Nerd's Eye View blog

Navigating Income Harvesting Strategies: Harvesting (0%) Capital Gains Vs Partial Roth Conversions

July 22, 2020 07:01 am 19 Comments CATEGORY: Retirement Planning

For many high-income clients, financial advisors recommend deferring income as a strategy to mitigate taxes, especially when the client is in a high tax bracket and expects to be in a lower tax bracket in the future as income levels decline (e.g., after retirement). However, in the opposite circumstance, when current taxable income is lower than anticipated future income (e.g., because the client is building substantial wealth), it can be beneficial instead to harvest income instead, take advantage of the taxpayer’s lower tax bracket, and limit the amount of income deferred into the future which would presumably be taxed at a higher rate anyway (as the more income that is deferred to the future, the greater the risk of bumping up the taxpayer into an even higher tax bracket as a result!). But how does the financial advisor choose the best strategy when it comes to avoiding too much tax deferral and harvesting income instead, especially when there are opportunities to harvest both ordinary income (e.g., Roth conversions) and also capital gains (at their own preferential rates and tax bracket thresholds)?

Advisors choosing between these methods – and whether to harvest ordinary or capital gains income – should consider the tax rate brackets associated with each income type to assess how to most effectively minimize overall tax liability (both now and in the future), as well as the “Capital Gains Bump Zone” – where the marginal tax rate on ordinary income can be driven substantially higher by indirectly driving capital gains (along with income generated from qualified dividends) into higher capital gains brackets as well. Because capital gains may be harvested at 0% for those in the bottom two tax brackets… but only if other ordinary income doesn’t ‘crowd out’ those lower tax brackets first!

Accordingly, financial advisors can design optimal income harvesting strategies for their clients by considering when it’s better to harvest ordinary income at its brackets, versus capital gains at those brackets, depending on the relative outlook for each in the future. For instance, those in the 0% ordinary income tax bracket can benefit more from harvesting additional ordinary income (versus capital gains) at 0%, as the jump to the next ordinary income tax bracket (once income turns from negative to positive) is significant. However, for clients in the 10% or 12% ordinary tax bracket (but still in the 0% capital gains tax bracket), it’s often better to harvest capital gains income (versus ordinary income) to reduce the impact of future capital gains income taxed at the 15% capital gains rate (and thus minimizing a 15% increase in capital gain taxation from 0%, compared to a 10% increase, from 12% to 22%, in ordinary income tax). In other words, the choice to harvest either ordinary or capital gains income will largely depend on how that additional harvested income will impact future income tax rates (for that particular type of income, given that individual’s own income growth trajectory).

However, the changes in ordinary and capital gains tax brackets as income itself rises (if only through the impact of deferring that income in the first place) are not the only factors to consider when deciding whether to harvest income, though, as there are other mitigating factors that will impact a taxpayer’s overall tax liability. These include the taxation of Social Security benefits, which phases in as income levels rise (such that harvesting income can actually trigger taxation of these benefits); Medicare Part B and Part D Premium Surcharges, which increase with higher income levels; and the Net Investment Income Tax (NIIT), which increases part of the 15% and the entire 20% capital gains tax brackets by 3.8% and applies not just to capital gains income but also to interest and dividend income as well (except for IRA withdrawals, including those carried out for Roth conversions, which are not subject to NIIT). Financial advisors should also consider the impact of state income taxes (especially if the client is planning to relocate to a different state in the future), and charitable contributions, as well as the step-up in basis of inherited assets received by beneficiaries, and even the beneficiaries’ own tax rates.

Ultimately, the key point is that financial advisors whose clients have lower tax rates today should be wary about deferring income at those low rates – often causing higher rates in the future – and instead can soften the impact of higher future tax rates by strategically harvesting ordinary and/or capital gain income today (with their separate tax bracket structures). However, there are several mitigating factors (such as Social Security, Medicare premiums, and the Net Investment Income Tax) that need to be considered when designing a suitable strategy for the client, and because of the unique tax rates (and bracket structures, and strategies) of ordinary income versus capital gains, it’s often necessary to navigate from year to year which is actually the ‘optimal’ strategy to pursue!

#FASuccess Ep 186: Cost-Effective Seminar Marketing By Leveraging Facebook Digital Ads To Fill Local Events, with Samantha Bezar

July 21, 2020 07:05 am 1 Comment CATEGORY: Financial Advisor Success Podcast

Welcome back to the 186th episode of Financial Advisor Success Podcast!

My guest on today's podcast is Samantha Bezar. Samantha is the director of digital marketing for Thrive Financial Services, a hybrid RIA and insurance agency near Philadelphia generating more than $6 million of annual revenue while serving nearly 500 clients. What's unique about Samantha, though, is the way she's built a scalable marketing solution for the firm, with a combination of digital marketing and in-person events that have lifted the revenue of the firm from a few hundred thousand dollars to more than $6 million of revenue in under 3 years.

In this episode, we talk in-depth about Thrive's seminar marketing approach, why they've chosen to do education-only events and not dinner seminars, the way they initially drew participants by relying on buying third-party mailing lists but dropped their cost of client acquisition by more than half by doing their own Facebook digital marketing to fill in-person seminar events, the exact process that Thrive goes through to target their ideal prospects on Facebook, engage them to register for the seminar and confirm they actually attend, and the metrics of how a $3,000 marketing spend can turn into tens of thousands of dollars of new revenue, which just gives Thrive more money to reinvest into their marketing process to further accelerate their growth.

We also talk about how Thrive transitioned to webinar events in the face of the coronavirus pandemic, why the company still chooses to do its webinars as an in-person live stream and not just a recorded webinar or voice-over PowerPoint approach, the tools and technology that Thrive uses to deliver its webinars and handle its online registration process, and how Samantha determined that text messaging can actually be a highly effective marketing tool to ensure prospects follow through.

And be certain to listen to the end, where Samantha shares her own journey of learning digital marketing in the advisory world without a background as a financial advisor, the importance of viewing all marketing as experiments where it's okay to try something out and fail because that's the only way you find out a new approach that works, and why Samantha sees marketing automation software tools as the key to executing scalable marketing for an advisory firm in the future.

Credibility Marketing: Self-Publishing A Financial Advisor Book For Authority, Not Book Sales

July 20, 2020 07:08 am 0 Comments CATEGORY: Marketing

There is no question that writing and publishing a book as a first-time author is a huge commitment, yet a growing number of financial advisors are finding that having a self-published book is not only a doable and personally rewarding undertaking, but that it is also a highly effective return on their time and financial investment. As while the revenue generated from book sales may not be exceedingly lucrative, it is the opportunity a book offers to the financial advisor to grow their business that is actually worth far more than the book sale revenue itself! For instance, publishing a book not only bolsters an advisor’s authority as a subject matter expert, but it can also be used to promote the author, generate client referrals, and open conversations with key contacts (from prospects to hard-to-reach COIs).

In this guest post, Zach Obront, Co-Founder of Scribe Media, explains how financial advisors can harness the potential of a self-published book to strengthen their brand, establish their expertise, and grow their business. As a starting point, successfully leveraging a self-published book begins with establishing a well-crafted listing on Amazon. This includes not only a compelling description of the book itself, but also a complete Central Author page (including author photo, bio, and other articles or content released), and getting book reviews (which can be generated by asking people who have read the book, or to whom the advisor can offer to send a copy of the book, to leave a written review). When asking for book reviews, it is important to ensure that reviews are only about the book itself, and that they do not include comments on the advisor or on the advisory firm’s abilities. Accordingly, it is helpful to ask for reviews from readers who are not the advisor’s clients to prevent any potential issues around testimonial rules.

And with a good foundation in place, financial advisors as authors can optimize publicity by identifying who their primary target audience is (i.e., the ideal client persona they want to reach), and the media sources where they spend the most time. Authors can use articles or blog posts to pitch their books and seek out interview or podcast opportunities to talk about their book. Financial advisors can also share and/or discuss their book with existing and prospective clients, which is a good method of word-of-mouth publicity, and with symbiotic professionals (i.e., Centers Of Influence) whose lines of work intersect with the topic of the advisor's book and who can provide copies of the advisor’s book to their own clients to promote the advisor’s subject matter expertise (and generate referrals in the process).

Ultimately, the key point is that financial advisors with a self-published book possess a powerful tool to increase their own authority as subject matter experts and generate new client referrals… which can be worth many multiples more than ‘just’ the value of book sales themselves. By intentionally determining who they want to attract and who would be interested in the subject matter of the book, advisors can make powerful new connections by opening conversations with potential new clients and lead-generators.

Weekend Reading for Financial Planners (July 18-19)

July 17, 2020 03:00 pm 0 Comments CATEGORY: Weekend Reading

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!

Kitces & Carl Ep 38: Coming Up With Content Ideas That Will Resonate With Your Clients And Prospects

July 16, 2020 07:21 am 4 Comments CATEGORY: Kitces & Carl Podcast

When financial advisors have the urge to create original content for their clients (or with hopes of attracting new ones), the overwhelming volume of resources that are already publicly available for consumers can easily create the impression that there’s nothing new or unique to say... or worse, that no one wants to hear their own perspective and insights. The end result is that many advisors simply give up before they ever get started, out of the fear that they will have nothing impactful to create or contribute. Yet the reality is that often, creating meaningful content that connects with clients and prospects can be as simple as just answering the questions they’re already asking!

In our 38th episode of Kitces & Carl, Michael Kitces and financial advisor communication expert Carl Richards explore some of the straightforward ways to create content to enhance relationships with existing clients or deepen a connection with prospects, without feeling overly burdened to “be original”, and how to overcome the “analysis paralysis” that comes with trying to choose the “perfect” topic (that doesn’t actually need to be so perfect!). Because ultimately, the biggest roadblocks to creating content are often put up by our own inner critics that create unrealistically high expectations (as in the end, clients and prospects simply want content that shares something relevant and of interest to them).

One simple solution for choosing timely and relevant topics for client and prospect communication is for advisors to track the questions they’re already being asked – especially those that are asked multiple times by different clients – and to create content by answering those most frequently asked questions. By preparing thoughtful, thorough answers that address these questions, advisors can easily create content that by definition is already on the minds of clients and prospects… but in an even more efficient manner that reaches an audience of many (versus answering the same question one client at a time!). Similarly, another strategy to cultivate content ideas is just to notice the environment around you – the ideas that are compelling, the conversations that stick in your head, and articles or stories that have a personal impact to you (and would therefore feel meaningful to share with others).

Having a system in place to capture ideas as they come can also help organize (and later, prioritize) potential topics to develop into shareable marketing content. Notably, there are several tools that can help keep track of content ideas, including apps like Evernote, Google Keep, Apple Voice Memos, Pocket, or even a simple physical notebook or daily planner.

Equally important is establishing a habit of regularly scheduling time to work on developing the ideas, as well as devoting time to review and reflect on the ideas that have been captured. And advisors can leverage tools like Google Analytics for quantative feedback on overall engagement to understand what kind of content really is resonating (or not).

Ultimately, the key point is that most financial advisors already have more than enough interest and knowledge to create rich and valuable content that will be well-received by clients and prospects… simply by focusing on the questions they’re already being asked, and translating the news and events around them into the messages and information that their clients and prospects need to hear. Establishing a system to capture ideas, and developing a regular practice of reviewing those ideas, can be helpful when organizing and prioritizing relevant topics that will be valuable to readers. And committing to a regular routine of actually creating the content will help keep the process on track, by creating a system that the advisor can be accountable to in the first place!

When Clients Fight: How To Handle Conflict When It Erupts In A Client Meeting

July 15, 2020 07:05 am 1 Comment CATEGORY: Client Trust & Communication

Disagreements over money are commonly cited as the number one reason couples divorce, and financial advisors often find themselves in the middle (or as the target!) of client fights. Yet while fighting and conflict are often thought of as negative activities that should be avoided (or simply ignored) as much as possible, the reality is that client conflicts are difficult to avoid and not easy to resolve, especially when they involve money, and in practice, not all client conflicts are negative. In fact, they can actually provide advisors with opportunities to better understand their clients and strengthen relationships – not only between the feuding clients but between the advisor and client as well!

Accordingly, advisors can leverage conflicts amongst clients with basic communication skills and mediation strategies to strengthen the relationship and, in some instances, even their bottom line. In one study that surveyed roughly 1,300 financial planners, researchers found that most (74%) of the respondents had very often worked with emotionally distraught clients, and that nearly half had mediated arguments between married couples. Furthermore, a majority of advisors in the same study indicated that by discussing sensitive, personal, non-financial issues with clients, they improved communication between family members, and seemed to promote better alignment of clients with their core values. And for 39% of the advisors, these discussions even helped to increase their business!

When helping clients through conflict, financial advisors may recognize the “four horsemen of the apocalypse” that include the types of unproductive fighting styles that can damage a relationship, such as criticism, contempt, defensiveness, and stonewalling. Of these ‘four horsemen’, stonewalling is the most dangerous as it can be an indicator that the fighting individuals have essentially given up on the relationship, accepting that there is no resolution to be found. By avoiding or reframing these communication styles, though, fighting can be a productive exercise in helping individuals better understand each other and brainstorm new ideas for collaboration, compromise, and agreement.

Important strategies for financial advisors who are interested in deepening their skills to help clients experiencing conflict include simple de-escalation techniques (e.g., using calm behavior, politely paraphrasing what the client says, and taking a short break from the situation). The goal of these techniques is to offer the agitated client a chance to cool off, to allow the advisor to empathetically connect with the client, and for everyone involved to catch their breath and remain objective.

And when client fights involve the advisor as the target of anger or hostility, it is important for advisors to remain calm and impartial for the relationship with the client to continue developing over time. Some steps the advisor can use to maintain a healthy dialogue with their client include 1) using a ‘soft’ start-up approach by taking responsibility and slowing the conversation down, 2) sending and receiving verbal attempts to soothe and repair the dialogue and diffuse negativity, 3) being willing to compromise, 4) moving the conversation to a place of mutual understanding and respect, and 5) addressing emotional injuries as appropriate, allowing time for both parties to heal from the argument.

The key point is that advisors can ultimately benefit when helping their clients through difficult conflicts, even when they themselves are participants in these conflicts. And by learning when to use certain communication skills and mediation techniques to deal with client fights, advisors can better understand their clients, help them communicate more effectively with other family members, and develop deeper trust and long-lasting relationships with them.

#FASuccess Ep 185: Becoming A Financial Coach As An Alternative To The Traditional Financial Advisor Business Model, with Christine Teh

July 14, 2020 07:06 am 2 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 185th episode of Financial Advisor Success Podcast!

My guest on today's podcast is Christine Teh. Christine is the founder of Teh Financial Coaching, which provides tax consulting and financial coaching services to high-income individuals and couples still struggling with money in the San Francisco Bay Area. What's unique about Christine, though, is the way that she is building a successful financial coaching practice by not only systematizing her coaching packages for clients but also systematizing her marketing process via LinkedIn to scale her reach to be able to get a high enough volume of clients to make the coaching business work.

In this episode, we talk in-depth about how Christine structures her financial coaching services for clients, why the focus of her work is on short-term cash-flow tracking for clients and not necessarily their long-term retirement plans, the reason she insists that clients track their spending manually in a spreadsheet and not use online tools like mint.com, the four- and eight-week financial coaching packages that Christine created for clients to be more scalable than hourly coaching and that also helps her find better-fit clients, why Christine's philosophy is to teach her clients to fish, and how she tries to graduate them to become self-sustaining and not to remain her long-term clients.

We also talk about how Christine markets her services given the reality that she may need to find 1,000 to 2,000 clients to work with in the coming decades to achieve her own business goals, why she chose LinkedIn as her social media platform of choice to build her personal brand and market herself, the daily LinkedIn routine that Christine goes through to maintain her marketing presence, and the tools that Christine is now using to add live streaming to her weekly LinkedIn marketing routine.

And be certain to listen to the end, where Christine shares how she made the transition and took the leap from quitting her stable corporate job for the entrepreneurial path of becoming a financial coach, why she chose financial coaching and not the traditional RIA business model as her approach to working with clients, and the mindset shift that she had to go through in order to start building a successful financial coaching business.

Implementing Client Meeting Surges To Boost Advisor Productivity And Systematize Client Value

July 13, 2020 07:03 am 12 Comments CATEGORY: Practice Management

The typical financial advisor meets with clients year-round, both because clients vary as to when they want and feel the need to see their advisor, and simply to ‘even out’ the workload involved in preparing materials for and actually spending time seeing clients during those meetings. The end result is that, according to the latest Kitces Research study, the average advisor spends nearly 27 hours per week on client service, which includes meeting preparation, planning, and the meeting itself. However, adopting an alternative client meeting strategy – the ‘surge’ method – can dramatically boost advisor productivity, systematizing the client review meeting in a manner that delivers the same level of quality service (if not better) to their clients, while freeing up as many as several months of the year to focus on other aspects of their businesses (or personal lives!)!

In this guest post, practice management consultant and coach Stephanie Bogan explores the client meeting surge approach, which involves developing a highly systematized method to conduct client meetings by separating the ‘factory work’ (e.g., the rote tasks and routines, such as preparing forms, confirming appointments, updating client information, etc.) from the ‘focus work’ (e.g., the intellectual work such as detailed financial planning analyses that rely on the advisor’s knowledge and understanding of their client’s situation). The meeting process itself is organized into four steps: 1) scheduling meetings (where a typical surge schedule would accommodate 3 client meetings per day, 3 days a week – generally Tuesday through Thursday, typically scheduled over 4- to 8-week periods, and only during set months of the year); 2) preparing the client deliverables, giving the advisor an opportunity to review client files in advance of the meeting (typically, Mondays are set aside for advisors to review client meeting files); 3) the actual meetings themselves; and 4) following up with the clients, providing them meeting summaries and (automated) personal check-ins at regular intervals after the meeting such as every 30-, 60-, and/or 90-days afterward (usually tasks that are completed on Fridays during surge weeks).

While the main concern of the surge approach is that it might seem to compromise the advisor’s ability to provide specialized, tailored attention to each client, in reality, the process of systematizing the ‘factory work’ actually enhances the meeting experience by creating more time for the advisor’s ‘focus work’ that needs thoughtful discussion and analysis, empowering the advisor to delve more deeply into these topics with the client during their meeting. Not only does this afford the advisor the opportunity to closely examine complex issues facing their clients, but it also helps them more easily identify other potential problems that might go unnoticed without the ability for a deeper analysis, and at the same time, even strengthens the relationship with the client.

Ultimately, the key point is that the meeting surge process can offer financial advisors more flexibility to balance their client meetings with other aspects of their businesses by systematizing and streamlining the client meeting process, freeing up more time throughout the year. And while the meeting surge process may involve a dramatic mindset shift for advisors in considering how business is actually done in their firms, the systematized approach can increase meeting efficiency and give the advisor the opportunity to focus more on complex planning issues, which not only enhances the meeting experience itself but also increases the actual value delivered to the client, all over a few months during the year. Which frees up the remaining off-meeting-surge months of the year for the advisor to consider other important issues, like how to grow their business and enhance their service offering even more!

Weekend Reading for Financial Planners (July 11-12)

July 10, 2020 02:56 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the news that the Small Business Administration has released data on all Paycheck Protection Program (PPP) loans above $150,000, which includes more than 1,000 independent advisory firms and related industry service providers, raising the question of whether advisory firms are being hypocritical advising clients on their finances while needing to rely upon PPP for their own, or simply humanizing the reality that particularly mid-sized scaling advisory firms are still businesses with staff and overhead that face economic business cycles that can include layoffs in difficult times (which PPP loans were specifically intended to prevent).

Also in the news this week are requests from advocacy groups to the Department of Labor to extend its rather-narrow 30-day Public Comment period regarding the potential for ERISA fiduciaries to begin to receive commissions and other revenue-sharing agreements, and a Model Rule proposal from NASAA for more consistent requirements of state-registered investment advisers on their policies and procedures for everything from their code of ethics and proxy voting to handling material nonpublic information and business continuity and succession.

From there, we have a number of additional industry research studies out lately, including Cerulli research that finds the overwhelming majority of the mass affluent still rely on human advisors (and not robo-advisors) and that most clients are still very satisfied with their advisors (so satisfied, in fact, that it may soon become increasingly difficult to find new clients who aren't already attached to another advisor!), a J.D. Power study that finds the majority of advisors at broker-dealers aren't satisfied with their platform's technology tools (despite 92% acknowledging that technology is crucial to their choice of platform), and a LIMRA study finding that almost 3/4ths of advisory firms have shifted their marketing focus to expand relationships with existing clients as prospecting has become more difficult in the world of pandemic social distancing.

We also have a few marketing-related articles this week, including a look at the kinds of online/digital marketing strategies advisors are testing in the face of the pandemic, guidance on how to create an effective sales process that can be tracked and improved over time, and the core outcomes to focus on whenever conducting a client meeting (hint: the #1 key simply boils down to answering the client question: am I going to be OK?).

We wrap up with three interesting articles, all around the theme of managing ongoing stress: the first examines the concept of "goal diversification" as a way for us to break a cycle of stress and burnout by finding new ways to have some 'small wins' that give us more positive feelings of progress; the second is a powerful reminder that in the age of the 'always connected, always be productive' mindset, sometimes it's incredibly powerful and rejuvenating to make a proactive decision to be deliberately unproductive for a little while; and the last explores recent research findings that the greatest adverse effects of stress actually derive from our mindset about stress, that the more harmful we believe stress will be the more harmful it turns out to be, and that by Acknowledging and Owning the stress, we can try to Use it, changing our mindset about stress that takes us down a (literally) healthier path.

Enjoy the 'light' reading!

How Rising ETF Investing By RIAs Triggers The SEC’s 13F Reporting Requirements

July 8, 2020 07:06 am 1 Comment CATEGORY: Regulation & Compliance

Amidst the economic expansion that came in the wake of World War II and in response to the rise of institutional trading by bank trust departments, insurance companies, investment companies, and registered investment advisers, Congress directed the SEC to conduct a study in 1968 to better understand the nature of institutional investor activity in the interest of maintaining healthy competition in the financial marketplace. The end result – the Institutional Investor Study Report of 1971 – revealed a lack of information available for investors regarding institutional investor activities and the impact their trading may have been having on the broader markets.

In response, Congress amended the Securities Exchange Act of 1934 by adding Section 240.13f-1, known as Rule 13f-1 (and the supporting Form 13F), mandating that institutional investment managers disclose and report on a quarterly basis their equity holdings of certain “13(f) securities” as identified by the SEC. 13(f) securities consist mainly of equities that trade on a national securities exchange (including not only traditional stocks, but also certain equity options and warrants, closed-end investment company shares, and importantly in today’s world, ETFs).

The 13(f) reporting requirement applies to all institutional investment managers that manage at least $100M in those 13(f) securities, where the definition of an “institutional investment manager” pertains to banks, insurance companies, broker-dealers, corporations, and pension funds that manage their own portfolios, as well as discretionary investment managers – in other words, registered investment advisers (i.e., RIAs) – who invest on behalf of others.

Consequently, registered investment advisers who exercise discretionary authority over $100M or more of 13(f) securities as of the last trading day of the month – by holding, for instance, a broad portfolio of ETFs for their clients, or simply by trading stocks directly, or using a growing number of direct indexing solutions – are required to file four consecutive quarterly Form 13F reports. In fact, given the substantial rise in popularity of ETFs amongst RIAs, a large swath of SEC-registered investment advisers (i.e., those holding ETFs at or above the $100M threshold) are now becoming “institutional investment managers” subject to the 13F reporting requirements… which has only been compounded by the fact that the $100M threshold has not been updated in decades even as the RIA industry grows. The first Form 13F filing deadline is 45 days after the last day of the calendar year in which they first crossed the $100M threshold (of holding 13(f) securities).

The Form 13F filing information required by the SEC is prepared in an XML table format that is uploaded directly to the SEC EDGAR database. RIAs who are required to file Form 13F but who do not share discretionary management responsibility with any other independent investment adviser are required to complete a 13F Holdings Report, while reporting advisers who are in a co-advisory or sub-advisory relationship (e.g., those who use third-party TAMP providers or sub-advisers but otherwise meet the filing requirements) are required to complete a 13F Combination Report or a 13F Notice, respectively.

The SEC website has extensive guidance on the submission process, though, given the time-consuming nature of completing and submitting all of the requested information, some advisors may prefer to delegate the responsibility to a third-party service provider. And in fact, the growth of the use of ETFs by RIAs – and the associated 13F filing requirements they create – is rapidly creating a cottage industry of 13F filing solutions in the form of both technology tools (e.g., portfolio management platforms offering built-in 13F analysis tools to facilitate RIAs that are self-filing 13F), and service providers to help those RIA that prefer to outsource their required 13F filings instead.

Registered investment advisers who may have missed their Form 13F filing deadline (e.g., because they didn’t know the 13F rules applied to their ETF investing activities!) should simply file their reports as soon as possible, as while the SEC does not grant extensions, they do encourage advisors to submit their Form 13F as soon as they can.

Ultimately, the key point is simply that with more and more RIAs offering discretionary management services that include managing portfolios comprised of ETFs (which are 13(f) securities) instead of mutual funds (which were not), many firms have a new reporting obligation as an “institutional investor” that they may not have realized they have. Fortunately, the growth in technology tools and service providers to support the process make it more manageable to complete than it was in the past. But 13F reporting is still a non-trivial compliance burden that RIAs must be prepared to manage… and, potentially, to catch up on with the SEC if they’re just now realizing they haven’t been in compliance with their 13F reporting obligations all along!