Michael Kitces’ weekend reading for financial advisers

Weekend Reading For Financial Planners (Aug 22-23) 2015

Enjoy the current installment of “weekend reading for financial planners” – this week’s edition kicks off with the second edition release of the CFP Board’s “Financial Planning Competency Handbook”, a nearly-1,000-page tome that aims to capture the entire comprehensive financial planning body of knowledge (for both students learning financial planning and practitioners to use as a reference).

From there, we have several practice management and technology-related articles this week, including a review of digital estate planning software solution EverPlans, a first look at a new “matchmaking” site for consumers to find a financial adviser (where advisers pay to be listed and featured on the site), and a review of the new T. Rowe Price “MarketScene” app designed to provide market insights and information that advisers can use with their clients. There’s also an article about time-saving tips and ‘productivity apps’ for advisers, a discussion of the issues to be aware of if you’re looking to merge your advisory firm (from the perspective of other advisers who have gone through the process), and some advice from practice management consultant Angie Herbers about the experience of merging a firm after she merged her own with marketing consultant Kristen Luke to form their new adviser consulting business Kaleido.
We also have a few technical planning articles, from a discussion of the new regulations from the IRS and Treasury Department cracking down on sales of a Charitable Remainder Trust (CRT) income interest, to a look at the recent expansion of the Repaye program that can adjust student loan repayment amounts to be a smaller percentage of (discretionary) income, and a look at the estate planning considerations of the emerging new 529A ABLE accounts for disabled and special needs beneficiaries.
We wrap up with three interesting articles: the first is from Professor Robert Shiller, who explores the concept of the “Financial Singularity” (where markets potentially become perfectly efficient with technology automation); the second is a discussion from experienced angel investor Tucker Max about why angel investing is really not a good idea for most investors; and the last is a discussion from industry commentator Bob Veres about how advisory firms that want to serve younger clients and the middle market must go further than “just” adding in robo-adviser technology tools on their website.
And be certain to check out Bill Winterberg’s “Bits & Bytes” video at the end, covering the latest news and developments from this week’s LaserApp technology conference!
Enjoy the reading!

Weekend reading for August 22nd/23rd:

CFP Board Releases Expanded Planning Competency Handbook (Christopher Robbins, Financial Advisor) – This month, the CFP Board released a new second edition of its “Financial Planning Competency Handbook”, an extensive nearly-200-page expansion from the first edition two years ago (which itself was a whopping 735 pages!). The purpose of the handbook is to be a central repository for all things financial planning; the first section contains chapters on each of the current 72 principal topic areas under the CFP Body of Knowledge, with both technical knowledge and tips on how to apply it in practice; the second section is a detailed case study example that goes through each part of the financial planning process; and the third section (which is new) examines the interdisciplinary nature of financial planning and its intersections with psychology, behavioral finance, communication, and even marriage and family therapy. Ultimately, the purpose of the book is to comprehensively capture the full CFP body of knowledge, in a manner that may be useful for students and faculty of programs, and for CFP practitioners. Notably, students who purchase the book also gain access to an online test bank of more than 400 practice questions for the CFP exam, and practitioners (for a separate cost) can get up to 28 CFP CE credits for reading the book.

Cut From A Different Cloth (Joel Bruckenstein, Financial Advisor) – In recent years, there have been a number of new software solutions designed to help clients organize and manage their affairs in the event of death or disability. The basic idea is to gather all of the key documents and information in one (digital) location, so that an executor or attorney-in-fact can gain access promptly and easily. The problem, however, is that most such solutions have been extremely poorly designed from a technology perspective, and not very user-friendly… until the latest entrant, called EverPlans. The distinction of EverPlans is that while most solutions have been created by estate planning attorneys (who don’t necessarily have the technology savvy), in this case the software was created first and foremost for consumers, and has only recently shifted to becoming available for advisers as well. The site is organized into key sections, including health and medical, financial, legal, and an “After I’m Gone” area, with subsections to capture everything from key information to digital copies of important documents (including digital account information from social media to bank accounts), with guided questionnaires for clients to enter their information (which is currently all manual, with no account aggregation “yet”). To facilitate the actual access to the data – when someone needs it! – the client can assign “deputies” who receive access to some or all of the information, and the privileges of the deputies may vary (e.g., a spouse or executor may have access to everything, but an adviser only gets access to financial accounts, and an adult child only gets access to health and medical information. For the adviser version, the adviser’s company name and details can be included for clients to see, although the software doesn’t otherwise yet integrate with other adviser software tools (e.g., even though it prompts clients to enter all of this data, it’s not integrated to push that data to any adviser CRM systems or planning software, at least not yet). Pricing is currently $2,500/year for up to 200 clients (which amounts to only $12/client/year), a significant savings for clients over the $75/year retail version, although at this point beyond the group discount and ability to include the adviser’s information there isn’t much difference between the retail and adviser versions. Still, Bruckenstein notes that EverPlans looks very promising, especially if/when/as more adviser features are added.

Matchmaker, Matchmaker, Find Me An Advisor (Carol Clouse, Financial Advisor) – Websites to help consumers find and vet potential advisers are becoming increasingly popular, and the latest addition is a site called GuideVine, launched by CEO Raghav Sharma in March of 2014 as a local service around New York City with 30 advisers and now expanding nationally to include 160 advisers (with 40 more soon being added) and attracts up to 1,400 new unique site visitors per week. From the adviser’s perspective, GuideVine positions itself as an adviser’s digital marketing partner, and the company helps advisers create two-minute videos to share with potential clients on GuideVine’s site (along with a photo and profile of the adviser) to communicate what’s unique about them. Consumers who then visit the site can search and filter through the advisers based on various criteria, and thus far has been attracting primarily higher-income Gen X clients in their 40s with kids and a portfolio to manage. GuideVine suggests that the videos in particular will help make the advisers more relatable to prospective clients, and help drive conversions; thus far, about 2/3rds of the advisers on the platform report that they have at least met with prospects introduced through the site. For advisers, the service costs $200-$600 up front as an onboarding fee (depending on how involved GuideVine is in the video production), and then an annual fee of $1,800/year.

Want Market Intel For Free? There’s An App For That (Joel Bruckenstein, Financial Planning) – Historically, savvy financial services wholesalers have used the perspective they get from talking to lots of advisers to share investment ideas and insights based on what other advisers are doing that’s working. To further leverage this approach, T. Rowe Price has rolled out a new free app (currently on iPad, soon for iPhone and Android) called “MarketScene” that aims to fill this void, providing a wide range of investment ideas and insights from the T. Rowe Price team. The app is broken into five primary areas: Market Performance (showing data on performance results of various market indices), Market Consensus (looking at the consensus investor expectations regarding the economy and corporate earnings), Key Themes (according to T. Rowe Price’s experts perspective, with supporting analytical and investment data and insights, and recommended funds to implement), Asset Allocation Strategy (again based on T. Rowe Price analysts), and a “What To Watch” section about major investment themes/issues to watch in the coming months. In the future, T. Rowe Price also plans to expand their asset allocation model functionality, to gather data from what other advisers are doing, to track adviser trends over time. Ultimately, Bruckenstein suggests that the T. Rowe Price app is superior to what most other asset managers and mutual fund companies provide when it comes to useful investment data, and the fact that must of the data and charts can be repurposed for use with clients (cut and paste into client presentations, newsletters, etc.) is a nice bonus as well.

Smart Time-Saving Tricks For Advisors (John Bowen, Financial Planning) – We all have the same 168 hours in a week to grow a business, so figuring out how to maximize the productivity of those limited hours is crucial as a financial adviser. Bowen advocates using the strategies of Ari Meisel, author of “Less Doing, More Living” who advocates a system of sorting any task/problem into one of three paths: optimize it, automate it, or outsource it. The key distinction here is that from the business perspective, it’s not just about outsourcing or delegating, as assigning an inefficient task to someone else is still inefficient for the business, compared to first optimizing it or simply automating it altogether. Ultimately, Bowen shares a number of tools and solutions that he’s used to his own optimize/automate/outsource process, including: the Five Minute Journal (a Positivity approach shown to increase personal productivity, where you take 5 minutes a day to write down 3 things that turned out well in the past 24 hours, and 3 wins you expect to achieve in the next 24); Waze driving app (to avoid those traffic jams when driving to client meetings!); FitBit to focus on getting healthy; a virtual assistant service called Fancy Hands to outsource/delegate quick and easy tasks; an email Inbox sorting/management tool called SaneBox (helps you by automatically sorting your emails into folders/categories so you can better prioritize your Inbox); TimeTrade web-based scheduling app (to save time on all the back-and-forth emails that arise when trying to schedule calls/meetings); using Skype and/or iMeet for video calls and screen sharing (save time on meeting travel!); automating purchase and delivery of regular household essentials (e.g., detergent, toothpaste, etc.) with Amazon Subscribe & Save; and using TaskRabbit to outsource small tasks to (prescreened) contractors.

Mergers And Aspirations (Olivia Mellan, Investment Advisor) – A potential advisory firm merger or acquisition may look great on paper based on the financials, but advisers who have gone through the M&A process caution that it can also be far more disruptive than anticipated. The biggest driver of the disruption is the ‘culture clash’ that can occur between the firms, and cultural changes – either actual or just feared – can lead to losses of some good clients and/or good employees. Accordingly, the advice for a good merger is that finding a good cultural fit in the first place is absolutely crucial; the more similar the firms are in the first place, the less the risk of a disruptive merger. However, vetting the culture, and figuring out how two cultures will merge and blend, is far more difficult than ‘just’ the analytical number crunching of the deal, and realistically requires an extended ‘courtship’ process where firm owners get to know each other, their values, and how those values are reflected in the firm. To aid the process, it can help for firms to actually try to codify their values and culture, from whether the firm truly embodies team-based or more individually-oriented achievement, its management and communication style, and more. Of course, the caveat is that even in a well-vetted culture match, some staff turnover may be inevitable – for instance, if a staff member simply prefers being in a smaller firm environment, being acquired by a larger firm may lead to turnover, regardless of whether the culture is otherwise a match.

Postcards From The Edge: 7 Things I Learned From My Merger (Angie Herbers, ThinkAdvisor) – In this article, Herbers reflects back on the past year since she merged her practice management consulting firm with marketing consultant Kristen Luke into their new entity Kaleido, and the perspective it’s given her as someone who consults with other advisers about their own advisory firm mergers. Key insights from the experience include: your role in the new merged entity will inevitably feel like an entirely new job (even if the intention is to keep roles the same, the reality is that as each of the partners focus their role and rely on the strengths of their partners, the dynamics will change); the business itself will be something entirely new, which may feel painful as you have to let go of what you originally built to reinvest yourself into the new merged entity (though the good news is that’s also an opportunity to clean house and fix problems in the old business!); the merger process is personally disruptive as all your existing routines are broken and changed and familiar comfort zones are lost and need to be re-established anew; be careful not to waste too much time/energy sweating the small stuff in the merger, because the reality is that it’s likely all going to change anyway (in ways that you may not even be able to predict in advance, until you really see the new merged business and where it focuses); stand up for what you really do well, and make sure you really do hold on to the things you truly do best (that can positively impact the business); listen to your intuition (and don’t let good ideas get bogged down in the details of the merger and post-merger process); and be ready to jettison the “dead weight” (mergers will create overlapping jobs, and the reality is that trying to reassign employees to new roles/positions often doesn’t work, and just delays the inevitable).

IRS Issues Final Regs On Sale Of CRT Interests (Jonathan Tidd, Wealth Management) – This month, the IRS issued new regulations to crack down on an “abusive” tax shelter strategy involving the sale of an old/existing Charitable Remainder Trust (CRT). In a “normal” CRT strategy, an individual may donate appreciated securities with little or no basis to a Charitable Remainder Trust, allowing the stock to be sold inside the CRT and avoiding the immediate capital gains impact; the CRT then re-purchases new investments with a $100,000 cost basis. In the “abusive” version, the donor would take back a CRT income interest for as much as possible – for instance, a $100,000 CRT might have a retained income interest worth $90,000, with a $10,000 remainder value for the charity – and then later the trust sells the value of the income and remainder interest to a third party. Upon sale, the CRT is liquidated – as once a third party buys both the income and principal interests, the trust is a moot point – and the charity receives its $10,000 share and the original donor receives the $90,000 share. However, for tax purposes, the $100,000 cost basis for the $100,000 of property inside the trust (remember, appreciated securities were sold and reinvested) is allocated pro rata to the charity and the donor, which means the donor receives back $90,000 in liquidation with a $90,000 cost basis, effectively getting a “free” step-up in basis (while the undistributed capital gains and associated tax liability still inside the CRT disappears) and potentially finishing with more money (as $90,000 tax-free may actually be worth more than the original $100,000 reduced by capital gains taxes if the appreciated securities were just kept and liquidated in the first place). Accordingly, to crack down on this, the new Treasury Regulations 1.1014-5(c) and 1.1014(d), Examples 7 & 8 (as modified by Treasury Decision [TD] 9729), require that the available amount of cost basis must be reduced by the CRT’s undistributed ordinary income and net capital gains and then the “actuarial share” of the remaining cost basis is allocated. Which effectively means if zero-basis appreciated securities were donated into the CRT, the sale of the CRT interest will also end out with a zero cost basis, triggering a capital gain upon sale for the original donor and eliminating any tax benefit to the sale-of-CRT-interest strategy.

Revised Program Will Reduce Student Loan Repayments (Ann Carrns, NY Times) – Last year, President Obama signed an executive order to expand the Repaye (short for “revised pay-as-you-earn”) program for student loans, given that now nearly 70% of graduating college seniors have student loan debt (averaging more than $28,000). Those who are eligible can restructure their monthly student loan repayment obligations to be a relatively small share of their income, which may dramatically cut the size of their ongoing debt payments. The original Repaye program was limited to certain loan types and starting loan dates and only for those with very high debt-to-income ratios (which still qualified an estimated 5 million student loan borrowers), but a new more expansive version will make Repaye available to anyone with Federal direct loans, regardless of when the students received the loans or what their debt-to-income ratio is. Going forward, monthly loan payments for those who are eligible under Repaye can be capped at 10% of their discretionary income (which is defined as any/all income above 150% of the Federal poverty line, or the excess above $17,655 in 2015); any loan balance remaining after 20 years forgiven altogether (for undergraduate loans; if graduate school loans are involved, forgiveness comes after 25 years). Notably, the Repaye program is still separate from other income-related repayment plans, that are still available in limited situations as well (though eventually all such programs may be simplified and consolidated into Repaye). The Department of Education still needs to issue final rules for the updated plan, but those should be available by November 1^st, allowing borrowers to enroll before the end of the year.

ABLE Act Considerations For Estate Planning (Philip Herzberg, Journal of Financial Planning) – At the end of 2014, as a part of the so-called “Tax Extenders” legislation, President Obama signed into law the Achieving a Better Life Experience (ABLE) Act, that created the new Internal Revenue Code Section 529A and a new type of tax-preferenced savings account called the 529A (or ABLE) account intended for disabled and special needs beneficiaries (as long as the disabled individual meets the requirements for Social Security disability and was disabled before the age of 26). Similar to 529 college savings plans, the 529A plans will be run by the states, although with a 529A plan the beneficiary must use the plan in their state (unless the state itself contracts to partner with and use another state’s plan). Contributions to 529A plans are eligible for the annual gift tax exclusion (so no gift tax return is due), but are also limited by the annual gift tax exclusion (no more than $14,000 in total contributions to the account for any/all contributors). The appeal of 529A plans is that funds used for a qualifying disabled beneficiary are tax-free when withdrawn (non-qualified withdrawals are subject to ordinary income plus a 10% penalty tax), and neither the account balance nor the withdrawals count against the beneficiary for most means-tested Federal and state aid programs (although SSI benefits may be impacted once the account balance surpasses $100,000). Any dollar amounts remaining in the 529A plan at the death of the beneficiary must be used first to repay state Medicaid benefits, with the remainder (if any) going to heirs. Given the account contribution limitations and the Medicaid payback provision, Herzberg notes that 529A plans probably won’t be appealing as an alternative to special needs trusts for affluent families, but the complications of special-needs trusts mean that 529A plans may be useful for simpler planning scenarios. And while many families may not use a 529A plan in lieu of a special needs trust, some could choose an ABLE account in conjunction with a special needs trust instead.

The Mirage Of The Financial Singularity (Robert Shiller, Project Syndicate) – In their recent book “The Incredible Shrinking Alpha”, Larry Swedroe and Andrew Berkin make the case that the amount of alpha that can be achieved by investment managers is on the decline, a combination of more dollars chasing a limited quantity of alpha, smarter and smarter investors (who thanks to the Paradox Of Skill increasingly struggle to outdo one another), and the ever-rising use of technology to find and exploit market anomalies (until their exploitable value goes to zero). The pattern raises the question of whether at some point, the available alpha for every possible investment strategy will go to zero, particularly with the assistance of technology, in what Shiller dubs “the financial singularity” (analogous to the technological singularity when computers replace human intelligence) where the computers really do ensure markets are perfectly efficient. In such a world, there would be no mispriced market securities or unique investment opportunities, and investors’ decisions would diverge only because of differences in their personal circumstances. Of course, as Shiller points out (as has Joseph Stiglitz before him), such an outcome is itself a recognized paradox – if markets became perfectly informationally efficient, there would be no economic incentive to create the computers that would trigger and maintain the financial singularity in the first place. And ultimately, Shiller notes that in the aggregate, investors are still emotionally driven, prone to following broad-based stories and themes (“of great new eras and of looming depressions”), all of which influence markets. While Shiller does acknowledge that the particular strategies that add value in portfolios may change and morph over time, in point of fact that may simply mean that the genius of great investors is simply knowing which investment methods to apply, and when to abandon them and apply another instead.

Why I Stopped Angel Investing, And You Should Never Start (Tucker Max, Observer) – Max shares his perspective as an angel investor, one who started almost “accidentally” by investing into a startup that happened to hit it big, and with the success quickly became addicted to investing into more and more new companies (ultimately putting $1.2M into about 80 different companies). Yet while Max ultimately notes that his angel investing has been very profitable, he’s stopping as an angel investor, primarily for the simple reason that he believes there is a dearth of good people to invest in, which is a serious issue because the limitation of angel investing success is not finding good ideas for businesses and the money to fund them, but the people who are capable of executing them. And in fact, given how “hot” entrepreneurship has become lately, Max suggests that if anything, the number of people engaging in entrepreneurship who do not actually have the skills to do and cannot really effectively execute a start-up has only increased in recent years! The “people problem” is exacerbated by the fact that there’s limited education on how to effectively build start-ups (lots of education on how to get the first customer, and how to scale from 10 to 1,000, but remarkably little about how to survive the crucial startup phase from 1 to 10), and that Max finds too many founders are just outright young and inexperienced in business (while young entrepreneurship is often celebrated, in reality even the average tech founder is 38 years old, with 16 years of work experience!). Max also points out that even for those who do want to do angel investing, the reality is that it’s very time consuming to find the deals and vet the companies and people (not to mention getting involved advising them and helping them to succeed!). Beyond these issues, Max also notes that angel investing is problematic because the economics and structure of angel investing generally only benefits a select few; the reality is that it’s common to make more money from your one single best angle investment than all the rest, put together, which means you have to aim for every deal to go big and accept most will fail in order to succeed! For those who nonetheless want to be involved in angel investing anyway, Max ultimately suggests that the best path is to be a limited partner in a venture capital (VC) fund who’s capable of doing the heavy lifting necessary to really execute angel investing well (but watch out for angel crowdfunding platforms). Though remember that even the VC fund path has significant risks too, as most VC funds lose money in the end!

How To Serve The Middle Market And Profit (Bob Veres, Financial Planning) – While the rise of robo-adviser-for-advisers platforms theoretically can help advisers work with more middle-market clients, Veres notes that advisers accustomed to serving more affluent clients may find the rest of their services are also mismatched to a younger/less-affluent clientele, as helping in areas like advanced estate planning, charitable strategies, and sophisticated tax strategies just aren’t relevant to many middle market clients. Accordingly, Veres suggests that firms who want to serve this market should hire/assign a younger adviser to serve these clients, as that adviser will more likely be in tune with the planning issues relevant for younger clients, from debt management issues to counseling clients through their necessary insurance coverages and home mortgage options when buying their first home. More broadly, Veres notes that the biggest contribution of a younger adviser working with younger clientele may simply be helping them to create good habits and follow the “essential formula” of saving 15%-20% of income, avoiding usurious credit card rates, and investing for the long term. So how should the young adviser get paid for this service? Veres notes that XY Planning Network advisers are delivering this kind of service model for young clients by charging a monthly retainer fee from the client’s bank account, while other advisers charge a percentage of assets under management under anticipation that the amount of AUM will grow enough over time to be profitable for the firm (and in fact, helping clients plan their savings and investment strategies can also become a projection for the adviser of whether/how those AUM fees will grow over time).

I hope you enjoy the reading! Let me know what you think, and if there are any articles you think I should highlight in a future column! And click here to sign up for a delivery of all blog posts from Nerd’s Eye View – including Weekend Reading – directly to your email!

In the meantime, if you’re interested in more news and information regarding adviser technology I’d highly recommend checking out Bill Winterberg’s “FPPad” blog on technology for advisers. You can see below his latest Bits & Bytes weekly video update on the latest tech news and developments, or read “FPPad Bits And Bytes” on his blog!