Executive Summary
Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the economic buzz of both Presidential candidate Joe Biden's proposed tax plan (with significant ramifications to advisors and their clients with incomes greater than $400,000/year), and the potential that a new economic stimulus package may be forthcoming next week as Congress comes back from its July recess to consider more stimulus checks, an extension of unemployment benefits, and even the possibility of a major infrastructure spending plan or a payroll tax cut.
Also in the news this week is a major shift in the industry's processes for taking exams, as the CFP Board announces that it will allow both the July-rescheduled-to-September and also the later November CFP exams to be taken virtually via a new Remote Proctoring process, and FINRA and NASAA similarly announce that major industry licensing exams from the SIE to the Series 6, 7, 63, 65, and 66, are all becoming available online and virtually.
From there, we have a number of articles about the changing industry landscape, including a look at how independent broker-dealers are slowly and steadily reinventing to become broader advisor-support platforms that now generate the majority of their revenue from fees (and not commissions), when advisors should consider switching broker-dealers (despite the hassle it entails), and why advisors looking to retire soon are increasingly eyeing a transition to RIAs as a way to queue up the sale and exit (for both the more appealing economics of RIA deals that often pay cash upfront instead of requiring a broker-dealer-style Earn-Out, and the more favorable tax treatment of actually being able to sell 'the business' instead of simply taking ongoing revenue-sharing payments in the later years).
We also have a few marketing-and-sales-related articles this week, from a look at how advisory firms are adopting more digital marketing strategies as a complement to their traditional sales approach that in some cases is increasing their sales conversion rates above their pre-pandemic levels, what it takes to truly establish yourself as a credible "authority" in your niche or specialization, and why it's so uncomfortable to try to learn a sales "script" to explain your value but why it's actually natural for it to feel uncomfortable (and still important to do anyway!).
We wrap up with three interesting articles, all around the theme of setting goals for yourself: the first looks at how it's valuable to have big goals to figure out where you want to go, but success is all about breaking down "big" goals into small ones that are actually achievable (and can help feed our motivation to keep going); the second similarly explores how setting too many goals can seem appealing but may actually slow us down from achieving any of them; and the last provides a powerful reminder that it's great to think about "big" goals that create big business success, but as the pandemic has highlighted, it's really those who create sustainable goals that actually survive and thrive when the inevitable downturns come (and have more of an opportunity to generate big successes in the long run!).
Enjoy the 'light' reading!
Details Of Presidential Candidate Biden's New Tax Proposal (Huaqun Li, Garrett Watson, & Taylor LaJoie, Tax Foundation) - As the election season continues to gear up, former Vice President and current Presidential candidate Joe Biden has released the prospective tax plan he would propose to implement if he were to become President. Broadly speaking, the proposal aims to raise tax rates on upper-income earners (generally defined as those earning more than $400,000/year) in a variety of ways, including a reversion of the top tax bracket from 37% to 39.6% for those with income above $400,000, restoration of the Pease limitation (which phases out itemized deductions and would be the equivalent of approximately a 1.2% tax rate increase) on income above $400,000, a phaseout of the Qualified Business Income deduction for taxable incomes above $400,000, an increase in the long-term capital gains (and qualified dividend) rate to 39.6% on income above $1M, a cap on the benefit of itemized deductions to a maximum tax bracket of 'only' 28% (and not the new top marginal tax bracket of 39.6%), and bringing the 12.4% Social Security tax back for all income levels above $400,000 (effectively creating a 'donut hole' where income between the current $137,700 Social Security wage base and up to $400,000 would not be Social-Security-taxed, but income above and below those thresholds would be). Notably, the cumulative effect of these changes - given the new top tax bracket, Pease limitation, and especially considering the impact of the addition of Social Security taxes on upper incomes - would increase the top marginal tax rate from 37% (plus the 2.9% Medicare tax on earned income) to nearly 53%, while increasing the top capital gains rate from 20% to 39.6% (plus the 3.8% Medicare surtax on Net Investment Income on top). On the other hand, the Biden proposal would also establish an $8,000 tax credit for child care expenses, make tax benefits to defined contribution plans more uniform, expand the Premium Assistance Tax Credit for buying health insurance from an exchange, and increase the top corporate tax rate from 21% to 28%. Of course, in the long run, it remains to be seen whether Biden wins the election, and even if so whether Congress will pass the proposal (and/or whether it may be changed), but the proposal does provide a roadmap to what may come from a tax perspective after the election... which may directly impact prospective tax planning for clients today?
New Economic Stimulus Package May Be Introduced Next Week? (Zack Friedman, Forbes) - Congress comes back from its July recess next week, and upon its return, Senate Majority Leader McConnell is expected to present draft stimulus legislation. Ultimately, the final details remain to be seen, but given that Republicans only control 53 seats in the Senate and therefore will need some Democrat buy-in to get substantive legislation passed, the proposal is anticipated to have elements that would appeal to both parties. Key elements will likely include: a second round of stimulus checks, which has broad bipartisan support to do 'something', though the exact amount and eligibility criteria are up for debate (from another one-time $1,200 check to an ongoing $2,000/month payment, though McConnell has indicated that Republicans aren't on board with a recurring payment option and that new stimulus checks may only be available to those earning less than $40,000/year); state and local aid, particularly to support schools (from elementary and secondary schools, to colleges and universities) aiming to re-open in the fall, though the parties are very far apart in their proposed amounts (with Republicans suggesting $30B and Democrats asking for $430B for a broader range of state and local aid); some extension of additional unemployment benefits, though concerns remain about whether the prior $600/week benefit was 'too generous' and has created disincentives to work, raising the question of whether there will instead be either a lower amount, or a change to provide a 'return-to-work' bonus instead of an unemployment benefit; and liability protection for businesses, hospitals, and schools (e.g., in the event COVID-19 is contracted on their premises), that would run retroactively back to 2019 and forward to 2024. Other considerations on the table but even more contentious and subject to debate include: a payroll tax cut (which President Trump has strongly advocated for as part of the next round of stimulus legislation); student loan forgiveness (which House Democrats have advocated for, but doesn't appear to be rising as a priority in the Senate); a $4,000 "travel bonus" to encourage families to take trips and bolster the suffering tourism and hospitality industries; and an infrastructure plan (which has bipartisan support from both President Trump and the Democrats but may simply be too large-scale and complex to negotiate and agree upon in short order).
CFP Board To Offer Remote Option For September And November CFP Exams (Mark Schoeff Jr., Investment News) - This week, the CFP Board announced that it will begin to offer a "Remote Proctor" option for the fall CFP exams scheduled September 22nd to 29th (and also for the subsequent November 3rd to 10th exam cycle). The option comes as the tail end of the March exam cycle was curtailed by the breakout of the coronavirus pandemic that forced the closure of Prometric testing sites, and the July exam cycle was rescheduled altogether (to the coming late-September dates); presumably, with a remote option, CFP candidates will no longer face the risk of short-notice cancellations and rescheduling (even if there is a further resurgence of the pandemic). Notably, though, in-person CFP exams will still be offered as well, and in fact, the CFP Board will only permit candidates to select the Remote Proctoring option if they are either located more than 50 miles from a Prometric center (ostensibly including situations where their local Prometric center ends out closing due to the pandemic), or those who "have health concerns" and can meet the technology requirements of having both an internet-enabled computer and a webcam and live microphone enabled (such that test-takers can be monitored remotely via both audio and video), and will require the completion of an application to request permission to take the test remotely. Which follows the trend of FINRA and NASAA, which also this week began to open up testing windows to allow remote scheduling of various industry licensing exams, including the Securities Industries Essentials (SIE) test, as well as the Series 6, 7, 63, 65, and 66 exams. Though notably, with the rise of remote test-taking as an option, and organizations like Prometric figuring out how to proctor exams remotely, the big question going forward may be whether industry exams ever revert back to in-person testing in the future or remain operating in a remote fashion indefinitely.
With Wealth Management Confronting Change, What Is An IBD Nowadays? (Tobias Salinger, Financial Planning) - The world of independent broker-dealers has been dominated by industry consolidation in recent years, as epitomized by the recent Advisor Group acquisition of Ladenburg Thalmann... which now supports a combined 11,500 advisors, albeit while consolidating Ladenburg's five legacy broker-dealer subsidiaries into just 2. At the same time, broker-dealers are increasingly offering 'hybrid' options for their advisors who also want an RIA affiliation - either their own independent RIA, or under the broker-dealer's affiliated corporate RIA - and as network and support platforms for RIAs also begin to emerge, the question becomes what exactly an Independent Broker-Dealer (IBD) really is at this point that makes it unique (as it's clearly no longer about 'just' having an 'independent' relationship with the platform anymore)? In fact, IBD leaders themselves suggest that the labels of independent broker-dealer and independent RIA will cease to become distinct categories in the future, as the industry itself converges, and the latest Financial Planning research study shows that more than 50% of the revenue from the top IBDs actually comes from fees and not commissions anyway (and accounting for nearly all of the cumulative 136% growth of top IBD revenues since 2007). At the same time, though, competition amongst independent broker-dealers continues to be fierce, as the demand for broker-dealers to do more for their reps, while also keeping up with technology and compliance costs, has compressed margins to single digits for most IBDs, and no more than about 3% on average for small- to mid-sized broker-dealers in particular (for which the estimated $1.5B upfront and $500M/year ongoing cost of Regulation Best Interest for the broker-dealer community is just a further nail in the coffin). As a result, broker-dealers are increasingly trying to compete either by focusing into a particular niche of advisors to serve, or by looking for merger and acquisition opportunities to achieve better economies of scale in the hopes of surviving, and the number of broker-dealers themselves has fallen by nearly 1/3rd since the mid-2000s, even as the number of RIAs has soared by 44% over the same time period. Which, again, is leading more broker-dealers to pivot into the world of RIA support, with hybrid offerings, RIA M&A platforms, and more and more outsourced services, as the lines between broker-dealers and RIAs continue to blur.
5 Signs You Need To Switch Broker-Dealers (Jon Henschen, ThinkAdvisor) - Changing broker-dealers is challenging, given both the time and hassle of re-papering client accounts, the risk that clients won't agree to transfers and move along with the advisor, the 'distraction' for the advisor and their entire team to learning entirely new technology and systems... all for what may only be an incremental improvement in payouts or business economies, and the risk that it will turn out that the grass isn't actually greener on the other side anyway. Still, though, Henschen notes that often advisors drag their feet too long before making a sometimes-necessary change, and accordingly highlights a number of scenarios when advisors can and should look at switching broker-dealers, including: poor service quality, including unduly long response times for support and/or a decline in the accuracy of information provided (a challenge for both small broker-dealers that may lack the scale for effective staffing, and larger broker-dealers that are struggling with the integration of back-offices after acquisitions and consolidation that may have even intended to reduce staff support for advisors as a way to save money in the merger); unusually high platform expenses, which are sometimes 'invisible' to the reps without some additional questions, but can include 'high' administration fees for advisory accounts (e.g., as much as 20bps or more for non-wrap accounts), platform fees for third-party managers not held directly with the broker-dealer, mark-ups on third-party money managers, or simply high E&O rates (sometimes with high $150,000+ deductibles as well); broker-dealers that themselves aren't in good financial health (which increases the risk of one morning just 'finding out' the firm has been sold, and more generally can limit the ability of the firm to reinvest into technology and staff to improve the quality of service and platform for the advisor); lack of value-added services (e.g., practice management consulting, marketing support, etc.); and simply an outright mismatch in focus (e.g., an advisor with an advisory focus working with a broker-dealer more focused on transactional business; an advisor focused on alternative investments with a broker-dealer that doesn't make such products available; a desire to have an RIA affiliation and offer advisory accounts with a broker-dealer that doesn't provide such options; a clean compliance record but a broker-dealer that has multiple blemishes that reflect poorly on the advisor [in addition to driving up their E&O costs]).
Succession Planning For Brokers: Convert To An RIA First? (Shad Besikof, ThinkAdvisor) - Mergers and acquisitions for advisory firms have been on the rise, particularly amongst independent RIAs, capped by recent high-profile deals like Goldman Sachs acquiring United Capital for $750M, and a recent study by Advisor Growth Strategies finding a 29% increase in the earnings multiple being paid for advisory firms (up from 5.1X from 2015-2018 to 6.6X in 2019). Notably, for an advisory firm with 30% profit margins, this amounts to approximately 2X revenue, which is not dissimilar to the payouts that large wirehouses are now offering for their "Client Transition Programs" for retiring advisors. However, transitions within broker-dealers are typically paid as a percentage of revenue over a period of 5+ years (i.e., an Earn-Out structure), while demand for RIAs has been turning deals to be increasingly upfront-cash based, in what was historically 1/3rd upfront and 2/3rds after milestones and earnouts but more recently has been as much as 70% in upfront cash. Not to mention that the sale of the business upfront for cash may make a significant portion of the deal eligible for preferential long-term capital gains rates (while the broker-dealer-style Earn-Out structure is typically all taxed at ordinary income). As a result, the combination of reduced risk on sale (in the form of far more upfront cash brought to the table at closing), plus the potential for more favorable tax treatment, can make it more appealing to convert an advisory firm to an RIA before a planned sale and exit. With the obvious caveat that, if the advisor doesn't have a strong relationship with their clients, there's still a risk that clients won't fully transition to the RIA in the first place (but then again, if client relationships aren't strong, an Earn-Out structure is likely to pay far less than anticipated as well?)?
Client Conversion Rates Don't Have To Fall; How Some Advisors Are Prospering During The Pandemic (David Sterman, RIA Intel) - The traditional advisor approach to getting prospects to become clients has 'always' been built around the in-person meeting; by whatever means the advisor markets (from Centers Of Influence to referrals or other marketing strategies), when it comes time to convince a prospect to become a client, it's all about the client coming into the advisor's office to set a good first impression, demonstrate the advisor's professionalism and credibility, and try to get them on board. Except now with the coronavirus pandemic, the in-person "close" is often not possible, and gone with it is the ability to establish in-person rapport (as it's more difficult to read body language and connect with prospects through a webcam alone). The end result is that, at best, the time from prospect inquiry to close is taking longer than it has in the past, as prospective clients ask more questions and are slower to build trust and decide to engage. Still, though, that doesn't necessarily mean advisors are 'doomed' to lower close rates. Instead, as Sterman notes, many firms are simply taking a more proactive approach to build trust in the first place, from engaging more proactively in social media, producing written and video blog content to help better establish the advisor's presence with and relatability to prospects, and sending out more emails and drip marketing. In fact, some firms that have been engaged in a more proactive process of building trust digitally, to support the eventual sales meeting, are actually reporting higher conversion rates than before the pandemic. In addition, it's important to note that the current economic environment can produce different types of prospects as well; some firms are noting an uptick in interest for more hourly-based planning advice (and are taking on such prospects in the hopes they'll engage more deeply in an ongoing relationship in the future). Consequently, some firms are looking at hiring audio/visual support on an ongoing basis to simply become an anchor for their marketing efforts in the future (as the trust-building it brings will likely remain relevant even when prospects can also meet in the advisor's office in-person again!).
7 Ingredients That Make You Truly Authoritative In Your Clients' Eyes (Andrew Sobel, Iris.xyz) - In a world where an advisor's trust with clients and prospects is driven heavily by credibility, there is perhaps no better compliment (and outright business benefit) than to be seen as an "authority" on a topic. Yet as Sobel notes, ultimately, being an authority is about more than just having the Expertise to be an authority (although having that high level of knowledge and skill is unquestionably valuable). Other key aspects to being seen as an authority include: a lived Experience that makes you relatable on the topic, and demonstrates that you know what you're talking about and have "gotten your hands dirty" in or working with the area of authority (e.g., the 'business expert' who's never actually built and scaled a business, the 'social media guru' who doesn't have much of a social media presence themselves, or the advisor specializing in retirees who doesn't actually have many retiree clients) to be able to say "I've worked with over 50 clients on this specific type of challenge..."; Knowledge Breadth (which means not just knowing about the particular topic, but also about the broader context of what's involved in ancillary/related areas); good Judgment to be able to make decisions and effective recommendations even in situations that perfectly map to your existing expertise or to understand when situations may differ (e.g., where two clients have seemingly identical problems but require different recommendations because of their broader situation); Applied Insights (i.e., not just 'knowing' what to do, but actually being able to apply those insights into practical and actionable recommendations); Conviction (that you really walk your talk and convey confidence in your expertise); and some level of Social Proof (e.g., a prestigious client list, word-of-mouth referrals, media visibility, awards, and other 'third-party' credibility markers that indicate others in the marketplace see you as an Authority, too).
Learning Your Lines (Steve Wershing, Client Driven Practice) - Imagine for a moment that you discovered a magic spell that could motivate any client to work with you and implement your recommendations... with the catch that the spell is cast with an unfamiliar language, making it very unnatural and different to say. How hard would you work and practice to learn to cast the spell effectively? Yet despite the obvious answer - who wouldn't want to learn and practice that spell! - Wershing notes that in practice, most financial advisors are reluctant to similarly learn and develop the script of how to communicate their own differentiator and unique value proposition. As ultimately, to create a strong marketing message, Wershing suggests that the key really does start with creating a "brand script" that explains how you help clients get to where they want to go. Of course, some advisors have at least tried this tactic over the years, only to find it's "too salesy", "unprofessional", or doesn't feel authentic. But the reality is that no script, no "magic spell", no conversation in a foreign language, will ever feel comfortable until you've really practiced and learned your lines. In fact, when you look at how stage performers convey themselves when acting, the whole key is to learn and practice their lines over and over and over again until they sound completely natural when spoken... even though the words they were speaking had been written by someone else (the author of the play or movie script). Which means on the one hand that it's completely normal for the effort of trying to speak lines written by someone else to feel unnatural and inauthentic at first. But in the end, that's not a reason to abandon the approach; it simply means you need to spend more time learning and practicing your lines?
The Downside Of Thinking Big (Shauna Mace, Advisor Perspectives) - It's common in the world of strategizing for growth to "think big" and challenge yourself with stretch goals. Yet the caveat is that in practice when the goal is too big, it can just feel daunting, overwhelming, and unachievable... to the point of de-motivating us from even wanting to start. As a result, Mace suggests that the key to really changing and improving is not about thinking big, but thinking small and incremental, trying to find "Small Goals" that bring the opportunity for "Small Wins" that reinforce our confidence in our ability to succeed and compound in a positive direction of growth. After all, the reality is that virtually all changes - even and especially big ones - are really the compounded result of small efforts repeated over time (from the $1B advisory firm that 'simply' added 1-2 clients per month compounded for 10-20+ years, to the proverbial elephant that gets eaten one bite at a time, or the person who feels overwhelmed by running a 26.2-mile marathon but can envision just taking 52,400 steps one at a time). Notably, this doesn't mean it's bad to have some big goals to start - it's important to know what direction those small goals should point - but once the big goal is set, Mace suggests that it's crucial to then break it down to smaller goals along the way, identifying what monthly or even daily business development activity will help connect to the targets, what needs to be adjusted to make those incremental goals achievable, and focusing on 'just' identifying what step must be taken or roadblock must be cleared to achieve the next small win, whether that's just focusing on how to add a few more social media followers or get a little more engagement with more likes and retweets (which eventually turn into more followers, who are more engaged followers, some of whom may reach out as prospects, and then eventually become clients, to keep on track for the long-term goal). Because in the end, long-term change and success require persistence, and it's incredibly difficult to remain persistent with a "big" long-term goal where it feels like the goal is so distant that each day's efforts are negligible. Smaller goals that allow us to get "small wins" help to make that long-term persistence feel more worthwhile and on track.
Don't Bog Yourself Down With Too Many Goals (Dorie Clark, Harvard Business Review) - In the real world, it's often hard to focus a business down to just one goal; there are inevitably a wide range of competing interests and priorities, leading to a series of goals that must be accomplished sequentially and sometimes simultaneously. Yet in the end, we only have so much time, attention, and bandwidth to accomplish our goals, which means at some point, it's crucial to set a roadmap to identify which goals truly have priority and what their timelines are. Clark suggests that the starting point is to set broader over-arching goals that should be the guideposts for everything else - from the business owner that sets a 3-year strategic vision of where to focus, down to an individual employee who asks their boss "what is the most important goal I can be working on this year?" To the extent there are multiple goals that may overlap, consider creating a "Goal Timeline" that literally writes out the sequence of what goals will be achieved, and when, over what time period - both to understand where the limits are (when you write out the goals, is there a point where you're simply doing too many at once?) and to help think through which goals really matter most and must be done first (as a foundation for building the later ones)? By sequencing goals, it also becomes easier to clarify how long a goal should be pursued, if only to determine whether it's worth sticking with, or when it's time to move on; in other words, goal timelines not only help prioritize, but also help to avoid the "churn and burn" phenomenon of entrepreneurial ideas that get tested but discarded for the next goal before they even had the chance to be worked on in the first place! In fact, it's sometimes feasible to identify a "keystone" goal - one that, if accomplished, will make everything else easier (e.g., rebuilding that website that will ultimately make all the other marketing and growth efforts easier, or a key operations hire to free up time so you can focus on all the other areas that need your time and attention).
Stop Trying To Be A Unicorn, And Be A Camel Instead (Frank Dillon, Irish Times) - In recent years, the focus of startups has increasingly been about becoming a "unicorn" - that next breakout company that becomes a huge $1B+ enterprise - towards which venture capital investors increasingly put their dollars. And more generally, the culture of creating startups in a wide range of industries - including as a financial advisor - has been all about "go big or go home", with a never-ending pressure for outsized growth. Yet as author Alex Lazarow notes in his recent book "Out-Innovate," in practice the "Go Big" (often at 'all costs') approach can actually de-stabilize the business, turn prospective successes into failures, and, in general, make businesses less robust to the inevitable uncertainties and vicissitudes that can impact a business. Not to mention that a constant focus on how to "disrupt" and do something completely different misses the opportunities to simply make what we have incrementally better with a new business (or as entrepreneur Peter Thiel once quipped, "we wanted flying cars, but we got 140 characters" instead). So what's the alternative? Instead of focusing on the mythical unicorn of success, think about trying to build a "camel"... a robust beast that can survive a long drought. In the context of especially Silicon Valley startups, the culture is often to spend so heavily that it would be impossible to survive a drought and in fact even growing companies need more capital to keep growing in the hopes of someday actually being viable (e.g., 10 years into operation and after its IPO, Uber still lost $1B in its first quarter as a public company!). In the world of financial advisors, firms don't necessarily get (or get hooked on) the same cycle of external capital. But the dynamics are still similar, where firms run with untenably small margins as they reinvest 'too' aggressively for growth, and in the process become overly subject to the risks of even 'normal' market volatility (culminating in situations like the recent explosion of mid-to-large-sized advisory firms requesting PPP loans to avoid layoffs in the market downturn). The key point, though, is simply understanding that sustainable growth - that is robust against temporary interruptions along the way - looks different than growth-at-any-cost approaches... and in practice, may be more likely to build a bigger and more successful business in the long run anyway?
I hope you enjoyed the reading! Please leave a comment below to share your thoughts, or make a suggestion of any articles you think I should highlight in a future column!
In the meantime, if you're interested in more news and information regarding advisor technology, I'd highly recommend checking out Bill Winterberg's "FPPad" blog on technology for advisors, and Craig Iskowitz's "Wealth Management Today" blog as well.
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