Kitces.com - Advancing Knowledge in Financial Planning

Weekend Reading for Financial Planners (Aug 28-29)

August 27, 2021 02:57 pm 3 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "Weekend Reading For Financial Planners" – this week's edition kicks off with the industry news that SEC Chairman Gensler has signaled a willingness to approve new Bitcoin ETFs as long as they utilize futures contracts (rather than the cryptocurrency directly) and operate under the more stringent rules that apply for mutual funds under the Investment Company Act of 1940... leading to a slew of new Bitcoin ETF submissions to the SEC in the past two weeks, and a likelihood that Bitcoin ETFs will become available for general advisor use sooner rather than later.

Also in the industry news this week are a number of other interesting industry headlines:

Investor Advocate Barbara Roper of the Consumer Federation of America takes a new role with the SEC as a Senior Advisor to Chairman Gensler... signaling that more financial advisor regulation may be coming in 2022
A new consumer survey finds that Millennials are increasingly turning to human advisors over robo-advisors with a growing demand for financial advice

From there, we have several investment-related articles, including:

A look at the landscape of asset managers launching their own proprietary indexes, and the launch of a new rating service - The Index Standard - to vet and compare them
How Vanguard's Total Bond Market has successfully implemented bond indexing over the past 30 years (replicating its underlying index precisely net of fees, down to the basis point!)
Why asset managers are increasingly looking towards direct indexing technology as the next frontier (and acquiring direct indexing providers in the process)

We've also included a number of articles on hiring advisors:

Why one advisory firm prefers to hire former athletes (because of the mindset that is developed when engaging in competitive sports)
Why another advisory firm prefers to hire those outside the industry instead of recruiting industry talent to maximize long-term growth
How the imperfection of even a good hiring process means firms should simply assume that they will need to hire multiple advisors over the years to find the best long-term fit

We wrap up with three final articles, all around the theme of finding our own passion and focus:

How the career advice of "Pursue Your Passion" can turn it into an obligation, and why it's better to try to find work that maximizes your skills, not just what you 'love to do'
How to think through the opportunities of a career transition
Why being an "uncertainty killer" for others is the best path to career success

Enjoy the 'light' reading!

Kitces & Carl Ep 67: Setting A Personal Growth Goal When You Don’t Need More Revenue For Success

August 26, 2021 07:05 am 2 Comments CATEGORY: Kitces & Carl Podcast

Although there have been some incremental shifts in recent years, the financial advice industry has traditionally (and remains) geared towards attracting individuals who thrive in a career where their earnings have the potential to increase depending on how hard they work. Viewed through the Maximizer/Satisficer lens that Barry Schwartz introduced in his book, “The Paradox of Choice” (where Maximizers are those who continually strive for more, while Satisficers are those who are happy with having ‘just enough’), the advice industry is built to attract, reward, and celebrate those who tend to land on the Maximizer side of the equation. Yet, recent Kitces Research on advisor wellbeing indicates that, while an advisor’s self-perceived wellbeing steadily improves as their take-home pay increases (i.e. money really does buy happiness), the rising revenues only contribute to an advisor’s wellbeing up to a certain point (about $1.5m), and once firm revenue grows beyond that, there’s a direct inverse correlation between advisor wellbeing and revenue. And for financial advisors who want to avoid that sharp decline in wellbeing and have reached a point where their business is doing well enough that they don’t feel the need to press as hard to grow, the question arises, how can they shift their focus away from growth… and towards something else?

In our 67th episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards discuss how advisors can think about optimizing their own practices for something other than revenue, why figuring out how to manage towards something other than money may contribute even more to happiness, and what advisors can do after having gone through the optimization process.

As a starting point, the first shift that an advisor can make to move away from an aggressive growth mindset is to start thinking about ways to increase their take-home pay rather ‘just’ than their revenue. Some strategies include identifying the practice’s most profitable clients, ‘transitioning’ the other (less) profitable clients by referring them out to an advisor that can do a better job of serving them, and then trying to replicate those ideal clients. Meanwhile, advisors who are satisfied with their level of income and how their practice is set up can begin to optimize for whatever it is that aligns with their own interests and goals, such as, number of days off per year, hours spent with their kids, or number of tennis matches played, to name just a few!

From there, advisors can then turn their attention towards what to do once they’ve optimized for whatever (new non-revenue) metric they want to manage to. And it’s at that point that advisors often need the most help. Because, as is often the case with our own clients, few advisors have taken the time to really think about what we would ideally like our lives to look like, and as a result, could also benefit from going through their own life planning process, such as those offered by George Kinder or Money Quotient. For many advisors, setting audacious stretch personal goals for themselves can provide a path towards getting off the growth-for-growth’s-sake cycle and help them focus their incremental time and energy in a completely different (and more positive) direction.

Ultimately, the key point is that there are specific steps advisors can take to improve their own wellbeing once they get to a point where they don’t have to work as hard to grow their business and can start reaping some of the rewards for all the hard work they put in order to get to that place. And while not all advisors have reached that point (yet), the takeaway remains that simply going through the exercise of thinking about what their goals will be, once they’re making enough in their business that they don’t need to keep growing revenue just for growth’s sake, can help ensure that they are building their business with intent and are focusing on the long-term goals that really mean the most!

Limits Of Tax Diversification And The Tax Alpha Of Roth Optimization

August 25, 2021 07:02 am 34 Comments CATEGORY: Taxes

From the moment they were introduced nearly 25 years ago in the Taxpayer Relief Act of 1997, the Roth IRA has been an incredibly popular retirement vehicle, thanks to its ‘unlimited’ potential for generating tax-free growth. Of course, the caveat is that Roth-style accounts are only tax free because the contributions into the account are made on an after-tax basis – unlike traditional retirement accounts, which enjoy a tax deduction on the initial contribution. Which means in practice, households must make a decision whether to contribute to a pre-tax traditional IRA or a tax-free Roth, based on whether the upfront tax deduction (on the traditional IRA contribution) will be more or less valuable than tax-free growth at the end (on the Roth IRA distribution).

Mathematically, the Roth-versus-traditional IRA decision will actually be the same, regardless of growth rates and time horizon, as long as both accounts remain intact and tax rates don’t change. If future tax rates do change, though, the Roth IRA will result in more wealth when tax rates rise in the future, while the traditional IRA will benefit when tax rates are lower in the future. Though in practice, because the tax burden for a Roth IRA is paid upfront – when the (after-tax) contribution is made – there is no future uncertainty with respect to its future tax rate; instead, changes in tax rates primarily impact the future value of a traditional IRA, in particular, making it better or worse off depending on whether or how tax rates change.

To cope with this uncertainty, one popular approach is to ‘tax-diversify’ between the two types of accounts, splitting contributions between traditional and Roth IRAs so that there is at least ‘some’ benefit regardless of which direction tax rates go (as higher tax rates benefit the portion of dollars in the Roth, and lower tax rates would benefit the traditional IRA dollars instead). However, the reality is that splitting dollars between traditional and Roth retirement accounts isn’t just a form of diversification; because the outcomes are correlated to each other (as a change in tax rates that benefits one type of account adversely impacts the other type by the same amount), the net result is that tax diversification doesn’t actually diversify the risk, it simply neutralizes the opportunity altogether. Or viewed another way, splitting between traditional and Roth IRAs is not akin to the diversification of owning different types of stocks; it’s more akin to just bailing out of stocks altogether and owning zero-return cash.

So what’s the alternative? Instead of trying to tax-diversify between traditional and Roth retirement accounts, taxpayers can consider trying to ‘Roth optimize’ exactly when to add dollars to tax-free Roth accounts. After all, a household’s tax rates typically vary throughout life – often by a wide range as careers start and stop and change, family and health needs impact our time in the workforce and what we earn, businesses are started and subsequently fail or succeed, and eventually retirement comes (with its own tax complications of Social Security benefits and Required Minimum Distributions). Which means there will be years where a household can ‘time’ its tax situation, by contributing to traditional IRAs in years when income and tax rates are high, and tactically switching to Roth contributions (or even engaging in Roth conversions) when tax rates are unusually low.

Of course, there’s always a risk that tax rates will change in the future, not because of the household’s change in income, wealth, or circumstances, but simply because Congress itself ‘changes the rules’ by altering tax rates. Although, in reality, while tax brackets have varied significantly throughout history, tax deductions have often changed alongside the brackets, such that changes in effective tax rates have actually been remarkably narrow throughout history. In other words, the variability of tax rates due to Congress (which we can’t control) is actually dwarfed by changes in tax rates within the household over time (which can be planned for!).

Ultimately, though, the key point is simply to understand that arbitrarily splitting dollars between traditional and Roth-style retirement accounts isn’t actually a positive wealth-creating strategy; instead, it is more akin to ‘going to cash’ and eliminating the opportunity altogether. For those who want to actually maximize wealth with the traditional-vs-Roth decision, the better approach is to try to Roth-optimize by timing when to shift between traditional and Roth accounts. Which, in practice, is easier than most realize, as while a household’s future is never certain, the Roth-vs-traditional decision has the most impact in years that are especially high or low in income… which are actually the years that are most easy to identify in the moment for a Roth optimization timing decision!

#FA Success Ep 243: Scaling $1B Of Organic Growth In Under 5 Years With Targeted Multi-Niche Online Education, With James Bogart

August 24, 2021 07:04 am 1 Comment CATEGORY: Financial Advisor Success Podcast

Welcome back to the 243rd episode of the Financial Advisor Success Podcast!

My guest on today's podcast is James Bogart. James is the CEO and President of Bogart Wealth, an RIA located in McLean, Virginia that manages $1.8 billion of assets for 900 households.

What's unique about James, though, is that his firm has nearly doubled its assets under management organically since the start of the pandemic just 18 months ago, by leveraging online educational webinars that address very specific niche issues around employee benefits for those who work at specific companies in the energy sector.

In this episode, we talk in depth about how, although it took years to establish themselves as the “go-to name” for benefit planning needs for companies such as ExxonMobil and Shell, doing so led to an acceleration in growth when the layoffs came at large energy companies during the pandemic, how James used the foundational knowledge from his CFP certification as a base from which he could build out his benefits planning expertise by learning how to source and interpret the requisite documentation for specific companies online, and why the key to James’ firm’s success isn’t just the result of their deep understanding of employee benefits in general, but rather how to apply their knowledge specifically to particular companies’ benefits in a way that clearly differentiates their expertise for prospective clients who work at those companies.

We also talk about how, by making their webinars readily available on the firm’s website and via YouTube, James has created a marketing funnel that gives prospects the ability to refer their friends by sharing their videos (a dynamic which James says is even more valuable than client-initiated referrals), how James has tracked his client acquisition cost from $350 down to just $20 after pivoting away from doing dinner seminars and going fully virtual, and how James leverages an advisory board that consists of 12-15 clients to get feedback about his business (and then later makes sure he shows them how he’s implemented their suggestions so they feel empowered to give more constructive feedback in the future).

And be certain to listen to the end, where James shares how, during his webinars, he offers a “no cost, no obligation” full financial plan for prospects as a way to demonstrate the value his firm will deliver once they onboard as clients, why James says that recently adding tax preparation along with financial planning and investment management has been the real “secret sauce” to his firm’s ongoing success, and how James is managing the challenges that come along with such rapid growth, including finding adequate office space and experienced planners to hire who don’t have existing books of business so that they have the capacity to absorb all the new business that James’s firm is already bringing in.

So whether you’re interested in learning just how James doubled the size of his firm to $1.8b in 18 months, how he leveraged his expertise in the employee benefits programs at major energy companies to reach potential clients at a key transition point, or how he’s been able to manage and absorb that growth in such a short period of time, then we hope you enjoy this episode of the Financial Advisor Success podcast, with James Bogart.

Lifting Advisor Wellbeing By Focusing On Time And Income Over Revenue Alone

August 23, 2021 07:04 am 7 Comments CATEGORY: Personal/Career Development

The career path of becoming a financial advisor has long been lauded as an opportunity that pairs together a high income potential with the flexibility of building your own book of clients (or the outright benefits of being an entrepreneur building an independent business). The caveat, though, is that while financial advisors do generate an income far higher than the national average, there is also a great deal of stress in building an advisory business from scratch and just trying to survive long enough to enjoy that income. Not to mention the reality that, as the saying goes, “You can’t take it with you”… raising the question of whether the stressful pursuit of a financial advisor’s income potential is even ‘worth it’ in the long run?

But as the latest Kitces Research on Advisor Wellbeing shows, financial advisors do in fact enjoy not only above-average income, but above-average wellbeing in all 18 sub-scales of the Comprehensive Inventory of Thriving (a comprehensive measure of wellbeing). And in fact, while the average American typically reaches a point where their wellbeing stops rising once they achieve a certain level of income, financial advisors continue to report ever-greater levels of wellbeing as their career earnings continue to grow with additional years of experience!

The caveat, though, is that while advisor wellbeing does rise as income grows, advisor wellbeing actually begins to decline once the aggregate revenue of the business exceeds $1.5M. And on average, the higher revenue grows from there, the lower the self-reported wellbeing of financial advisors themselves! The shift appears to be driven by the reality that once an advisory firm grows materially beyond $1.5M of revenue, it is virtually inevitable that the advisory firm takes on multiple lead advisors, and a growing team infrastructure to support them… transforming the founder’s role from being the advisor they first set out to be into becoming a manager instead, while simultaneously increasing their hours worked and reducing the autonomy they have over their time and schedule. All of which are associated with lower wellbeing.

Of course, given that most advisors haven’t even reached $1M+ of revenue, many might wish they had such ‘first-world’ problems. However, our Kitces Research on Advisor Wellbeing also shows significant dips in advisor wellbeing at approximately $275,000, $550,000, and $825,000 of revenue… all of which are associated with capacity thresholds where advisory firms must hire to service their ever-growing number of clients. Which means in practice, advisory firms actually face a series of repeated barriers that reduce wellbeing… all associated with hitting the capacity limitations of serving clients, and what happens when the firm either doesn’t hire early enough, doesn’t hire enough at all… or hires so many people that the founder primarily shifts to becoming a manager of that team (instead of an advisor).

Ultimately, though, the key point is simply to recognize that in the end, it’s maximizing the value of our time – and literally generating the maximal revenue from the minimal time – that appears to be one of the greatest drivers of advisor wellbeing. Which means the key to “happy growth” is not just adding more clients, but specifically increasing revenue per client (by attracting and serving more affluent clients who can pay higher fees) that allows advisors to do their most rewarding work. Even if, in the long run, that actually means working with fewer clients… who most value the time and value that their financial advisor provides!

Weekend Reading for Financial Planners (Aug 21-22)

August 20, 2021 02:58 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "Weekend Reading For Financial Planners" – this week's edition kicks off with a recap of the CFP Board's latest update to its 5-year strategic plan, which includes an ever-greater focus on its standards of conduct and enforcing them... but raising the question of whether the CFP Board is ready enough to enforce its standards even if it means the total number of CFP certificants might (temporarily) decline in order to clean its own house and build a more trusted foundation for growth in the future?

Also in the industry news this week are a number of other interesting industry headlines:

A new study finds that almost 25% of SEC-registered investment advisers took PPP funds, and an estimated 6% of those may have claimed more than they should have (and those who did are disproportionately advisors who already had a history of client complaints, misconduct, or outright fraud, reinforcing the view that a small number of 'bad apples' are engaging in a disproportionate amount of bad advisor activity?)
The majority of advisory firms (51%) report that the pandemic didn't have any impact on their culture, but of those where it did, nearly 4/5ths reported that it was a detriment to their employee engagement

From there, we have several investment-related articles, including:

Talking points on how to persuade clients to rebalance when they're hesitant due to embedded capital gains
The ongoing rise of alternatives as a substitute for ultra-low-yield fixed income allocations
Why the real 'investing nightmare' is not a 40% bear market or a 'lost decade' in stocks, but a scenario where markets are down 40%+ even after a decade (which hasn't been experienced in the US, but does occur periodically in other countries around the world!)

We've also included a number of articles on client communication:

Why even good advisors can end out with regulatory complaints if they allow a gap to emerge between client expectations and reality (and fail to address it before the dissatisfaction escalates)
How big life changes can affect client behavior, and lead to situations where advisors must dig deeper in client communication to unearth the underlying issues
Why giving 'blunt' advice can turn off prospects... but it is also an effective way to screen out those who aren't really ready to work with an advisor and implement their advice

We wrap up with three final articles, all around the theme of being decisive in our focus:

Why the most successful businesses are not just the ones who take action, but are the ones that most often take decisive action
How fear of our own mortality often stokes us to cram as much as we can into our time, instead of encouraging us to better focus that time instead
Why sometimes the best decision we can make is to stop trying to be bigger 'just for the sake of', and instead focus on being better for those we want to serve most (from our family to our most ideal-fit clients)

Enjoy the 'light' reading!