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Seeking Best Execution: Understanding The SEC’s Expectations For Advisors To Deliver Best Outcomes For Clients

November 20, 2024 07:01 am 0 Comments CATEGORY: Regulation & Compliance

Investment advisers are fiduciaries that owe a duty of care and loyalty to their clients. One component of this duty of care is an obligation to seek best execution of client securities transactions. While this requirement might sound relatively straightforward, the lack of a single definition for what this duty actually requires can make it challenging for advisers seeking to understand precisely what it means to comply with this responsibility.

One of the best sources of guidance from the Securities and Exchange Commission (SEC) is a 1986 interpretive release that unofficially sets forth a framework for satisfying the fiduciary duty to seek best execution of securities transactions in client accounts. Broadly, the statement says that an adviser should consider the totality of services that it brings to the table, including both quantitative and qualitative factors such as the value of investment research the custodial broker-dealer provides to the adviser, execution capability (i.e., the types of investment products or strategies that a custodial broker-dealer can handle in an accurate and timely fashion), and commission rates (which can include asset-based pricing, platform fees, account activity fees, and more), among others.

The SEC, in its interpretive release, sets an expectation of "periodic and systematic evaluation" (i.e., initial and ongoing due diligence) of the custodial broker-dealer(s) that are used for client securities transactions, indicating that advisers should perform initial due diligence on any new custodial broker-dealer to be used for client securities transactions, and then periodic ongoing due diligence of said custodial broker-dealer thereafter (though the SEC does not prescribe any particular frequency of such evaluations).

Notably, much of the language from the 1986 SEC Interpretive Release was later reiterated in a 2018 SEC Risk Alert and a 2019 SEC Interpretation. These 2 communications suggested that advisers have differing responsibilities depending on whether they are responsible for selecting broker-dealers and executing client trades, which suggests that advisers that have not accepted the responsibility to select custodial broker-dealers on behalf of the client (e.g., because the client voluntarily directs the adviser to execute trades on their behalf at a particular broker of the client’s choosing), or did not recommend such a directed arrangement, is not under an obligation to seek the best execution of client transactions (though the adviser must still disclose the possible downside possibilities of such an arrangement, such as less favorable execution and/or higher costs).

Finally, the SEC Division of Enforcement's extension of best execution principles to advisers' mutual fund share class selection, as evidenced by the string of enforcement actions that resulted from the SEC's iterative Share Class Initiative that originated in 2016, suggests that there is a de facto best execution obligation for an adviser to select the lowest cost share class a client is eligible for within a mutual fund. Which might require advisers to periodically scrub the roster of mutual funds they purchase for clients to confirm that no lower-cost share class alternatives are available and that clients with existing mutual fund holdings are not eligible for a tax-free conversion to a lower-cost share class within the same mutual fund.

Ultimately, the key point is that by remaining mindful of both the quantitative and qualitative factors that the SEC expects to be considered when initially and periodically evaluating such custodial broker-dealers, advisers can ensure they not only fulfill their fiduciary duty to seek the best execution on behalf of their clients but also continue delivering the best possible outcomes!

#FASuccess Ep 412: 3X’ing The Business With No More Than 50 Great Clients By Hyperfocusing On Who You Can Add The Most Value For, With Anjali Jariwala

November 19, 2024 07:03 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Anjali Jariwala Podcast Featured Image FAS

Welcome everyone! Welcome to the 412th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Anjali Jariwala. Anjali is the Founder of FIT Advisors, an RIA based in Torrance, California (but works virtually with clients nationwide) and oversees $65 million in assets under management for 45 client households.

What's unique about Anjali, though, is how she has tripled her annual revenue from $250,000 to $750,000 during the past 6 years, while only adding a net of 10 client households (going from 35 to 45 clients in total), by hyperfocusing into her niches of physicians with complex tax needs and small business owners with $5M–$20M of revenue, offering a combination of advanced financial planning and CFO planning services while raising her fees along the way (to match the additional value she's now able to provide them).

In this episode, we talk in-depth about how Anjali shifted her marketing approach over time from paid advertisements, an area that was very successful for her but had become increasingly competitive for her target clients, to instead building a blog and podcast targeted at her 2 niches, how Anjali was able to attract high-quality prospects by simply centering the content on her blog and podcast on the issues her top 10 existing clients were facing (including both technical planning topics and the emotional aspects of money, to demonstrate both her technical acumen and her ability to relate to their personal experiences with money), and why Anjali then decided to stop blogging and podcasting during the early days of the COVID pandemic, as she not only had to support clients going through a period of financial and emotional strain but also had to deal with stress in her personal life given that her husband worked as a physician navigating COVID exposure with his own patients, and yet Anjali still receives a sufficient flow of prospects today based on the prior blog and podcast content she created that continues to live on… plus client referrals from her now-established client base.

We also talk about how Anjali grew her revenue primarily by not increasing her client headcount (which only rose from 35 to 45 clients over the past 6 years) and instead focused on raising her minimum annual retainer fee from $10,000 to $18,000 per client, why Anjali's current clients and prospects are largely willing to pay this fee given the tailored services she offers clients (from her ability as a CPA to offer advanced tax and CFO-style business planning specifically related to her two niches, to even providing feedback about how best to negotiate their employment agreements for her physician clients), and how Anjali's decision to decide on the number of clients she wanted to work with and a target revenue upfront, rather than pursuing unbounded growth, is what allowed her to effectively value her time and allowed her to focus on the clients for whom she can provide the most value.

And be certain to listen to the end, where Anjali shares why she wishes she had invested more hard dollars in marketing sooner (particularly given the time it can take for tactics like podcasting and blogging to bear fruit in the form of new clients), how Anjali freed up time by not using a TAMP but instead an outsourced Chief Investment Officer to conduct investment research and cue up trades for her to execute, while allowing her to continue to better implement the trades herself to facilitate her customized, tax-efficient client portfolios, and how Anjali is approaching the idea of success, now that she has built a financially thriving practice, in part focusing on being able to pursue her passions and maintain flexibility to meet her professional, personal, and family needs.

So, whether you're interested in learning about building a profitable hyperfocused practice, implementing a marketing approach that reaches a firm's ideal target client, or adding value for clients by offering advanced tax planning, then we hope you enjoy this episode of the Financial Advisor Success Podcast, with Anjali Jariwala.

Highlights From The Advise AI Conference 2024

November 18, 2024 07:04 am 0 Comments CATEGORY: Conferences

In recent years, AI has become an increasingly common feature in advisor technology. The possibilities at the intersection of AI and financial advice are exciting – faster processes, better connections, less time on ‘busy work’ – but also come with uncertainty about the future of the field. What might the field of financial advice even look like in 10 years? Yet, there are still notable gaps between the potential of AI-enhanced technology and its current capabilities.

In this guest post, Craig Iskowitz, CEO and founder of Ezra Group, shares highlights from this year’s Advise AI Conference, where industry leaders gathered to explore how AI might shape financial advice, from back-office operations to client interactions. Rather than focusing on the fear that AI might replace advisors, a key theme was how advisors could work alongside AI to deliver more effective, timely, and personalized insights to clients. For example, while some speakers discussed how AI leverages data at scale, others, like Sindhu Joseph of CogniCor, highlighted how the platform identified life events and changes (such as the birth of a child) to prompt timely, personalized advisor outreach.

Another conference theme centered on how advisors could effectively vet new advisor technology products. A panel of industry leaders recommended examining not only the feasibility of implementation but also critical factors like data safety, privacy, and compatibility with existing systems. Once vetted, new technology can be implemented gradually, focusing first on a few high-impact tasks that directly enhance advisor productivity.

Other key highlights from the Advise AI Conference included:

Personalized Client Experiences: Multiple vendors, including Andrew Smith Lewis of Alai Studios, discussed how AI can enhance – not replace – personalization of client experiences with tools like AI companions (e.g., Lydia) that remember both advisor personalities and client interactions.
Measuring AI ROI: Andrew Altfest, CEO of FP Alpha, shared insights on shifting AI from back-office support to client-facing tasks, such as portfolio construction and new client onboarding, to enhance measurable outcomes.
AI For Marketing: Susan Theder, Chief Marketing and Experience Officer at FMG, shared how AI could be trained to capture an advisor’s unique voice, enabling marketing efforts that feel more authentic and personalized.
Leadership's Role In AI Success: Brooke Juniper, CEO of Tifin Sage, emphasized that firm leaders can foster successful AI adoption by promoting a culture of experimentation and learning.

Throughout the Advise AI Conference, speakers highlighted the importance of each stage in the AI integration journey. With well-designed interfaces and thoughtful integration, AI tools can be implemented across advisory firms, enhancing both back-office and client-facing workflows. With support from firm leadership, advisors can iterate on these tools to continuously improve efficiency and service quality, ultimately benefiting clients through smoother onboarding processes and clearer action steps.

Ultimately, the Advise AI Conference emphasized that while AI technology is still in its early stages, its potential to transform advisory firms is undeniable. With a flexible approach and a balance between technology and the human touch, AI is poised to elevate the way advisory firms serve clients – for the better!

Weekend Reading For Financial Planners (November 16-17, 2024)

November 15, 2024 02:01 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of “Weekend Reading For Financial Planners” - this week’s edition kicks off with the news that the latest Fidelity RIA Benchmarking Study shows that while RIAs saw gains in AUM and revenue last year, their operating margins tightened, suggesting that rising expenses are cutting into firm profits. The study also looked at what “high performing” firms are doing differently than their peers, finding that these firms have a higher close rate on referred prospects, were better able to maintain pricing discipline, and had significantly lower expenses as a percentage of firm revenue.

Also in industry news this week:

NASAA has proposed an amendment to its broker-dealer conduct model rule that would restrict the use of the terms “advisor” and “adviser” for broker-dealers and their registered representatives who are not also investment advisers or investment adviser representatives
A recent study suggests that large RIA consolidators are becoming more like their large broker-dealer counterparts, not only in terms of the AUM they control, but also in the types of services they offer advisors under their umbrella

From there, we have several articles on tax planning:

7 year-end tax strategies advisors can consider to help their clients lower their tax bill this year and into the future
Why seeking to minimize a client’s current-year tax bill isn’t always the optimal strategy when considering their lifetime tax obligations and their lifestyle needs
While RMDs are a fact of life for many retired clients, advisors can help make the most of them by strategically selecting assets to fund the distribution to meet asset allocation and asset location goals

We also have a number of articles on advisor marketing:

How lead segmentation can boost the effectiveness of an advisor’s email marketing campaign
A 3-email sequence to effectively welcome new leads to an advisor’s email list and encourage them to engage with the firm
A review of email marketing software providers, which can vary significantly based on features and price

We wrap up with 3 final articles, all about college planning:

How, contrary to popular belief, the sticker price of college tuition (and particularly the average net price students actually pay) has lagged the broader inflation rate in recent years
Why the increasing use of ‘merit aid’ among colleges makes high school grades important not only for college admission, but also for the breadth of schools they might consider
A tool that lets users evaluate the return on investment of different degree programs, colleges, and majors shows that getting a degree still typically comes with a significant (though not universal) positive financial return

Enjoy the ‘light’ reading!

Kitces & Carl Ep 151: What’s Holding You Back From Delegating What You Need To Let Go Of?

November 14, 2024 07:04 am 0 Comments CATEGORY: Kitces & Carl Podcast

Kitces & Carl Ep What's Holding You Back From Delegating What You Need To Let Go Of

As the financial advice industry began shifting from a sales-based model to a more sustainable asset management approach, advisors found their roles shifting along with it. With revenue rooted in more predictable, recurring income, many advisors were able to step off the relentless 'treadmill' of constant sales, allowing them to invest in growth by hiring staff and delegating tasks. Effective delegation, in turn, created a positive cycle, freeing advisors from lower-value activities so they could work on building and scaling their firms. "Delegate and let go" became a common mantra, with advisors encouraged to focus only on the highest-value tasks. Yet, even for advisors who understand the value of delegation, actually letting go is often easier said than done.

In the 151st episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards discuss the psychological challenges advisors often face when it comes to delegating tasks and the strategies that can make delegation more effective.

Despite the potential upsides of delegation, advisors typically face 3 psychological hurdles to overcome in order to delegate effectively. First, it can be hard to imagine that doing all of an advisor's least favorite tasks would be someone else's dream job (after all, if doing those tasks were so enjoyable, then advisors wouldn't be trying to delegate them in the first place!). Second, people generally enjoy working with those similar to themselves, which can make it tempting to hire a 'mini-me' with similar strengths and inclinations. However, doing so can unintentionally reinforce the advisor's reluctance to delegate disliked tasks. Finally, even if an advisor dislikes a particular task, they may still be the fastest (and most skilled) at completing it, creating an argument for the advisor to continue doing it. Together, these elements create a compelling case for not delegating at all. In reality, though, holding onto these less-favored, non-growth-related tasks can limit a firm's long-term capacity to scale.

The first 2 barriers can be addressed by hiring an 'opposite', rather than a 'mini-me'. For example, while it might seem natural to hire someone similar, bringing in someone who has complementary strengths – such as an operations-focused person who thrives on detailed follow-through – ensures that tasks the advisor may find draining are handled by someone who enjoys them. The third barrier – that no one else can complete a task as well or as quickly as the advisor – may hold true and can be challenging to overcome. Yet, advisors may still benefit from delegating the work, as once a task is offloaded, an advisor's time is freed up for more productive work – or even for taking additional time off! A highly leveraged advisor has more flexibility in shaping their day-to-day business operations.

Ultimately, advisors aiming to delegate effectively can benefit from focusing on a new hire's ideal strengths and aptitudes. Hiring and working with an 'opposite' can feel counterintuitive at first – a checklist-oriented person, for example, may 'just' complete their assigned tasks without exploring beyond the to-do list, which could feel foreign to an ideas-driven advisor. However, this dynamic can also be incredibly freeing. After all, someone who enjoys a particular set of tasks is more likely to take ownership and improve that process – and, by extension, contribute to the firm's long-term success!

2024 Election: Evaluating The Impact Of A (Likely) Republican Trifecta On The TCJA Sunset And Tax Planning

November 13, 2024 07:02 am 0 Comments CATEGORY: Taxes

With Republicans appearing to have secured a sweep of the White House and both chambers of Congress, the most immediate question for many financial advisors and their clients is what impact the election results will have on the scheduled expiration of the Tax Cuts & Jobs Act (TCJA) at the end of 2025.

At a high level, the Republican trifecta would appear to set the stage for much of TCJA to be extended beyond the original 2025 sunset date. However, with the makeup and priorities of the incoming Congress differing from those in 2017 – and with President-elect Trump having made numerous promises for new tax cuts on the 2024 campaign trail – there will inevitably be portions of the existing law that Congress will aim to amend or even expand beyond the original tax cuts created by TCJA. Which means that the question going forward is not so much whether TCJA will be extended, but rather which portions will remain in their current form and which may have some 'wiggle room' for change in the next tax bill.

For example, the current 7 tax brackets and increased standard deduction that have been in effect since 2018 are expected to remain largely unchanged. However, the $10,000 limit on State And Local Tax (SALT) deductions, which has been highly contentious with both Democrat and Republican supporters and detractors, is much more likely to become a negotiating point. Some legislators advocate keeping the SALT cap as is, others push for it to be raised in some form, and still others (including the president-elect) want the SALT cap to be eliminated entirely.

Other key areas likely to be impacted include:

The Child Tax Credit, which is currently capped at $2,000 per child, with some bipartisan support to raise it at least to the pandemic-era $3,600 maximum;
The Alternative Minimum Tax (AMT), which currently affects very few taxpayers, could be amended as part of SALT cap negotiations to kick in at lower income levels for households with high SALT deductions, offsetting the impact of raising or eliminating the SALT deduction cap;
The Section 199A deduction for Qualified Business Income (QBI) for pass-through owners, which could conceivably be increased if Congress pursues Trump's proposal to cut corporate tax rates from 21% to 15% in order to preserve the proportionate difference between pass-through and corporate tax rates;
The gift and estate tax exemption, which appears likely to remain at its current elevated level, reducing the urgency for high-net-worth households to gift assets or implement trust strategies to reduce their taxable estate before 2026 (and, in some cases, making it better to avoid gifting assets to preserve the step-up in basis those assets would receive otherwise).

Furthermore, the Trump campaign has proposed a number of additional tax cuts, including tax-free treatment of income from tips, overtime pay, and Social Security benefits, and even eliminating income tax entirely in favor of tariffs. Notably, though, any of these proposals would still need approval from a Congress that may prefer to extend existing tax cuts rather than introduce new ones.

What's certain heading into 2025, however, is that there will be a new tax bill to extend and/or replace TCJA. And while it may not represent as large of a shift from the status quo as TCJA did in 2017, it could still have tax planning implications for millions of Americans – at least until it reaches its own sunset date in another 8–10 years!