Weekend Reading for Financial Planners (Nov 27-28)

Authors:

Ben Henry-Moreland

Team Kitces

Ben Henry-Moreland is a Senior Financial Planning Nerd at Kitces.com, where he specializes in writing and speaking on financial planning topics including tax, practice management, and technology. He also co-authors the monthly Kitces #AdvisorTech column. Drawing from his experience as a financial planner and a solo advisory firm owner, Ben is passionate about fulfilling the site’s mission of making financial advicers better and more successful.

Read more of Ben’s articles here.

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Adam Van Deusen, CFP

Team Kitces

Adam is a Financial Planning Nerd at Kitces.com. He previously worked at a financial planning firm in Bethesda, Maryland, and as a journalist covering the banking and insurance industries. Outside of work, he serves as a volunteer financial planner and class instructor for local and national non-profits.

Read more of Adam’s articles here.

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What's Likely To Change As Senate Weighs Build Back Better Act (Sahil Kapur, NBC News) - Last Friday, the U.S. House of Representatives passed the Build Back Better (BBB) Act after months of debate and multiple rounds of changes to the original text of the bill. But BBB still has a long road ahead before becoming law, needing to first pass the Senate and, if any changes are made there (which is almost certain to occur), potentially requiring another round of negotiations between the House and Senate to reconcile differences between the two and reach an agreement on the bill’s final form. For financial advisors and their clients, the most significant element of the bill that could change from the House-passed version is the proposed increase to the State and Local Tax (SALT) deduction cap, which the current House bill would raise from $10,000 to $80,000. That provision has proven divisive among Democrats, with more progressive members arguing that the raised cap unfairly benefits the wealthy, while others – predominantly from higher-tax states – have campaigned on raising or repealing the SALT cap to lower the extra tax it imposes on their constituents. And because every Senate Democrat’s vote is needed to pass the bill over the 50 Republicans who will presumably vote against it, it would not be surprising to see the negotiations on SALT to be drawn out until nearly the end of 2021 (as well as on other components of the bill on which there is disagreement, such as expanding paid family leave under FMLA to 4 weeks, and expanding Medicare coverage for vision and dental care). Which means that, as in 2017 when the Tax Cuts and Jobs Act created the SALT cap, there may be only a handful of days between the passage of the law (whatever its final form may be) and the date when most of its provisions would take effect (in this case, January 1, 2022).

Ultra-Rich Skip Estate Tax And Spark A 50% Collapse In IRS Revenue (Ben Steverman, Financial Advisor) - As stock prices have soared over the last year, growing the already-immense wealth of billionaires like Jeff Bezos and Elon Musk to over $5 trillion collectively, progressives have focused on the estate tax as a way to redistribute some of that wealth. But even as billionaires’ balance sheets grew, the amount of estate tax paid by wealthy Americans declined by over 50% from 2018 to 2020, from $20 billion to $9.3 billion in total estate taxes paid. In fact, in 2020, only 1,275 families – representing just 0.04% of the Americans who died that year – paid any estate tax at all. The drastic decline is partially the result of the Tax Cut and Jobs Act passed by Republicans in 2017, which doubled the estate tax exemption (which currently sits at $11.7 million for individuals and $23.4 million for couples) and narrowed the pool of individuals who could potentially owe estate tax. Yet at the same time, amongst the fewer wealthy individuals who are above the exemption threshold, there has also been an increase in more proactive planning using sophisticated estate planning techniques, like Grantor-Retained Annuity Trusts (GRATs) and Family Limited Partnerships (FLPs), to transfer wealth to family members estate-tax-free (or at least greatly estate-tax-diminished). And even though progressive politicians have proposed ways to limit the ability of the ultra-rich to avoid estate taxes, their proposals have so far been halted by resistance from Republicans and moderate Democrats (as exemplified by the Build Back Better act, which in its original version prohibited the use of most GRATs and FLPs but ultimately saw those provisions stripped from the bill).

Advisors Look To Nontraditional Fees To Match Client Needs (Ted Godbout, National Association of Plan Advisors) - In recent years, investors have become more aware of the fees they are charged for investment advice and management. This increased awareness has come hand-in-hand with the proliferation of automated investment platforms (a.k.a. “robo-advisors”) that promise a diversified, automatically-managed portfolio at less than half of the traditional 1% fee charged by many human advisors. And yet, even though investors’ fee awareness has increased, along with an increasing number of options to manage their own investments through technology at a lower cost, the fees charged by human advisors have remained largely stable over the last decade (showing no signs of the “compression” that was widely feared to result from the rise of robo-advisors). According the latest Cerulli Edge – U.S. Advisor Edition report on trends across the advisor industry, the reason for this might be that investors are recognizing the value of specialized financial advice, separate from what they are paying to have someone simply manage their investments. As a result, Cerulli anticipates that investors will seek more “non-traditional” (i.e. non-asset-based) fee arrangements that align more with the financial planning and advice that those investors are showing they actually value most. Accordingly, Cerulli sees long-term potential for monthly or annual retainer fee models that not only clearly align with the value they provide, but also open up new markets of potential clients – like high-earning, not-rich-yet investors – who were previously underserved by AUM-based advisors because of their limited amounts of investable assets. But even though these fee models may see more widespread adoption in the future, Cerulli observes that they pose no threat to the dominance of the AUM model in the short term, noting that only 13% of advisors currently offer an annual retainer or subscription model in their practice.

The 10 Top-Performing Financial Advisor Blog Post Topics Of 2021 (Claire Akin, Indigo Marketing Agency) - Blogging can be a powerful marketing technique for financial advisors. At a basic level, it enables them to reach prospective clients by demonstrating the advisor’s financial planning expertise. On top of that, a well-written blog post can showcase the advisor’s personality and the experience of the clients they work with. But it can be challenging for some advisors to think up content ideas for a financial advisor blog (and particularly to find ideas that will generate the level of online engagement that makes writing a blog post worth the amount of time and energy that goes into it). So for advisors who are struggling with new content ideas, this list of the high-performing blog post topics (from a marketing agency that creates blog content for financial advisors) might provide some inspiration. As might be expected, many of the topics are those that establish the advisor’s niche expertise in a discoverable way (e.g. “Getting the Most From Your Microsoft Benefits Package” and “Tips for Amazon Open Enrollment”). Others offer actionable advice on popular topics that have a time-sensitive angle that spurs action (“How to Prepare for an Unexpected Death” and “10 Things to Do Within 10 Years of Retirement”), or present a unique or more personalized expert opinion (“How I Invest My Money” and “Here’s Why the DOW Doesn’t Really Matter”). But perhaps surprisingly, several of the posts have nothing to do with financial planning, but focus on the advisor themselves (“Our Team Updates”, “Why I Became a Financial Advisor”) or their clients’ experiences (“Our Client Stories”, “See a Sample Financial Plan”). In other words, demonstrating expertise on a blog is valuable, but is not the only thing that potential clients care about; they want to know what the advisor is like as a person and what their client experience is like, along with highlighting what the advisor can specifically do for them.

The Five Elements Of Click-Worthy Email Subject Lines (Samantha Russell, Advisor Perspectives) - Email as a marketing technique is both helped and harmed by the ubiquity of email in modern life. On the one hand, the amount of time that people spend in their inbox means that email can be the best way for an advisor to get their message in front of a current or potential client. On the other, the sheer amount of email received on a daily basis means that it can be challenging to create one email message that stands out from the rest. The difficulty of successful email marketing is underscored by the financial industry’s 24.8% average email open rate and 2.7% average click-through rate. Because the subject line is the first (and often only) part of the email that the reader sees, creating a subject line that grabs the reader’s attention can make the difference between the email being opened (and getting the rest of its message in front of the reader) or languishing unread in their inbox. So what makes an effective subject line? Above all, subject lines need to be specific about their subject and audience (e.g., “Tax Strategies for High Earners”) to make the email’s value to the (intended) reader clear. The same holds true for tactics like phrasing the subject line as a question (“Could Inflation Affect Your Retirement Plans?”) or including numbers (“Back to School: 5 College Planning Mistakes to Avoid”), which can help the subject line stand out (but may also read clickbait if not sufficiently detailed, diminishing the reader’s trust in the advisor’s message). Meanwhile, some effective subject lines are driven as much by the type of content within the email as the message itself: Client updates and alternative media (like video) can be a refreshing change of pace for readers accustomed to generic written messages, so highlighting these types of content (e.g., “July Client Update” or “[Video] How To Preserve Generational Wealth”) can spur the reader to open the email and explore further. Whatever the tactic, the important part is to clearly communicate not only the email’s content, but also (explicitly or implicitly) why it would benefit that particular reader to open the email and read the message inside.

Get This On Video (Robert Sofia, Forbes) - Marketing strategies, while ultimately having the goal of creating more clients and generating more revenue for a firm, can take several different approaches toward that end. Some strategies are about creating general awareness and reputation for the firm among the community of that firm’s potential clients. Others are about establishing the advisor’s expertise within the niche market they serve. And many strategies are simply meant to convince a potential client to click through to the advisor’s website and book an introductory meeting. Some marketing channels can be well-suited to one or more of these strategies, but not the others: for example, a well-written blog post can demonstrate the advisor’s expertise, but unless it includes a direct call to action, it may not result in readers immediately clicking through to book a meeting. Video campaigns, however, seem to have a unique advantage over other techniques, in that they perform well in all three types of marketing strategy. They are easily (and often enthusiastically) shared on social media, creating more awareness of the advisor and their message than blog posts or static images. The video’s content can also demonstrate the advisor’s expertise and deliver a memorable message in less time than it takes to read a blog post. And, according to Snappy Kraken’s 2021 State of Digital Marketing report, video campaigns massively outperform other marketing techniques in terms of click-through rates (such as to the advisor’s website or appointment booking site), achieving a 42.6% click-through rate versus an average of 2.7% for all emails for the financial industry. But, as the Snappy Kraken CEO notes, an effective video campaign requires more than recording the content and posting it on YouTube. To maximize views, shares, and ultimately the number of people clicking through to book a meeting, the video should be posted on a native page on the advisor’s website, with all email and social media promotion of the video pointing to that page. That way, the engagement that surrounds the video campaign (in the form of social media shares, comments, and questions) is directed toward the advisor’s site, not to a third party like YouTube or LinkedIn, which puts the advisor in a position to have related calls-to-action that actually turn a video viewer into an actual prospect (or more engaged client).

What’s Changing In The New FAFSA And What’s Not (Ann Carrns, The New York Times) - Each Fall marks the beginning of the college application and financial aid process for students and their parents. And for those applying for financial aid for the first time (and some returning filers!), filling out the Free Application For Federal Student Aid (FAFSA) can be an intimidating prospect. To help alleviate some of the confusion related to the FAFSA form, Congress in late 2020 approved changes to the FAFSA, as well as the formulas used to determine financial need. The changes, which will be enacted over the coming years, will trim the number of questions on the FAFSA by two-thirds. Also, the previous Expected Family Contribution (EFC) is being replaced by a new Student Aid Index (SAI) that will better describe the amount of financial aid for which a student potentially qualifies. And while the legislation eliminates a break for families with multiple students in college at the same time, it also increases the income protection allowance (i.e., the family's income excluded from the financial aid calculation) by 20% for parents and 35% for most students. Another important change is that certain types of untaxed income, including gifts from grandparents and distributions from grandparent-owned 529 accounts, will no longer be reported on the FAFSA, and will not impact the receiving student’s financial aid eligibility. Given the range of changes, financial advisors will have many new ways to support clients with students heading to college in the coming years, not only by guiding them through the new changes, but also by using income planning and asset location strategies to maximize financial aid eligibility under those new rules!

Grandparent 529 Plans Get A Boost From New FAFSA Form (Robert Farrington, Forbes) - Saving for college is a stressful topic for many families, and is an important area where financial advisors can support clients. One of the most popular tools for college saving is the 529 plan, which allows individuals to save and invest funds in an account that grows tax-free, and comes with tax-free distributions for qualified educational expenses. Furthermore, many states also offer tax incentives for saving in 529 plans, and saving in 529 plans is not just limited to a student’s parents, as many grandparents have used 529s to support their grandchildren’s educations as well. However, while distributions from grandparent-owned 529 plans may not be taxable income (as a qualified distribution from a 529 plan), the distributions currently do count as income to the receiving student for the purposes of financial aid calculations. Which can subsequently decrease the student's financial aid eligibility... and ironically, because income is counted more aggressively than assets, income from a grandparent-owned 529 plan can actually be treated even more harshly than assets in parent-owned 529 plans, unless the funds were used for just the last final year or two of college after the last FAFSA form was filed. However, this is set to change thanks to legislation passed in late 2020 that, when implemented, will no longer require gifts from grandparents and distributions from grandparent-owned 529 plans to be reported as student income on the FAFSA. While the exact year this will go into effect is unclear (as the changes are just now being rolled out), it will be a major benefit to students receiving assistance from grandparents. For financial advisors working with clients considering multigenerational 529 planning, this is also a very beneficial change as it dramatically improves the treatment of grandparent-provided assistance for the financial aid process. At the same time, though, it’s important to note that grandparent-held 529 funds can still be considered for the CSS Profile, which some schools use to determine aid eligibility, so knowledge of a particular student’s college choices could impact distribution strategies. Nonetheless, this new FAFSA change for grandparent-owned 529 plans can provide an opportunity for advisors to highlight the tax benefits of grandparents funding 529 accounts, both for students and the grandparents themselves, rather than gifting money directly to grandchildren-students or to their parents on behalf of the grandchildren!

The Elite Master’s Degrees That Aren’t Paying Off (Melissa Korn and Andrea Fuller, The Wall Street Journal) - The rising cost of college tuition, and the increasing student loan burden faced by undergraduates trying to cover their tuition costs, has received significant attention in recent years. A less-visible phenomenon, though, has been the (even larger) increases in tuition and student loans for those in graduate programs. And while some graduate programs like law and medical schools prepare students for jobs in traditionally high-paying fields, others can leave graduates with large student loan balances but not enough of an (or any) increase in income to pay off the additional loans. At the most extreme end, recent graduates of Columbia University’s film program who took out federal student loans had a median debt of $181,000, but two years after graduating half of these borrowers were making less than $30,000 per year. And unlike Federal undergraduate loans to students, which are capped at $12,500 per year, Direct PLUS loans for graduate students are only limited by the cost of attendance. In fact, graduate Direct PLUS is the fastest-growing federal student loan program, and Federal loan data suggest that during the 2020-2021 academic year will for the first time borrow as much as undergraduates. Given the large and widespread undergraduate and graduate debt burdens, student loan planning can be a service in high demand for financial advisory firms (or for advisors supporting advisors on a pro bono basis!). For students whose incomes are not sufficient to cover their scheduled federal student loan payments, income-driven repayment plans can be an important tool for managing the debt burden and advisors can help borrowers structure their income to maximize the benefits under the program. And for student loan borrowers working in eligible fields, the Public Service Loan Forgiveness (PSLF) program can forgive the federal student loan debt of borrowers after making 120 qualifying monthly payments (and the government has temporarily expanded eligibility for the program!). Though alternatively, sometimes the best approach is to simply take a fresh consideration of whether a particular graduate school program is really worth the cost (and associated student loan debt) in the first place. As in the end, borrowers with large Federal student loan balances do have several tools to alleviate the burden (and advisors are well-positioned to support them), but in the long run taking on debt as a self-investment into education is only a good deal if it creates enough of a potential increase in future earnings to pay off in the first place (which unfortunately, needs to be evaluated for each/any graduate degree)!

Unbundling Planning To Get More Client Engagement (Tony Vidler) - Comprehensive financial planning is often seen as the gold standard for client service. And while charging for comprehensive planning—whether on an Assets Under Management (AUM) or a fee-for-service basis—can generate significant revenue per client, the comprehensive model leaves out many clients who might only initially be interested in one or two parts of the planning process, and/or are scared off by the cost of an annual engagement or an ‘entire’ standalone comprehensive plan. To meet the needs of these clients, advisors can offer each component of the process separately on a more modular basis, and create price points for the different services (e.g., $1,000 for a portfolio review, or $750 for a cash flow analysis). And while an ‘unbundled’ offering might appear to lower the revenue per client - which can be a challenge for the economics of the advisory firm – it can have significant benefits for the advisor as well. For example, advisors can charge premium pricing for the work that they complete on a modular basis, because it is easier to define and articulate value in each of the unbundled planning services. And once a client experiences the advisor’s service offering and the value generated in one area of the financial planning process, they could be more likely to engage the advisor in different areas or on a more comprehensive basis (now that they’ve had a ‘taste’ of a positive planning experience and the advisor’s services and capabilities), even if they never thought they would be a ‘comprehensive’ client in the first place (potentially creating significant lifetime client value)! Unbundling also opens up the potential for more referrals from clients who know others who are similarly focused on the same parts of the planning process. The key point, though, is that at the end of the day, clients pay for results rather than for the advisor’s time, so an unbundled approach where clients get exactly the deliverable they want, and the advisor can charge a premium price-per-hour-worked, can be a win-win situation for both the advisor and their clients!

Outcomes Determine Advisor Value (Dan Danford, Advisor Perspectives) - When an individual has a problem that needs to be fixed by a professional, they generally prioritize the issue being solved, rather than concerning themselves with the time it takes the professional to do so. For example, a homeowner with a leaky faucet might be willing to pay a plumber the same amount to fix it whether it takes the plumber five minutes or an hour to complete, because at the end of the day the value is simply in the leak itself getting fixed. Similarly, financial planning clients are typically more concerned with how the advisor addresses their particular needs, as opposed to the number of hours it takes the advisor to complete their specific plan. This tendency suggests that advisors who can create efficiencies while tailoring their service to meet each client’s needs are likely to be more successful than those who take a more ‘one-size-fits-all’ approach, focusing their services to ‘just’ the parts that clients really want and value the most. At the same time, those offering a more customized approach can charge each client more, as the advisor will be generating significant value for the client, no matter how many hours it actually takes the advisor to complete the plan. For example, the homeowner might have been willing to pay the plumber $100 for just five minutes of work to fix the faucet because they are paying not just for the labor, but for the years of experience the plumber has that allows them to diagnose and fix problems quickly. Similarly, an advisor’s value is not just the hours it takes to complete a specific client’s financial plan, but also the years of training and experience that allows them to identify the most important issues for a client and develop a plan to address them – where in fact, the greater the experience of the advisor, the less time it takes for them to get to the heart of the issue and solve it for the client’s greater benefit! The key point, though, is simply that clients are more concerned with their financial outcomes, than the time it takes their advisor to get them there, so the most successful advisors are those who can meet each client’s specific needs and charge them a fee commensurate with the value they are offering to solve that specific problem!

How Consumers Hire Advisors and Why They Subsequently Fire Their Advisors (Philip Palaveev, Financial Advisor) - While financial advisors are well aware of the value they can offer, for an advisor-client match to be made, the potential clients not only have to realize that they could benefit from financial planning services, but also do the work to discover and select an advisor. And while advisors put significant time and money into marketing, focusing their efforts on the best ways to attract (and keep!) clients can improve the efficiency of their marketing efforts. With this in mind, advisory consulting firm The Ensemble Practice surveyed 500 consumers with personal income of $100,000 or more (most of whom had a net worth between $500,000 and $5 million) on their engagement with financial advisors. The survey found that recommendations from family or friends were still the most common way individuals in advisory relationships at least start the search for their advisor, but that brand and the reputation of the firm also carries a lot of weight (as consumers have little else to go on when evaluating an ‘intangible’ service like financial planning!). On the other hand, consumer preferences for initially finding an advisor are shifting as well, as while friends-and-family recommendations still topped the list, “online search” (e.g., via Google) was actually ranked higher than recommendations from a colleague, employer, or CPA/attorney! In turn, once consumers actually met with prospective advisors, the data showed that a friend-or-family recommendation was still the driving factor in deciding which particular advisor to work with, but followed thereafter was the consumer’s assessment of the firm’s initial presentation on their services, and its brand reputation (while “excellent investment performance” ranked only 5^th on the list of factors!). Of course, successful advisory firms not only attract new clients but also retain them once they come on board. With this in mind, the survey found that almost a quarter of respondents had left an advisor, and had not retained a new one – suggesting that the breadth of poor advice experiences from many ‘financial advisors’ is poisoning the well by making nearly a quarter of consumers uninterested in ever hiring an advisor again! For those who had left an advisory relationship, the most common reasons cited were cost, their advisor leaving the firm, and communication issues between the advisor and client (from not communicating regularly and clearly, to not listening well to the client’s point of view); again, though, “performance” ranked only 6^th on the list of reasons that clients leave. Ultimately, then, the key point is that while consumers may initiate contacts by referrals from friends and family, how the advisor shows up, presents their services, conveys their brand, and communicates on an ongoing basis, are the bigger drivers of long-term outcomes (not investment performance)!

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, I'd highly recommend checking out Craig Iskowitz's "Wealth Management Today" blog, as well as Gavin Spitzner's "Wealth Management Weekly" blog.