Nerd's Eye View blog

SECURE Act And Tax Extenders Creates Retirement Planning Opportunities And Challenges

December 23, 2019 07:35 am 129 Comments CATEGORY: Retirement Planning

Sweeping legislative tax or retirement reforms typically happen only once every decade or so, but the final weeks of 2019 brought the second major piece of Congressional action in the past 24 months, as the SECURE Act (along with a series of year-end tax extenders), which was passed in the House this past summer, finally made its way through the Senate and was signed into law by the President. The legislation will have substantive repercussions as financial advisors help clients plan for their retirements for years to come.

In the context of financial advisors and the clients they serve, the first, and probably most notable change resulting from the SECURE Act, is the elimination of the so-called “stretch” provision for most (but not all) non-spouse beneficiaries of inherited IRAs and other retirement accounts. Under current law, non-spouse designated beneficiaries can take distributions over their life expectancy, but for many retirement account owners who pass away in 2020 and beyond, beneficiaries will have ‘only’ 10 years to empty the account. On the one hand, without any other distribution requirements within those 10 years, designated beneficiaries will have some flexibility around the timing of those distributions; however, certain types of “see-through” trusts that have been drafted to serve as beneficiaries of retirement accounts may find that they’re no longer able to make annual distributions to the trust under the new rules (only to suddenly have both the IRA and trust forcibly liquidated at the end of the 10-year window).

Other notable retirement planning changes under the SECURE Act include lifting the restriction on making contributions to a traditional IRA after age 70 ½ (as long as there is earned income to contribute in the first place), and an age increase for the onset of RMDs from age 70 ½ to age 72. However, as was the case with the IRS’s recent proposal to update the RMD life-expectancy tables, since only about 20% of retirees take no more than only the amount that they’re actually required to take, any changes in the rules around RMDs will have little effect on the remaining 80% who are already withdrawing more out of their accounts than the IRS requires. In addition, the SECURE Act does not change the age at which an individual can make a Qualified Charitable Distribution from their IRA, which remains at age 70 ½ and now creates a unique 1- or 2-year window where IRA distributions may qualify as charitable contributions, but not as RMDs (that haven’t yet begun).

Beyond the changing or elimination of various age-based thresholds for retirement accounts, the SECURE Act also includes an allowance for a penalty-free distribution up to $5,000 for a qualified birth or adoption, the creation of a Fiduciary Safe Harbor for selecting a “Lifetime Income Provider” (i.e., annuity company) for ERISA fiduciaries (thus assuaging at least some liability concerns around using lifetime income annuities in qualified plans), a substantial increase in the tax credit available to small businesses when establishing a retirement plan (as well as a brand new tax credit for small businesses that adopt an “auto-enroll” provision in their retirement plans), an increase in the allowable auto-enrollment “default” 401(k) plan contribution, improved access to employer plans for long-term part-time workers, and a significant reduction in the barriers to creating and maintaining Multiple Employer Retirement plans (which in theory will help to create economies of scale for lower plan costs when a group of small employers band together to provide a retirement plan)… as well as several other miscellaneous, smaller retirement provision changes.

Other notable non-retirement provisions attached to the SECURE Act include a repeal of the TCJA-introduced Kiddie Tax changes (reverting away from a requirement to use trust tax brackets and back to using the parents’ top marginal tax bracket), adjustments to the medical expense deduction threshold (back to 7.5%-of-AGI again for 2019 and 2020!), expanded provisions for 529 college savings plans to be used for Apprenticeships and (up-to-$10,000 of) student loan repayments, and a series of Tax Extenders for the mortgage insurance premium deduction and the higher education tuition and fees deduction.

Ultimately, the key point is that, although not nearly as sweeping as the Tax Cuts and Jobs Act of 2017, the SECURE Act of 2019 makes numerous updates to the rules around retirement plans in an effort to increase access to employer-sponsored retirement plans, and (hopefully) takes a positive step towards addressing the so-called retirement crisis. But as with other legislation in recent years, what legislation may give with one hand, it takes with the other, and in practice, many financial advisors may spend more time dealing with what is lost under the SECURE Act – in particular, the stretch IRA – than what is gained. At the very least, though, financial advisors will be busy in months ahead as they re-evaluate plans for clients impacted by the new and updated provisions introduced by the SECURE Act.

Weekend Reading for Financial Planners (Dec 21-22)

December 20, 2019 02:53 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the news that after months of delays, the SECURE Act is finally being passed as an extension of a year-end Congressional spending bill, opening up the potential for Multi-Employer Plan (MEP) 401(k) offerings and more annuities in defined contribution plans... and notably for most advisors, severely curtailing the use of the popular "stretch IRA" strategy to generally no more than 10 years (instead of the full life expectancy of a much-younger beneficiary).

Also in the news this week is the release of the results of the CFP Board's independent task force on enforcement that found "significant failures" in its enforcement processes that must be reformed in the future, and the news that the SEC is looking to expand the Accredited Investor rules beyond the current income and asset test (including, notably, a broad-based permission that would allow all financial advisors themselves with a Series 7 or Series 65 to participate as an Accredited Investor).

From there, we have several technology-related articles, including a look at how the growth of advisor technology for the past decade is reaching the point where now the primary challenge is that advisors have 'too many' choices (and not enough time to wade through options, evaluate how they'll integrate, and do due diligence on vendors), a review of the recent InVest West FinTech conference that is taking an increasing focus on not just UX (user experience) and CX (client experience) but also AX (advisor experience), and a review by Bob Veres of a new wave of "financial planning software" companies that are not producing comprehensive planning software but instead increasingly more specialized 'niche' solutions around everything from tax return reviews and tax planning to Social Security timing, Medicare, and other elder care planning issues.

We also have a few articles on marketing, from tips on how to diligently follow up with a prospect after an initial meeting (without being too pushy), to a reminder that in the end clients don't want to hear your story (as the advisor) but want to tell their story (as we all like talking about ourselves!), and some suggestions on how to handle that moment in a prospect conversation where they say "I'm sorry, I already have an advisor".

We wrap up with three interesting articles, all around the theme of gift-giving ('tis the holiday season!): the first looks at how from an economic perspective, gift-giving is remarkably inefficient (as people try to 'guess' what non-financial gift will provide the appropriate amount of satisfaction and relationship-building with the recipient, with one study estimating $13B per year of 'economic waste'); the second looks at the rise of experiential gifts, which may be compelling to the recipient but are exponentially harder to organize and 'give' in the first place; and the last explores recent research finding that when it comes to family and close friends, a sloppily-wrapped gift is actually better than a neatly-wrapped one (as it lowers the expectations of what's inside and is more likely to have an upside surprise when opened!), but for more distant acquaintances it's still important to neatly wrap the gift (as an expression of your commitment to the burgeoning relationship)!

Enjoy the 'light' reading!

Kitces & Carl Ep 23: Following Through On Your Business Creativity By Saying ‘Yes’ And Figuring It Out Later

December 19, 2019 07:14 am 1 Comment CATEGORY: Kitces & Carl Podcast

No matter how well a financial advisor may understand and is able to explain a concept, the fact is that different people have different learning modalities, and oftentimes, advisors need to incorporate a variety of presentation methodologies in order to help clients understand important concepts relevant to their financial lives. Sometimes it takes creativity and innovation to discover how clients learn best, and by staying open to novel ideas and saying “yes” to unusual experiences, advisors may be surprised to find not only that they might come up with effective ways to communicate effectively, but also that they can uncover exciting opportunities for themselves along the way.

In our 23rd episode of Kitces & Carl, Michael Kitces and financial advisor communication expert Carl Richards talk about how a simple back-of-the-envelope Sharpie sketch was Carl’s solution to helping one client eventually achieve the “Aha!” moment of understanding a difficult financial concept. And how continuing to practice his sketch work as a way to simplify complex topics unexpectedly landed him a long-running (10 years and counting!) stint as the New York Times’ “Sketch Guy” columnist and ultimately opened up the world of international art exhibitions showcasing his work. Even without any formal training in art, Carl has evolved his sketching into a central part of his work by sticking to simple tools and persevering with continuous practice.

Ultimately, the key point is that giving yourself permission to pursue unplanned adventures might just lead to rich and rewarding experiences well worth the risk. And even though the business of planning and preparing clients for the future is often largely an objective, data-driven process, creativity and the flexibility to say “yes” to unplanned opportunities can be powerfully valuable tools used to tackle unique and unexpected situations and to help clients attain their unconventional, off-the-beaten-path goals.

Assisted Reproductive Technology (ART) Tax And Insurance Planning For Individuals With Fertility Challenges

December 18, 2019 11:27 am 8 Comments CATEGORY: Insurance

The Code of Laws of the United States defines Assisted Reproductive Technology (ART) as “all treatments or procedures which include the handling of human oocytes [eggs] or embryos”. For many individuals and couples with fertility struggles, ART has made biological parenthood possible. According to data from the Centers for Disease Control and Prevention, fertility treatments are on the rise with 284,385 ART cycles performed in the U.S. in 2017, and approximately 1.7% of all live births in the U.S. involve ART. The most common ART procedure is IVF; other procedures include Gamete Intrafallopian Transfer (GIFT), Zygote Intrafallopian Transfer (ZIFT), Intracytoplasmic Sperm Injection (ICSI), and Artificial Insemination.

As ART enables exciting new family opportunities, though, it also presents a number of financial and legal issues. For many, the extremely high costs and limited coverage by insurance companies create a high barrier to access ART procedures, forcing many to pay for treatments out of pocket, which have given rise to the proposal of several pieces of legislation in an effort to help make ART more accessible through insurance coverage. However, despite legislative efforts to expand insurance coverage for ART procedures, there is still no Federal requirement for insurers to provide ART coverage to policyholders. In turn, though, the lack of Federal laws requiring insurers to provide ART coverage has led thirteen states to pass their own “mandate-to-cover” laws (AK, CT, DE, HI, IL, MD, MA, MT, NJ, NY, OH, RI, and WV), and three have passed “mandate-to-offer” laws (CA, TX, LA) for residents and workers in those states. “Mandate-to-cover” laws require that some or all insurance plans have to cover certain fertility treatments, and “Mandate-to-offer” laws require that insurance providers offer certain testing and treatment services (although employers can decide which of those benefits, if any, to offer those covered by their plans). Some of these “mandate” states also carry certain exemptions for costs related to surrogacy, religious employers, and restrictions for same-sex couples.

Financial advisors can offer great value to their clients by reviewing their current health insurance policies and helping them understand whether their coverage includes fertility treatments, especially for individuals and couples living in non-mandate states. Some individuals may have access to coverage for ART procedures through employer-based group coverage, benefits available to government workers or military servicemembers, or public benefits like Medicare. Some employees who reside in non-mandate states, but who have employers with main offices in mandate states, may be able to benefit from the mandate-state policies as well.

A growing number of technology companies like Google, Facebook, and Spotify are also adding ART processes, such as egg freezing and IVF cycles, to their employee benefits packages. Advisors may want to encourage their clients to explore risk-sharing programs, scholarships and grants, and even traveling abroad where fertility treatments are offered at significantly lower cost (at least relative to the pricing of such services in the US).

The costs of ART procedures may also be mitigated by leveraging the tax code. The IRS considers “fertility enhancements” that help the taxpayer “overcome an inability to have children” as deductible medical expenses that can be claimed as itemized deductions (if the usual key thresholds for itemizing medical expense deductions are met). These deduction-eligible fertility enhancements include “procedures such as in vitro fertilization” and “surgery, including an operation to reverse prior surgery that prevented the person operated on from having children.”

Access to employer-provided tax-preferenced savings accounts, such as Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs), may provide additional tax-saving opportunities. A one-time IRA rollover to an HSA, called a Qualified HSA Funding Distribution (QHFD), can also be used to help fund expenses if income or liquidity is low.

Ultimately, the key point is that the cost of ART procedures can be unpredictable and potentially very expensive. While managing the costs of ART may take some creativity, advisors can help their clients successfully navigate the legal and financial complexities to minimize the emotional and financial burdens often experienced by those pursuing fertility treatments.

#FASuccess Ep 155: Eschewing A Bricks-And-Mortar Office For Reduced Overhead And (Virtual) Flexibility, With Derek Notman

December 17, 2019 07:09 am 3 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 155th episode of Financial Advisor Success Podcast!

My guest on today's podcast is Derek Notman. Derek is the founder of Intrepid Wealth Partners, operates as an agent for New York Life and an IAR for Eagle Strategies, and oversees nearly $50 million of assets under management for almost 200 clients.

What's unique about Derek, though, is the way that he's evolved his advisory firm from a traditional bricks-and-mortar office space into an entirely virtual practice, born out of sheer necessity when he moved halfway across the country for an advisory firm merger that fell through and then had to figure out how to operate from two office locations, and evolved into a firm that has no office space at all.

In this episode, we talk in-depth about Derek's journey from a high-volume bricks-and-mortar office-based practice to an entirely virtual one. From starting out as an insurance agent where the pressure was on generating a high volume of clients that ultimately culminated in a practice of more than 1,000 clients in his first 10 years, how a move from where Derek started in Vermont out to Wisconsin forced him to start meeting with his team and then eventually clients using video chat, the way Derek eventually built out the entire virtual team he operates with today, and the way Derek has been able to grow his income and his freedom by transitioning nearly 80% of his clients away to other advisors while working with his clients sometimes as far as a continent away.

We also talk about how Derek's efforts on growth and business development have changed over the years. From the way he aggressively sought out networking opportunities and referrals in person to expand his client base in the early years, to a shift of generating 100% of his new clients online and virtually today through the use of a blog and social media, his decision to create a narrower niche focus on small business owners and CEOs, and how declaring that he works virtually with clients right on his homepage as their "virtual wealth partner" has actually helped him to attract new clients by promising not to meet with them in person.

And be certain to listen to the end, where Derek talks about why he regrets having tried to build a big practice in a bricks-and-mortar office, the pain points he's worked through in trying to get a large insurance company on board with his virtual model, where the greater challenge was not running his firm virtually and digitally, but simply trying to market for clients online, and how Derek is now trying to teach other advisors the virtual tools and systems that he had to figure out the hard way.

Agile Financial Planning: Replacing “The Plan” With A Process Of Continuous Planning Improvement

December 16, 2019 07:08 am 17 Comments CATEGORY: Practice Management

In recent years, the financial planning profession has seen a growing shift in the services that financial advisors offer to their clients. Whereas in the earliest years of the profession, advisors primarily provided clients with product-based offerings such as insurance, annuity, and investment products, the focus of many advisors today has shifted to service-based offerings around the ‘advice’ itself. Interestingly, though, the shift to service-based advice offerings continues to expand, past the ‘traditional’ realms of financial planning advice, as now more and more financial advisors find themselves playing the role of a financial “life coach” to their clients, focusing more on how their clients can develop their goals and establish the financial capacity to realize their dreams (and not ‘just’ recommending the products they’ll implement to get there), and going along with them on the journey to navigate the inevitable shifts and changes that come along the way.

In this guest post, Roger Whitney – Senior Financial Advisor of The Retirement Answer Man, and creator of his “Agile Retirement Management®” process – describes a new financial planning paradigm he calls “Agile Financial Planning” for advisors who want to help clients achieve their financial goals, versus simply creating a one-time financial plan for them. This new model is based on the Agile Manifesto developed in 2001 by a group of software engineers inspired to improve upon the rigid, process-driven “waterfall” style of project management traditionally popular at the time (and that continues to be used effectively today by large corporate businesses). The Agile approach is based on four primary values: 1) individuals and interactions over processes and tools, 2) working software over comprehensive documentation, 3) customer collaboration over contract negotiation, and 4) responding to change over following a plan.

Adapting the tenets of the original Agile Manifesto, Roger developed his own “Agile Financial Planning®” approach, a financial planning process focused on the same objectives of continuous improvement, team input, and a quality (advice) product, with five core principles aimed to help advisors create a high standard for client care: 1) Acceptance that uncertainty is natural and will/should create a need to update strategies for achieving goals; 2) Collaboration between advisors (with financial planning expertise) and clients (with expertise around what makes the most sense for their own lives and situations) in creating a plan will produce more successful results than if the advisor just creates the plan for the client themselves; 3) Flexibility allows for creatively responding to changes in the plan with effective solutions, 4) Prioritizing goals and resources around what’s most important and impactful (versus what might be most attractive but is actually just distracting) will lead to improvement in everyone’s life; and 5) Communication on a continual basis will keep the process moving forward and in alignment with the Agile Financial Plan, providing opportunities to accept and respond to uncertainties as they arise, collaborate, stay flexible, and prioritize.

The Agile Financial Planning process consists of four stages: 1) Feasibility (creating a high-level plan to prioritize clients’ most important goals); 2) Sustainability (analyzing resources to develop resiliency in the plan against market forces and life circumstances); 3) Optimization (choosing the strategies to implement to make the best use of resources when executing the plan); and 4) Iteration (staying in touch with clients to ensure they remain engaged in the process, and keep moving forward with goal-setting and implementation). In turn, clients move through these stages with frequent meetings that Roger refers to as “huddles” and “SMART sprints”. In this context, huddles are brief conversations that take place frequently, and serve to keep the advisor and client in touch with each other, in between the goal-setting SMART sprints – the strategy discussions that help the client determine their next SMART (Sustainable, Measurable, Actionable, Realistic, and Time-Bound) goal to prioritize and then “sprint” to implement. Because Agile Financial Planning is a never-ending project that focuses on managing change.

Ultimately, the key point is that an Agile-style financial planning approach offers a process for financial planners who have chosen to go beyond ‘traditional’ financial planning practices that rely on long, comprehensive, data-gathering meetings upfront, to develop a one-time financial plan that is not frequently (if ever) updated. Instead, Agile Financial Planners coach clients on developing multiple SMART goals over time, discussed through frequent huddles designed to keep clients both on track and, more importantly, engaged. Even though the advisor is responsible for managing the process, the process still depends on a dynamic, interactive relationship with participation by both advisor and client, relying on the advisor’s financial planning expertise, and the client’s intimate understanding of their own goals, abilities, and circumstances.

Weekend Reading for Financial Planners (Dec 14-15)

December 13, 2019 02:45 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the 2019 edition of Financial Planning magazine's annual Tech Survey, showing the adoption leaders in each of the key advisor tech categories... and that despite all the hype, advisor use of "robo" tools remains not only tepid (at barely 11% of the advisor marketplace) but is actually declining as advisors predictably appear to be abandoning offering clients robo-only approaches and reverting back to their core (and more sustainably-priced) human-based financial advice services instead.

Also in the news this week is the release of the Investor Choice Act in the House that would end mandatory arbitration clauses amongst broker-dealers and RIAs, and a look at the recent Wells Fargo Advisors succession plan rollout that will pay retiring advisors as much as 225% of their trailing 12-month revenue (akin to a 2.25X multiple in the RIA marketplace) and facilitate next-generation advisors to buy those advisors out (but in turn more deeply binding those young advisors to the firm for the long run).

From there, we have several investment-related articles, including the latest Morningstar study on the behavior gap that finds the trailing 10-year gap has narrowed to 'just' 45 basis points in the US and has actually turned positive in the U.K. and Australia (though the narrowing/improvement may be driven in large part by rolling off the volatile years of the financial crisis and a 10-year sustained bull market), recent approvals to another 4 asset managers to offer non-transparent actively-managed ETFs (though it's not clear if advisors will actually adopt them), and an emerging trend that the push for lower-cost ETFs may finally be bottoming out as a series of recent zero- or even negative-expense ETFs have failed to garner market share since their launches earlier this year.

We also have a few articles on practice management, including a recent YCharts study on advisor communication (finding that most clients still don't think their advisors communicate frequently enough, or with enough personalization), the importance of regularly re-assessing an advisory firm's pricing and business model (and that the fear that clients will leave if the fee model changes are overblown), and a look at how the majority of advisors find the process of selling a firm to be very anxiety-inducing (as they try to figure out whether the acquirer really has the right culture and people to take the firm forward).

We wrap up with three interesting articles, all around the theme of managing (and improving the outlook of) your own career: the first explores how "sales skills" are often the top-ranked ability that successful people cite for their success (whether it's selling their services, or themselves, or their ideas, in the company/marketplace); the second looks at how it is increasingly acceptable to have a "resume gap" (whether due to taking time off to start a family, or to pursue new skills, careers, or even hobbies for a period of time); and the last examines how the best way to sustain and lift your own career is to try to develop your own personal brand that can give you (career) "pricing power" in the marketplace of job opportunities!

Enjoy the 'light' reading!

HSA Planning When Both Spouses Have A High-Deductible Health Plan (HDHP)

December 11, 2019 07:02 am 38 Comments CATEGORY: Retirement Planning

Since as early as 1960, our national health expenditures have been steadily increasing. The American Medical Association found Americans paid nearly $3.5 trillion on healthcare in 2017, and expenses continue to rise, with estimated increases in healthcare expenses by the Bureau of Labor Statistics pegged at over 7% since 2016.

To address our country's rising healthcare expenses, the Medicare Modernization Act was signed into law by President George W. Bush in December, 2003. This law created Health Savings Accounts (HSAs) to encourage individuals to enroll in High-Deductible Health Plans (HDHPs) in an effort to curb overall healthcare spending. In essence, HDHPs incentivize individuals to make healthcare decisions more carefully, with higher out-of-pocket requirements and lower premium expenses (which can often make up for the higher out-of-pocket requirements – especially for healthy individuals!).

Health Savings Accounts (HSAs) offer a further incentive for HDHP enrollment, as they provide a very attractive 'triple-tax' set of potential benefits. The three potential benefits are: 1) tax-deductible contributions, 2) tax-deferred growth, and 3) tax-free withdrawals for qualified medical expenses (although withdrawals made for non-qualified expenses are not tax-free and incur a 20% penalty if made before age 65). After age 65, though, non-qualified withdrawals have no penalty, so the account virtually becomes an “enhanced” IRA which can be used for any purpose but without the requirement of taking annual RMDs.

As with other tax-preferenced savings accounts, there are contribution limits for HSAs, which are based on the type of HDHP coverage an account owner has. For family HDHPs, annual limits are $7,000 for 2019 ($7,100 for 2020), and for self-only HDHPs, limits are $3,500 for 2019 ($3,550 for 2020). Additionally, HSA owners age 55 and older are allowed to make an annual $1,000 catch-up contribution.

Financial advisors with clients who are married and have mixed health insurance coverage can help their clients understand their actual HSA contribution limits, as these limits depend on the type of plan each spouse has. For spouses covered by separate self-only HDHP plans, each can contribute up to the maximum, self-only limit to their respective HSAs, but they can’t make up for any contribution shortfalls of the other spouse.

Sometimes, one spouse might have self-only HDHP coverage and the other an "employee-and-children" family HDHP (which does not offer coverage for the employee's spouse). This can be cost-effective for couples with children, as family HDHPs sometime provide for “employee and children” coverage that is less expensive than family plans that include both spouses. In this situation, the spouse with self-only coverage is limited to the self-only HSA contribution amount, and the spouse with family coverage can contribute up to the family limit. But while the total between spouses cannot exceed the family limit, the spouse with the family plan can make up for any contribution shortfall of the spouse with self-only coverage.

In rare cases, both spouses may each opt for separate HSA-eligible family HDHPs through their employers (perhaps because of different in-network doctors offered by each plan). Again, the total contribution between spouses may not exceed the annual family limit, but in this situation, both spouses have the ability to compensate for any contribution shortfalls of the other, or to simply choose which spouse's HSA it makes sense to fund first.

Financial advisors who have married clients with HSAs, where at least one spouse is under age 65, can employ some strategies to maximize the value of their clients’ accounts. For example, it may behoove the couple to maximize contributions to the older spouse’s account first in order to reduce the potential exposure to the 20% penalty for non-qualified withdrawals, since the penalty will not apply to the age 65+ older spouse. In addition, using HSA funds from the younger spouse’s account to pay for qualified medical expenses will also result in more funds in the older spouse’s account, available for penalty-free withdrawals for non-qualified expenses.

Ultimately, the key point is that the unique triple-tax benefits of HSAs make them attractive savings vehicles that can be used for expenses beyond medical care (but penalty-free for non-qualified expenses only after age 65). Financial advisors can help their clients with different HDHP coverage options get the most value out of their HSAs by guiding them through their specific contribution rules and choosing how to coordinate withdrawals for qualified and non-qualified expenses from each account in the most tax-efficient manner.

#FASuccess Ep 154: (Re-)Igniting Your Advisor Marketing By Defining Client Avatars And Removing Impediments To Action, With Mary Beth Storjohann

December 10, 2019 07:11 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 154th episode of Financial Advisor Success Podcast!

My guest on today's podcast is Mary Beth Storjohann. Mary Beth is the chief marketing officer for Abacus Wealth Partners, an independent RIA based in Santa Monica, California that oversees nearly $2.6 billion of assets under management for almost 1,700 clients.

What's unique about Mary Beth, though, is that up until very recently, she was the founder of her own independent advisory firm, Workable Wealth, and despite (in fact, because of) the successful growth of her solo practice, Mary Beth decided the best way to continue advancing her own personal mission of expanding her financial planning impact was to sell her firm and to take on a marketing leadership role in an even larger firm instead.

In this episode, we talk in-depth about what it means to be a chief marketing officer of a large independent advisory firm. How Mary Beth allocates a marketing budget of just 2.5% of revenue that still adds up to nearly half a million dollars to allocate for marketing purposes, the relative split of marketing dollars towards staff to help implement marketing strategies versus direct spending on sponsorships and advertising, and how Abacus's marketing team funnels all of its activity to a lead intake team, whose job is to screen all the firm's prospects to determine who is qualified and who should be referred out instead.

We also talk in-depth about how Mary Beth developed avatars for the firm's marketing, formerly defined marketing personas like builders, protectors, and changemakers that the firm uses to more clearly determine where they should be and not be targeting their marketing dollars, how the firm developed a brand style guide so all the advisors of the firm can communicate in a consistent manner when marketing, and why Mary Beth decided to remove the contact form from the Abacus website altogether and instead, just install an embedded scheduling app to let prospects instantly and immediately set up a time for an initial call with the firm.

And be certain to listen to the end, where Mary Beth shares her ideas about what any advisory firm regardless of size can do to better improve its marketing, given her own experience in both a very large advisory firm, and having previously worked as a solo practitioner. Why often the biggest improvement that advisory firms can make is simply removing the impediments they're unwittingly creating that may reduce their marketing effectiveness, and Mary Beth's philosophy that the long-term key to marketing is all about brand consistency, which means it's better to spend a small amount of marketing dollars in a very consistent manner for a long period of time than to spend a large amount of money in a very short period of time.

The Millionaire Sweet Spot: How Large Advisory Firms Are Scaling Advice For (Better) Profits and (Faster) Growth

December 9, 2019 04:08 am 3 Comments CATEGORY: Practice Management

Since the early days of the financial advisory business, revenue models have evolved to rely less on commissions and more on the recurring income stream generated from the AUM model. The result has been a shift away from an often-one-time sale of a product to an ongoing provision of financial planning and wealth management services. Naturally, AUM-based advisors have had to change how they spend their time, as firms increasingly required advisors to prioritize servicing clients on an ongoing basis (instead of on closing one-time sales of financial products).

Not only have changing business models influenced how advisors spend their time, but as the recently released InvestmentNews Adviser Compensation & Staffing Study reveals, the size of the advisor’s firm also influences how advisors allocate their (limited) hours. As while advisors who own solo practices are more likely to manage all (or most) of the business development and client servicing responsibilities, the larger a firm becomes, the more they rely on support staff to handle client service responsibilities (e.g., paraplanners and service advisors who have little, if any, business development responsibilities). Because with more support staff available to shoulder more of the client-service workload, lead advisors and practicing partners can devote more attention to business development, which ultimately results in higher profit margins. After all, having more affordable support staff manage client servicing is more operationally efficient than having higher-paid advisors deal with these responsibilities. The result is that larger firms tend to have extra capacity (as measured by the number of clients each advisor and support staff can service).

And notwithstanding the rise of the robo-advisor earlier this decade (which stimulated competitive fee compression among financial advisors and caused a dip in advisor productivity), the InvestmentNews study shows that productivity has actually bounced back and now even appears to outpace current trends in increasing revenue! Which suggests that as a firm’s client capacity increases, firms tend to move ‘downmarket’ and target clients that have less assets (versus targeting ultra-high-net-worth clients). As while highly affluent clients may result in more revenue per client, they may also be more labor-intensive for lead and senior advisors (as opposed to associate advisors and staff), which is why larger firms are servicing an increasing number of “mere millionaires”, who can be serviced with scale to a greater degree. Whereas with smaller firms, who don’t have the same ability to leverage economies of scale to successfully shift ‘downmarket’ and pursue smaller clients, the tendency is to maintain focus on larger clients as it has been traditionally in the past.

Ultimately, the key point is that emerging trends show larger advisory firms are shifting away from targeting highly affluent clients, and are instead aiming for smaller clients in the “millionaire sweet spot” – those clients who are still wealthy, but whose needs might not be so complex as to require senior-advisor-level service. And because these clients are generally less labor-intensive and price-sensitive as more highly affluent clients, they are a key factor for the rapid growth seen in many of today’s large firms. Solo advisory firms, on the other hand, lack the resources to implement economies of scale that larger firms are able to establish, and thus the most successful smaller firms flourish by continuing to target larger clients.