Weekend Reading For Financial Planners (Feb 25-26)

More Advisers Would Have Custody Under New SEC Plan

(Melanie Waddell | ThinkAdvisor)

The Securities and Exchange Commission’s (SEC’s) Custody Rule is designed to provide for the safekeeping of investor funds and securities, and to prevent such funds and securities from being misused or misappropriated by investment advisers. First adopted in 1962 (and amended since), the rule essentially called for segregated bank deposits, client notification about the location of their funds and securities, mailed quarterly account statements (from the adviser), and an annual surprise exam by an independent public accountant. Because of these additional compliance burdens, in practice most investment advisers try to avoid custody and simply rely on the use of third-party custodians (e.g., Schwab or Fidelity) instead.

But last week, the SEC issued a proposal that would amend the custody rule for the first time since 2009. Under the proposed “Safeguarding Rule”, an investment adviser who can make trades on behalf of a client (i.e., has discretion) would be deemed to have custody of the client’s assets. Which would effectively eliminate the authorized trading exception from having custody (under which advisers can make discretionary trades in a client’s account but are not deemed to have custody if they do not have the authority to disburse money to a third party on the client’s behalf) that many RIAs rely on today (thereby substantively shifting a very sizable portion of the wealth management RIA community under the custody rule). It remains to be seen, though, whether or what exact custody rule compliance requirements would be introduced for advisers who have custody through discretion but are still otherwise using third-party qualified custodians.

Further, the rule would extend custody obligations beyond securities and funds (subject to the current rule) to encompass all assets in a client’s portfolio, including private securities, real estate, derivatives, cryptoassets (that are not securities), and other assets. The amendments would require advisers to enter a written agreement with a qualified custodian to protect such client assets and would require advisers to hold private assets with a qualified custodian unless they can show that doing so would not be reasonable. This could create significant repapering requirements for advisers, as contracts between an adviser and custodian would be required even when clients engage custodians directly.

Overall, the proposed rule (which will undergo a 60-day public comment period) would significantly broaden the range of assets that would need to be managed through a qualified custodian (particularly notable at a time when private and alternative investments have become increasingly popular), and would, for the first time, scoop up all investment advisers who manage with discretion (which has become increasingly common in recent years as advisers operate more and more often using centralized model portfolios), further increasing the compliance and papering burden on advisers, particularly those with discretionary trading authority and whose clients hold a range of assets other than registered, publicly traded securities!

The SEC Outsourcing Rule And The Failures Of Fiduciaries

(Scott MacKillop | Advisor Perspectives)

While investment management was at the heart of the financial advisor value proposition in decades past, advisors today frequently offer a much broader suite of services to their clients. And given the wide range of outsourced investment management solutions (e.g., Turnkey Asset Management Platforms [TAMPs], Outsourced Chief Investment Officer [OCIO] and back-office trading solutions, and model marketplaces), advisors are increasingly turning to these platforms while focusing their time on other aspects of the financial planning process and growing their business. At the same time, outsourcing investment management does not absolve RIAs (which are subject to a fiduciary standard) of the responsibility to ensure that these outsourced providers are providing the advisor’s clients with high-quality service at an appropriate cost.

Amid this backdrop, the Securities and Exchange Commission (SEC) last October proposed a major new regulation that would establish formalized due diligence and monitoring obligations for investment advisers who hire a third party to perform a “covered function” (which include everything from TAMPs to trading software), with the goal of ensuring consumers receive a high level of service when their adviser outsources certain responsibilities (and that the advisory firm is ensuring its outsourced service providers are adhering to their contribution of the investment adviser’s fiduciary responsibility). The proposal has since received significant pushback from RIAs and industry trade groups, which have highlighted the compliance burden it would place on investment advisers and that advisers’ fiduciary duty already requires them to conduct due diligence and ensure that outsourcing firms are acting in their clients’ best interests.

While he sympathizes with the increased regulatory burden the proposal would put on investment advisers, MacKillop (the CEO of TAMP First Ascent Asset Management) thinks that the actions of industry participants led the SEC to draft the proposal in order to protect consumers. These include TAMPs and other outsourced investment management companies (some of which offer risky investment strategies, portfolios with high expenses, and charge high fees for their services, despite holding themselves out as fiduciaries), as well as investment advisers, some of whom do not treat the TAMP selection process as a fiduciary decision by not conducting adequate due diligence when they select a TAMP, not updating their due diligence files, or by their reluctance to switch TAMPs to a more effective or lower-cost alternative because of the hassle of doing so.

In the end, MacKillop suggests that while the proposed outsourcing rule might be a blunt instrument (that would increase the compliance burden of many advisers who already conduct sufficient due diligence on their outsourcing providers), the SEC’s hand was forced by behavior among both outsourcing providers and advisers that did not live up to their required fiduciary standard, and that clients would ultimately stand to benefit by closer adviser scrutiny of their outsourced service providers.

Rising Rates, Falling Revenue Will Dramatically Change RIA M&A Activity In 2023

(Neil Turner | InvestmentNews)

RIA Mergers and Acquisitions (M&A) activity has been brisk during the past few years, as heightened demand from acquirers (often RIA ‘aggregators’ infused with Private Equity [PE] capital) drove up valuations, to the benefit of those selling their firms. However, concerns have mounted among industry participants that changes in the economic environment in the past year (from inflation to weak market performance) and rising interest rates (and their impact on firms’ willingness and ability to borrow funds for their acquisitions) have the potential to cool the market for RIA M&A.

But rather than cool the market, Turner (the co-founder and co-CEO of NewEdge Advisors, an RIA and Independent Broker-Dealer [IBD]) suggests that the profile of RIA buyers will shift from RIA aggregators to wealth management firms that have IBD platforms. For instance, while firms that need to borrow to finance their acquisitions will find doing so more expensive in an elevated interest rate environment, IBDs could be flush with cash, as rising rates can increase broker-dealer earnings from client funds held in cash sweep accounts, allowing them to fill a possible M&A void and potentially increase RIA acquisition activity. Further, Turner suggests that the potential growth struggles of RIA aggregators in an elevated rate environment could lead to consolidation among the aggregators themselves, as a merger of equals could be seen as a better path to growth as acquiring financing for deals becomes more challenging.

Ultimately, the key point is that while there have been many predictions of a slowdown in RIA M&A in the coming year, cash-flush IBDs could emerge as prominent acquirers. Which means that RIA owners considering a sale could benefit from a larger pool of interested acquirers beyond other RIAs!

How Advisors Can Use Calls To Action To Generate Website Leads

(Advisor Websites)

Financial advisory firms often put a significant amount of time and money into attracting prospective clients to their websites. But getting a prospect to visit the website is only the first step on the potential journey to becoming a client. One way to increase the chances that website visitors will continue down this path is by using a Call To Action (CTA).

A CTA is a statement on a company’s website that encourages visitors to take a specific action and can take the form of a clickable button or hyperlinked text. But given the variety of ways to use CTAs on a website, advisors can several steps to convert more website visitors through persuasive CTAs. The first is to ensure that the CTA stands out. While it can flow with the site’s font and brand colors, a good CTA will jump out and grab a reader’s attention. Next, successful CTAs include easily understood, action-driven words (e.g., ‘download’, ‘book’, or ‘schedule’) that are personalized to the firm’s intended audience. The CTA can also provide direction to the visitor, for example by clearly showing how they can get in contact with the advisor to learn more about their services. Finally, an effective CTA typically will address the needs of its target audience, showing that the advisor understands their needs and has the expertise to solve them. For instance, a CTA that says “Download My Guide To Social Security” is not only clear about what the visitor will receive by clicking the button, but also shows that the advisor is knowledgeable in areas important to the prospect (assuming they are interested in Social Security!).

Altogether, because CTAs are an important part of an advisory firm’s website, ensuring that they are easily found, action-oriented, provide direction, and relevant to the firm’s target client can help firms increase their conversion rate of (hard-earned) website visitors into paying clients!

How To Maintain And Grow Your Email Subscribers

(Crystal Butler | Advisor Perspectives)

Email lists can be one of an advisory firm’s most effective marketing tools, as it allows the firm to remain top-of-mind for prospective clients and Centers Of Influence (COI) by offering helpful content on a regular basis. At the same time, email lists are not a ‘set it and forget it’ market tool; rather, advisors can refine and grow their email list to market themselves more effectively.

The first step toward a more effective email list is to find ways to grow it. To start, an advisor can ensure that their list includes current contacts (who have given their permission to be added to the list), including clients, prospects, leads, and COIs. Next, if the firm’s website does not include an email subscription form already, including one on the homepage (and in the website footer, to ensure it appears on every page) can make it easy for visitors to subscribe. Advisors can also add a link to the subscription form in their email signature and in their social media profiles (and be sure to test the form first to ensure it works!). And when new subscribers join the list, advisors can add a personal touch by sending a brief video to the prospect, using the subscriber’s name and referencing any specific interests or needs they might have. This can help the advisor stand out from others who only send automated emails.

Inevitably, some email list subscribers will unsubscribe at some point. But this can provide the firm with useful information as well, as advisors can analyze feedback from those who have left to identify and fix potential issues with their email campaign. Also, by removing inactive or unengaged subscribers, advisors can focus on reaching and communicating with those most interested in the advisor’s content and who are likely to act.

Ultimately, the key point is that with a bit of attention, an email marketing list can be a highly effective tool for advisors to build trust with prospects and to demonstrate their expertise in solving the financial planning issues subscribers might face!

5 Must-Haves For Financial Advisor Websites

(Kirby Mack | Wealth Management)

A financial advisory firm’s website can be one of its most valuable tools for attracting prospective clients, as it can start the trust-building process and demonstrate the value the advisor can provide. And by including a few key features, firms can increase the effectiveness of their website in converting website visitors into active prospects.

Effective advisor websites typically will reiterate the firm’s contact information multiple times to offer visitors a variety of ways to reach out. In addition to including contact information in the website’s header and footer, firms can consider adding a floating sticky contact bar (that includes phone, email, and social media contact information) to ensure that visitors are only one click away from making contact, no matter where on the website they are. Further, including one or more aesthetically appealing Calls To Action (CTAs) on a website (e.g., a downloadable guide or a link to set up a call with the advisor) can make it more likely that a visitor will engage deeper with the firm. Incorporating interactive elements (e.g., rollover elements, pop-up elements, or animations) into the website also can make it more engaging for visitors.

Advisors can also start building trust with website visitors by including personal touches on their websites, from showing how their background makes them well-qualified to serve their target clients to their personal interests to make them more relatable (having professional headshots can help as well!). Further, advisors can show how they are engaged with their broader community, for example by showing the charitable activities of the advisor and firm. And thanks to the SEC’s new marketing rule, firms can proactively use client testimonials to show website visitors how current clients have benefited from working with the firm.

In the end, because the firm’s website is often the first opportunity for an advisor to show who they are and the value they provide to clients, ensuring that the website does so in an engaging way and makes it easy for prospects to take the next step toward becoming a client can help firms turn more website visitors into eager prospects!

Here's How To Help Your Client Avoid An IRS Audit

(Jeff Stimpson | Financial Advisor)

As tax season heats up, many clients might be worried about the possibility of being audited and the headaches it can create. And while financial advisors might be wary of offering tax advice, one way they can add value for their clients is by helping them identify potential areas that might attract an audit.

For instance, red flags that could trigger an audit include rental losses, business sales, missed Required Minimum Distributions (RMDs), suspicious business expenses, failing to report foreign accounts, and certain charitable contributions. For instance, the IRS has also put significant attention on non-cash charitable contributions (e.g., paintings or stock), and clients can find that their entire deduction is disallowed if IRS Form 8283 (which lays out the requirements for reporting non-cash contributions) is not filled out correctly. In addition, ensuring that clients report all income sources (from 1099 income to an investment with a K-1) can help a client avoid an audit as well.

Notably, clients not only face the specter of IRS scrutiny of their tax return, but an audit from state tax authorities as well. And given that many individuals have moved (possibly temporarily) thanks to the increasing prevalence of remote work, clients will want to ensure that they file returns with the appropriate state tax authorities for their given situation.

And so, while a client’s CPA will likely take the lead in filing their tax return, financial advisors can play an important role in helping clients identify potential items that could lead to an audit and ensure that they have the required paperwork needed to file their return correctly. And once the return is filed, advisors can review it for further planning opportunities in the coming year!

Tax Season Headaches For Clients Whose Lives Changed Last Year

(Charlie Wells | Bloomberg News)

For some clients, this year’s tax return will look similar to last year’s. Perhaps their wage income increased, or they made more charitable contributions, but the broad contours of their tax return remained the same. But for clients who experienced life changes in 2022, their tax situation could be trickier.

For instance, amid the so-called ‘Great Resignation’, some clients might have changed jobs during 2022. Sometimes this can result in over-withholding of tax payments (as the new employer might not be aware of how much the employee earned and had withheld at the previous employer) leading to a large refund (or, if too little was withheld from the new employer, a tax bill). Either way, this can be an opportunity for an advisor to check to make sure the employee filled out their W-4 form (and any state equivalent) correctly in the new job to ensure the proper taxes are withheld for 2023.

In addition to changing jobs, some clients might have moved to a new state in the past year. This can mean a reduction in the taxes they need to pay if they moved to a lower-tax state, though some clients might be surprised by new tax liabilities (e.g., if they move to a locality with a city income tax). And for the coming year, advisors can analyze these clients’ municipal bond holdings to make sure they provide the intended tax benefits (as interest on current bond holdings might no longer be exempt from state taxes if they move to a new state).

Some clients might have started a new business or a ‘side hustle’ in the past year. While this can provide an opportunity for additional retirement account contributions, clients can sometimes forget about the taxes owed on this self-employment income, which could prompt a conversation with their advisor about setting up appropriate estimated tax payments for the coming year.

Ultimately, the key point is that because certain clients might be focused on the excitement of a major life transition, whether it is a new job or a move to a different state, financial advisors can help them understand the tax implications of these developments, as well as potential planning opportunities resulting from them!

The Best Tax Software Of 2023

(Martha White | The Wall Street Journal)

Taxpayers have a variety of ways to file their federal and state tax returns, from working with a CPA to doing it themselves with pen and paper. Many individuals will choose a middle ground, using tax preparation software to improve the speed and accuracy of their returns compared to completing computations themselves, and typically at a much lower price than a full-service CPA. But with a wide range of software options to choose from, selecting the best option for a given individual’s situation can be tricky. With this in mind, the Wall Street Journal reviewed a variety of tax preparation software tools and selected the best ones for given taxpayer situations.

The Journal selected TurboTax as its best overall tax software tool for its breadth of offerings for DIYers, filers who need a little bit of human help, or for individuals who want a tax professional to do the heavy lifting for them. TurboTax, along with certain other software providers, offers filers the option of talking through their return with a live tax expert via video or chat, offering an additional layer of assistance for those with questions about their return (though this assistance can require paying for a pricier offering tier). Also, like some other providers, TurboTax has a free offering for filers with relatively simple returns (though these users will want to be aware of potential upselling by the software providers to non-free service tiers they might not need). For those clients who start out working with software but want the option of meeting in-person with a tax professional, H&R Block (selected as best for in-person help) or Jackson Hewitt (best for those filing multiple state returns) could be options.

The Journal selected 1040.com as the best option for those with simple returns, particularly those who are confident in their ability to navigate the filing process. With a comprehensive list of supported forms and tax situations, as well as flat pricing with no upselling, 1040.com could be a viable option for many taxpayers (though free filing is not available). And for those who are self-employed, the Journal chose FreeTaxUSA as the best option, as it offers free federal filing for most self-employment and many small-business tax situations (though users will have to pay for filing their state return. And those looking for a totally free experience can use Cash App Taxes, which provides for both free federal and state returns (though users must first download the free Cash App app and set up an account).

Altogether, there is a varied landscape of tax preparation software options to meet an individual’s needs. But while these options are typically cheaper than working directly with a tax professional, clients (and advisors) with more complicated tax situations might consider whether the added cost of doing so might be worthwhile to improve the chances that their returns are filed correctly (and avoid potential penalties from the IRS and state tax authorities!).

Poise: The Key Personality Trait For Worldly Success

(Darius Foroux)

What’s more important for professional success: style or substance? On the one hand, working well with others and displaying confidence can help an individual rise up the ranks in your firm or attract clients. On the other, it can be hard to succeed on style alone, as professionals typically must have some sort of substance (e.g., technical knowledge) to back it up. But rather than emphasizing one or the other of these characteristics, the magic happens when an individual develops both of them and displays poise.

Whether it is in building broad knowledge in school or being able to execute on projects in the workplace, having both know-how and follow-through (i.e., ‘substance’) are important components of success. Foroux considers “qualities of substance”: the skills, habits, and mindsets that determine the way a person works and behaves when they are alone, the qualities that change the inner world of a person. For instance, successful financial advisors need to have the technical skills to provide quality service as well as the diligence to complete the range of tasks required to effectively serve clients.

At the same time, just being a person of substance is not necessarily enough to ensure a successful career. Rather, those who succeed typically also have what Foroux calls “qualities of style”: the skills, habits, and mindsets that determine the way a person works and behaves when other people are watching, or the qualities that change the way a person carries themselves in the world. For example, in addition to technical finance-related skills, a successful advisor will often have good communication skills, both to explain the value of their services confidently as well as clearly deliver their recommendations.

Putting these pieces together, a person with poise is someone who has both style and substance. This means that while it is important to use substance as the foundation for a career, developing a personal style, being aware of how others perceive you (while staying true to yourself), and displaying confidence in your work (without appearing arrogant) are also key parts to being a successful professional!

Permission To Suck

(Eric Soda | Spilled Coffee)

Thinking back to when you were a kid, it’s easy to remember the struggle to learn how to do certain things that now come automatically, from riding a bike to playing a sport for the first time. But while it might have been easy to fall down and get back up again as a kid, the fear of failure can prevent many professionals from trying out new things.

The key, though, is to give yourself ‘permission to suck’ and recognize that success at anything is a progression and that conquering or mastering something is a process that takes time. For instance, starting a new yoga practice can be frustrating, as you might not be as flexible as others in your class. But by sticking with it, you can gradually gain flexibility and take on advanced classes (show that crow pose who’s boss!).

This concept can apply to the world of financial planning as well. For example, a successful employee advisor considering whether to consider opening their own firm might worry that they will not be able to get any clients and that their firm will fail. But while it might be rough going in the beginning, advisors who follow through with a marketing plan and offer unique value to their clients often find that their client count (and revenue) ramps up over time.

So whether you are starting a new yoga practice or a new financial planning firm, there are almost certainly going to be bumps (and in the case of yoga, sore muscles) along the way. But just as you likely fell many times before successfully riding a bike, giving yourself ‘permission to suck’ and persisting through the tough times can lead to proficiency and success in the long run!

When Self-Doubt Can Be A Good Thing

(Stephanie Vozza | Fast Company)

Confidence is often considered a positive trait, as it can provide the push needed to take (smart) risks. However, individuals can sometimes fall prey to overconfidence in their knowledge or abilities, which can lead to poor decision-making. With this in mind, introducing a little self-doubt can be a healthy practice and lead to more objective thinking as well as better decisions.

One potential way to remedy overconfidence and introduce self-doubt is to adopt a growth mindset where you are constantly learning. By maintaining a healthy curiosity, you can be introduced to alternate viewpoints that can help shape your view of the world (and perhaps lead you to adjust your confidence in a previous belief!). Further, while many individuals strive to think objectively, questioning your assumptions and beliefs can be challenging. One way to get around this is to ask yourself what a stranger in your situation would need to know to make a certain decision (taking your prior knowledge out of the equation). This exercise can draw out potential lines of research that you might not have considered before. A third method for introducing self-doubt is to simply slow down when making decisions. Rather than relying on your current knowledge (which might be limited) to make a decision, taking some extra time can help you gather more facts and consider alternative viewpoints.

Ultimately, the key points is that self-doubt, when used in the proper doses, can be an effective antidote to overconfidence. By maintaining a healthy sense of curiosity and opening yourself up to alternative viewpoints, you can potentially gain insights that can help you make better decisions in the future!

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We hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think we should highlight in a future column!

In the meantime, if you're interested in more news and information regarding advisor technology, we'd highly recommend checking out Craig Iskowitz's "Wealth Management Today" blog.