Executive Summary
As financial planning firms, we offer a valuable service to consumers who are willing and able to pay for our services. Which is what makes the business of financial advice so valuable, and why the average income of a CFP professional is nearly double the median household income in the US. The unfortunate caveat, though, is that financial planning services still are not affordable to a large segment of consumers. Including, alas, the employees of most advisory firms, which means the very people who work there and are expected to advocate for the value of their firm's services and the benefits of financial planning have never actually experienced it themselves!
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss the issues to consider for advisory firms that want to remedy this gap offering financial planning as an employee benefit to the employees of their own firm... including considerations such whether to provide such services internally or externally, whether to let employees choose their own advisor, the tax consequences to consider, and why providing financial planning to employees can actually provide an Return On Investment as employees gain better perspective on how to improve the firm's client experience (by actually experiencing financial planning themselves!).
The first question you have to evaluate when considering how to offer financial planning as an employee benefit is whether you’re going to provide the financial planning services internally or externally. Offering financial planning “internally” means the firm's advisors actually do the financial planning for its employees. Firms may put one associate advisor in charge of all internal planning, or perhaps provide several advisors that employees can go to (since it may be awkward to get financial planning from your direct supervisor). Which raises a real issue with trying to do financial planning internally for employees: there are many conflicts of interest that can arise. For instance, what if an employee's financial plan includes a desire to leave the firm and go into another field? Or what if employees want to talk through the considerations of saving up enough money to buy out the founder in a firm (but don't want to announce their intentions to their co-workers yet)? These issues may be awkward to discuss internally.
As a result, most advisory firms I’ve seen that offer financial planning as an employee benefit offer it externally. The most straightforward approach is simply to engage in a reciprocal agreement with another similar-sized advisory firm – where each provides services to the other firm's employees. In this scenario, you will likely have a cost to actually pay the other advisory firm for their services as well, but if the firms are similar in size, presumably each firm will have roughly the same costs (and income) paid to each other. The caveat even with this approach, though, is that the firm may not actually have the expertise to help your employees, nor will you necessarily have the expertise to help theirs. Are you really prepared to develop for them a 3-year roadmap to repaying debt, navigating debt consolidation services, and repairing their credit scores, if that’s what your employee's planning needs are?
Which leads to a third option for financial planning as an employee benefit: just give employees a budget for financial planning, and let them go and find their own advisor. And the benefit of this approach is that employees can seek out their own advisors through organizations like the Garrett Planning Network or XY Planning Network, which include financial advisors whose expertise is in the areas that typically-younger "rank-and-file" employees actually need, while also having pricing that is less expensive than larger independent RIAs (and therefore more affordable to the advisory firm offering the employee benefit).
Beyond the enhancements in employee well-being that can come from having access to financial planning services (e.g., reduced stress, less absenteeism, better utilization of employee benefits, and lower employee turnover), one of the biggest indirect benefits of using an external firm is that employees can actually experience what it's like to seek out and be a financial planning client. Going through the process of finding an advisor, being onboarded, and then working with that advisor on an ongoing basis, gives employees perspective not only on the value of financial planning, but may also generate ideas about how to provide services better for the firm’s own clients. Of course, in order to avoid unintended negative feelings, it is important that employees understand the tax consequences of receiving financial planning as an employee benefit. Because financial planning is not a tax-qualified employee benefit perk, any money actually paid to an external firm (or possibly the market value of the services received internally), must be reported as W-2 income and becomes taxable to the employee.
The bottom line, though, is simply to recognize that financial planning services can be an excellent benefit to provide to employees, and particularly when employees get to seek out an external advisor and gain valuable insight into how your own firm can better service clients!
(Michael’s Note: The video below was recorded using Periscope, and announced via Twitter. If you want to participate in the next #OfficeHours live, please download the Periscope app on your mobile device, and follow @MichaelKitces on Twitter, so you get the announcement when the broadcast is starting, at/around 1PM EST every Tuesday! You can also submit your question in advance through our Contact page!)
#OfficeHours with @MichaelKitces Video Transcript
Well, welcome, everyone! Welcome to Office Hours with Michael Kitces.
For today's episode, I want to talk about financial planning in the workplace as an employee perk, and more specifically, financial planning in your workplace as an employee perk. In other words, offering financial planning as an employee benefit in your advisory firm. This week's specific question comes from Dan, who asked:
"We're trying to formalize our policy regarding financial planning for our own employees. It feels weird to offer our services to the whole world but exclude the people that mean the most to us, the ones that work for us. So we think we want to do this in-house, but we're concerned about the privacy issues and the inherent conflict between employee and employer. How do other firms handle this?"
I love this question, Dan. I think it's fantastic that you're rolling out financial planning as an employee benefit in the advisory firm. And, as you noted, it is more than a little ironic to me that we talk so much about the benefits of financial planning as advisory firms and then don't give employees any opportunity to experience that benefit. Because what that really means is that the firm ends up talking about the value of financial planning, but the employees themselves, who could possibly be the biggest advocates for the firm's services, can't really talk about its value because they've never actually experienced it themselves.
Or to view it another way, if you really want employees to be more engaged and excited about the value of financial planning that the firm provides, try putting them through the process. At a minimum, to receive an upfront plan, and ideally ongoing financial planning as well, right? Not just the managed retirement assets in the company 401(k) and profit sharing plan, which I know a lot of advisory firms do already for their employees, but actual one-to-one personal financial planning.
How Do You Offer Financial Planning As An Employee Perk – Internal or External [Time - 2:03]
But, as Dan notes, offering planning for employees is one of those things that's actually much easier said than done. The first question you've got to evaluate if you're actually thinking about doing this in your own firm is whether you want to do it internally or externally.
Offering financial planning internally means the firm actually does the financial planning internally for its employees. Some firms might have a particular advisor whose job is to do the financial planning for all the employees who want it. I've seen a few firms specifically give this work to their associate advisors as it's a good opportunity for them to get some client-facing experience delivering financial planning in a supervised environment without putting actual external client revenue at risk by having them learn on clients.
Or you might make two to three advisors available because it can be particularly awkward for someone to be assigned an advisor that is their like immediate team co-worker or their direct report. In other words, if you're an advisor, it's your operations team member or your paraplanner who reports to you for employee reviews and raises, and then you're the one doing the personal financial planning about their family finances, that can get a little bit awkward. That for most people crosses some comfort lines about advice and the separation of what I make and that person who sets my salary.
In point of fact, I think that actually raises what I think is the real issue with trying to do financial planning internally for employees, which is all these conflicts of interests and potential privacy issues that crop up. I mean, after all, what if their financial plan includes a desire to leave the firm and go into another field? That's a problem to disclose to the planner in your firm and raises real issues about whether that person might be passed over for opportunities if they've disclosed in the planning process they're thinking about leaving.
And then what happens if they don't leave? Now they're stuck in a firm where they're not going to get promoted because the firm thinks they're going to leave even if they're not planning to leave, but they disclosed it in the planning process. Or maybe they're planning to stay and they're trying to figure out how to save enough money to make an offer to buy the founder out of the firm. You might want to talk through the issues about buying in before you actually tell the founder you're planning to do so, which may be hard to keep confidential when the planning is being done internally.
And, more generally, I'm not sure if it's always comfortable even for employees to be asked to disclose all their personal financial details to someone who is also a co-worker. I think one of the benefits of a financial advisor, in general, is someone to work with that you can have a professional relationship with and be confident that you won't be judged about your financial situation. And that's harder when you also have a personal relationship with your advisor because it's your co-worker or a colleague in the firm.
As a result, most advisory firms I've actually seen that offer financial planning as an employee benefit, do it externally. The most straightforward approach that I've seen is just engaging in some kind of reciprocal agreement with another similar-sized advisory firm, where you say, "We'll do financial planning for your employees, and you do financial planning for our employees."
Now your advisor may be doing employee financial planning and spending some time doing the plans, but not for your employees. Your advisor does it for the other firm's employees, and their advisor does it for your employees, so the employees get served and the staff time commitment is the same, but you've separated out all the internal conflicts of employees being maybe a little too privy to personal financial details and goals of other employees and colleagues. And, you know, you can set appropriate restrictions in place that says you can't solicit the other firm's employees once you're building this relationship with other firm's employees and vice versa.
In this scenario, you will likely to have a cost to actually pay the other advisory firm for their services. If you're doing planning for their employees and the firms are at similar size and they're doing it for yours, then presumably they'll pay you about as much as you'll pay them for these reciprocal services, so the net result is even, but employees now have a bona fide paid financial planning engagement from an external professional.
The biggest caveat with this approach I think is that sometimes the firm you're working with and partnering with may not actually have the expertise to help your employees, nor will you necessarily have the expertise to help their employees. Because, the truth is, a lot of us tend to work with fairly affluent folks. We may have minimums that are hundreds of thousands of dollars for those with millions of dollars or more.
Your employees may not be qualified for your services and vice versa. Now, you can waive the minimums and have an agreement to do that, but the truth is that you really just may not have the expertise to help the average employee, because the issues might be about short-term goals, cash flow, budgeting, career management, or simply handling debt. You know, do you know how many of your employees are struggling with credit card debt? Are you prepared to help develop a three-year roadmap to repaying the debt, navigating debt consolidation services, and improving their credit scores if that's what their planning needs are? Do you actually have the expertise in that?
Which takes us to the third option that a lot of firms I see that do this just give employees a budget for financial planning, and let them go and find their own advisors – someone who really has the expertise to address their problems and concerns. And the employee can control it and find someone that's a good fit for them. If they just want some hourly advice on a periodic basis, they can go engage someone from Garrett Planning Network. If they want ongoing financial planning advice with somebody who specializes in working with younger clientele – like the employees of so many of our advisory firms – they can hire an advisor form XY Planning Network for $100 or $200 a month.
Frankly, you may find that when you work with firms that are actually targeted to working with, we'll call them rank-and-file employees, then the pricing is less expensive too. For a lot of larger independent RIAs that have a lot of employees that may need the service, the challenge is they often have several hundred thousand dollar account minimum or might have a $5,000 minimum fee, and so, even if you work on discounting that, it's expensive to provide the planning. While you might find advisors in places like Garrett Planning Network and XY Planning Network might have no asset minimums, typical annual fees could be as low as $1,000 or $2,000 a year, which just makes it more affordable as an employee benefit to offer in addition to maybe being a better match the employee to an advisor with the right expertise.
Benefits Of Offering Financial Planning As An Employee Benefit [Time - 8:35]
And letting your employee go and find their own advisor actually is a really good opportunity for them to see what it takes to find an advisor. Experiencing what prospective clients go through when finding advisors in your firm really gives them insights about how to make the advisory firms marketing better based on their own experience in trying to find an advisor. And that last point I think is actually one of the big indirect perks of having your employees get financial planning as a benefit, which is that they get to experience what it's like to be a financial planning client – in the process of finding an advisor, onboarding with an advisor, and working with an advisor on an ongoing basis.
Rick Kahler, who's a financial planner from South Dakota, published a wonderful article I think nearly a decade ago in the Journal of Financial Planning about the benefits of financial planners getting their own financial planners, not just for the actual benefit of third-party perspective on your financial planning needs, but because it's also such valuable perspective to improve your own experience for clients once you've experienced financial planning as a client.
And I think it's equally true for all the employees in your firm that touch the financial planning process. Not only do they get better perspective on what the firm really does and the value that planning provides, but they can actually get ideas about how to do it better in your firm for your clients based on the experience they have in someone else's firm as a client with some other advisor. And that's beyond just the actual benefit of providing financial planning to employees.
Earlier this year we had Liz Davidson from Financial Finesse on the Financial Advisor Success podcast. For those of you who aren't familiar, Liz's firm provides workplace financial planning benefits to mid to large-sized firms. That's what they do. And Liz talks about some of the recent studies that have come out showing empirical data that employee financial wellness leads everything from reduced financial stress to employees, cuts down on absenteeism, and helps them make better decisions to utilize their employee benefits (which then makes them more satisfied employees because they feel like they're getting more benefit from their benefits when they use them properly). There's even some data to suggest that better financial wellness for employees reduces turnover, because when people have a better relationship with their money and their income, they're less likely to job-hop to another employer who offers them a small raise when they become more effective and enjoying life with the income they've got.
Taxation Of Financial Planning As An Employee Benefit [Time - 11:00]
Before we wrap up, the tax nerd in me does feel compelled to point out one other issue worth recognizing if you're going to do financial planning for employees, there are somewhat unfavorable tax consequences of doing so. Because unfortunately, financial planning is not recognized as one of the various tax-qualified employee benefits perks that you can offer employees tax-free.
You can't offer financial planning through a Section 125 plan. You can pay for it directly and it's a deductible expense for the business, but you would have to include it in income for the employee. This is what really becomes the issue. The extent that you pay for financial planning services from the business on behalf of an employee, it's part of the employee's income, which means you'll have to report it to them on the W-2. If you give them $2,000 a year to pay for financial planning, they're going to have to report another $2,000 of income on their W-2 and pay taxes on it.
Indirectly, that's actually one of the upsides of keeping the financial planning internal. If your firm's advisor employees do the work for the rest of the employees and no money changes hands, there's not really anything to report on their W-2 for tax purposes (though, technically, if there's a going market rate for the services that you give them, it's probably supposed to be reported as employee compensation and still be phantom income to them, but arguably it's a gray area when the firm literally doesn't charge for it, no money changes hands, and there's no reciprocal services). But the moment there's actual dollars on the table or a reciprocal agreement because you're paying another advisor or a firm or you're doing planning for their employees in exchange for them doing yours – when there's a value exchange and the employee gets financial planning benefits – that's compensation to an employee. Which must be reported on the W-2 with some tax consequences.
If the amount of money that you're giving them for financial planning is moderate, the phantom income shouldn't be hugely problematic, but it is important at least to warn employees that the tax withholding for the financial planning benefit may slightly impact their take-home pay. And yes, you could give them a bonus to help them cover the taxes, but then, of course, the bonus to cover the taxes is itself taxable. So you have to go through the circular math just to figure out how much to re-bonus for the taxes on the original bonus which itself was a bonus for the taxes of the financial planning employee benefit. It kind of gets messy.
This shouldn't be a deal killer. Just practically speaking, for a moderate financial planning fee and an employee in the lower-middle tax brackets, this might only be a few hundred dollars of taxes which spread across the year might be no more than $10 or $20 per pay period in tax withholding to receive the benefit of comprehensive and ongoing financial planning advice, but be cognizant the tax consequences. Perhaps at some point, the Financial Planning Coalition will take up the challenge of advocating for better tax treatment for financial planning services, but for the time being, you have to be prepared for the tax consequences.
The bottom line, though, is just to recognize that offering financial planning as an employee benefit can be done. Actually it's especially good employee benefit to offer as it not only brings the actual benefits of financial planning into the workplace, but also provides perspective for the employees of what it's like to benefit from financial planning, and what that client experience can be like, which may help them bring new and fresh ideas back to the firm to improve the services for your own clients.
But if you're going to go down this road, give careful consideration to whether you actually want to deliver the service internally or send employees out to other advisors and firms. Also consider whether they're going to be sent to firms that actually have expertise in their needs, or if it's better to just give them some dollars and let them find their own advisors to match their own needs, which can be a good learning experience about what it's like to be a prospective client unto itself.
I hope that helps a little as some food for thought. This is Office Hours with Michael Kitces. We're normally 1 p.m. East Coast time on Tuesdays. Obviously a little bit late this week, but thank you for joining us, everyone, and have a great day.
So what do you think? Do you provide financial planning services to your employees as an employment benefit? Is it better to provide financial planning services as a benefit to employees internally or externally? How do you deal with the tax consequences of providing financial planning services as a benefit? Please share your thoughts in the comments below!
Are there any ERISA concerns with offering this benefit?
Another topic–along these lines–that I would like to learn more about is offering financial planning services to outside companies as a corporate benefit. Sure, we advisors could find values in having our own financial plan, but so many other companies in other industries could also benefit.
How would you go about doing this? How much would you charge? What deliverables would there be?
We use eMoney and could envision signing up all employees of a company for $50 (?) a month each and be there to help them get organized financially and answer questions they may have.
Michael or anybody have any thoughts on this?
This possibility interests me as well (that’s what I thought this article would be about). As a planner-to-be, I really enjoy working with more of the middle class who aren’t as likely to seek out ongoing advice with regularly scheduled appointments, but would appreciate having a go-to person when the need arises (for a lot of people, that’ll be January to April).
I could see taking the monthly retainer model (as described here: https://www.kitces.com/blog/three-financial-planning-business-models-to-effectively-serve-gen-x-and-gen-y-clients/) and offering a group rate to employers (maybe break out the retirement planning portion for tax deduction purposes).
Nice article Michael. If I could make one clarification. An employer that has a qualified plan can offer “retirement planning” to its employees as a fringe benefit, take a business deduction for the expense, and the employee may not be required to include the amount as taxable compensation.
I have often discussed this with business owners and advisers…as it is potentially a win-win for all. The employer looks good to its employees (and gets a deduction); the employee gets retirement planning advice; and the adviser gets the opportunity for more clients…and potentially more collateral business.
The employer needs to make sure the benefit, like other benefits, is explained in a written plan; does not discriminate as to who gets benefit (e.g. HCE’s, executives, etc); is not overly expensive/extravagant in value; and does not include other general financial planning, tax advice/preparation, estate/legal, brokerage and such. [I have seen these @ $500 – $1,500 per employee and with HCEs/owners a higher amount that is part non-taxable/part taxable]
None of the proposed tax legislature has specifically targeted this benefit like it has commuting/transportation benefits, moving expenses, etc.
Thanks
I have a question.
Let’s say a real estate brokerage wants to offer Financial Planning as a benefit to it’s agents.
How would you structure that?
Would you advise them to do it internally or externally?
Technically the agents aren’t their employees (they’re independent contractors) so how would that work in the grand scheme of things?