171/

Saturday 1 July 2017

4 Little Known Tips to Help You Pay School Tuition

College is expensive. According to the College Board’s 2016 Trends in College Pricing report, the average full-time student at a four year nonprofit private university will pay $35,020 a year in tuition and fees. Add in room and board and the...

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source http://blog.turbotax.intuit.com/tax-deductions-and-credits-2/education/4-little-known-tips-to-help-you-pay-school-tuition-23404/