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How To Survive Your First SEC Audit: Preparing For The SEC Examination And Complying With The Information Request Letter

July 31, 2024 07:02 am 0 Comments CATEGORY: Regulation & Compliance

For SEC-registered financial advisors, the prospect of an upcoming examination by the SEC can be a source of high anxiety. This is especially the case with newly registered advisors or formerly state-registered advisors who recently became SEC-registered since they may be uncertain about how the examination process will work, what elements of the firm the SEC will dig into, or what information the advisor will need to provide to the examiners. Even firms with robust compliance programs that do a good job following their required policies and procedures can struggle with examinations if they don't have the information that examiners will ask for readily available.

Thankfully, the SEC has published guidance that details the information typically requested during a first-time examination, as well as the questions examiners are most likely to ask the advisory firm, in the form of a Risk Alert titled "Observations from Examinations of Newly-Registered Advisors". Effectively, then, they've given out a 'cheat sheet' for the exam, from which advisors can glean information that can help them prepare for the inevitable phone call from the SEC initiating their next examination.

At a high level, the exam process typically kicks off with a phone call from the SEC examiner, followed by a secure email detailing the information being requested from the advisor. Advisors generally have about 2 weeks to collect the information for the specified examination period (which, for newly registered advisors, typically stretches back to the effective date of their initial SEC registration). Next, as detailed in the Risk Alert, the list of requested information tends to be similar for most advisors undergoing their first SEC examination and comprises various types of information.

First, the SEC will request information on the firm itself, including organizational charts, employee roles and responsibilities, financial statements, and/or any legal action against the firm that is pending or settled. Next, they'll want information on the firm's clients (including the number and types of clients served), client accounts (including Regulatory Assets Under Management and other assets managed such as "Assets Under Advisement"), and services (including the types of advisory services provided, authority to trade in client accounts, and use of third-party providers like custodians and subadvisors).

At the core of the examination, though, is a review of the firm's compliance policies and procedures and code of ethics, including not just a copy of the 'paper' compliance manual but also how the practices and controls the firm puts into place ensure it adheres to its compliance program. Which means the firm will need to provide records of holdings and transactions for each of its clients (which may require some training and practice for employees to be able to quickly pull the needed data from the firm's custodian), as well as archived client communications and any advertisements produced by the firm.

The key point is that even though the volume of information requested for an SEC examination may be large, advisors will be able to predict a large proportion of what that requested information will be since the SEC has given those details in its Risk Alert. Which ultimately helps advisors better prepare for an eventual examination by putting the systems in place to easily archive and submit information to examiners – and to reduce the chances of extended back-and-forth questions with regulators, so the firm and its advisors can get back to normal business!

#FASuccess Ep 396: Leveraging Coaches To Delve Deep Into A Divorce Specialization That Brings A Steady Flow Of Ideal-Fit Clients, With Michelle Klisanich

July 30, 2024 07:03 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Michelle Klisanich Podcast Featured Image FAS

Welcome everyone! Welcome to the 396th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Michelle Klisanich. Michelle is a Wealth Advisor for Financially Wise Divorce, a hybrid advisory firm based in Minneapolis, Minnesota, that oversees $87 million in assets under management for 91 client households.

What's unique about Michelle, though, is how she has leveraged her learnings from several different business coaches over the course of her career, which gave her the clarity to figure out how best to market to the clientele she really wanted to serve… women going through a divorce, who, after the divorce is finalized, typically transition to become ongoing long-term advisory clients with whom Michelle can build a deep relationship.

In this episode, we talk in-depth about how Michelle has created a structured process to help her clients successfully navigate the divorce process, from connecting them to divorce specialists that Michelle has pre-vetted, including attorneys, mortgage brokers, and therapists, as well as providing her divorcee clients with a roadmap for their way forward once the divorce is finalized, how Michelle has built around divorce planning as a way to open the door to prospective new client but still confirms up front that they are interested not only in her flat-fee divorce planning process, but also an ongoing advice relationship afterwards, and how Michelle executes on a strategy of networking online via Zoom meetings to cultivate relationships with centers of influence in the divorce space and generate a steady flow of referrals that fit her ideal client avatar.

We also talk about how Michelle's early-career struggles working in commission-based insurance sales, where she started out earning only $20,000 in her first year, and how her struggles led her to seek out a business coach that led her to work with Deirdre Van Nest to develop both her presentation skills and figure out how to identify and then hone in on her divorce niche, how Michelle realized she had become a true expert in her divorce specialization after working with another advisor coach, Libby Greiwe, who helped her execute with her ideal client more efficiently, and how after taking part in the Strategic Coach program in the next stage of her business coaching journey, Michelle eventually decided to make the leap from the insurance world to the independent advisory space, which allowed her a graceful way to exit from client relationships that weren't profitable or sustainable by simply choosing to leave them behind, resulting in a purposeful reduction in her client base from 350 down to only 90 good-fit clients she really wanted to work with (and losing only 2 clients that she actually wanted to keep in the transition).

And be certain to listen to the end, where Michelle shares how her experience going through her own divorce inspired her to work with women in a similar position, how the small wins early in her career helped Michelle overcome feelings of "impostor syndrome" derived from her perceived lack of experience and build her confidence to navigate the challenges of starting her advisory career as a 20-something who looked like a teenager, and why Michelle recommends that newer advisors shadow more senior advisors to learn how they overcame the early challenges in their own careers… and discover some best practices the newer advisors might want to emulate or at least adapt for themselves.

So, whether you're interested in learning about how to build a successful client niche by creating a structured system to serve them, leverage coaches to gain confidence and grow the business that you really want, or develop relationships with COIs to gain more ideal-fit client referrals, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Michelle Klisanich.

3 Key Principles For Measurable and Actionable Standards That Help Cultivate Excellent Client Service

July 29, 2024 07:02 am 0 Comments CATEGORY: Practice Management

Most financial advisors strive to provide excellent client care and prioritize a systematic process to maintain regular communication with their clients both on a scheduled (e.g., annual meeting) and an "on demand" basis. And while individual advisors running solo firms are often able to intuitively sense when they're delivering their best, as they grow and scale their firms, that same advisor eventually goes from individually 'owning' every client relationship to sharing the workload with first a client service associate, then a paraplanner, and then another advisor. Suddenly, the question of, "What does it mean to provide the best care for clients at this firm as a team?" becomes a crucial one to solve.

In this guest article, Bob Veres, editor and publisher of Inside Information (and co-producer of the Insider's Forum conference), shares how Brian Martin, co-managing partner of Accredited Investors in Edina, MN, sets company-wide standards for client communications that are both measurable and actionable, and that helped his firm more than double in size.

For firms looking to standardize procedures and create a system to measure the effectiveness of those procedures, a crucial starting point is to identify what the firm's desired outcomes are. Martin and his team drew on the standard of care in the healthcare industry and modified them for their firm by following 3 key principles: first, offering relationships with clients based on constant attention with at least 3 meaningful interactions throughout the year; second, following through on commitments made to clients; and third, providing ongoing and consistent planning for all clients, including the quieter ones.

Once the standards were agreed upon, the main question became how to define metrics and use them to determine whether the standards were being met, as well as identifying potential exceptions and determining when to escalate problems. Martin and his team started by assessing current practices and establishing practical goals based on where the team was already at to set everyone up for success, and mixing in only a few stretch goals (all tracked in the Salentica CRM). Starting with goals that reflected how things were currently being done allowed the staff to get behind the standards and build great momentum.

Over time, tracking metrics to measure the team's performance offered powerful insights that allowed the firm to better plan its capacity, not just by evolving goals to address 'overdue' communication and other high-priority tasks, but also by offering clarity into how to structure team assignments and client relationship allocations more impactfully. Other benefits also manifested from tracking the firm's progress as processes and standards were gradually refined. For example, implementing this system gave Martin's team another way to measure and articulate their workload (and when they were feeling overwhelmed). Additionally, this process helped clarify how the firm could elevate its culture around client service by refining its client interaction standards and offering an objective way for managers to measure advisors' performance.

Ultimately, the key point is that striving for stellar client care is at the heart of many financial planning firms – and devising the right metrics that help a firm assess its areas of excellence and potential areas for growth can be instrumental in establishing a flourishing firm culture based on exceptional client service. By first identifying how the firm wants to define its own standards of client service, and then evaluating how those standards are currently being met, firms can gain a clear and objective way to measure their standards, which can offer valuable insights into further cultivating a proactive culture of outstanding client care across the team!

Weekend Reading For Financial Planners (July 27-28)

July 26, 2024 02:00 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "Weekend Reading For Financial Planners" - this week's edition kicks off with the news that Charles Schwab's latest RIA benchmarking study shows that firms saw significant AUM growth in 2023, thanks in part to strong equity market performance, but also thanks to organic growth initiatives that brought in additional assets from new and existing clients. The study also identified attributes of "top performing" firms across a range of metrics, finding that they are more likely than other firms to have a clear ideal client persona, client value proposition, and marketing plan.

Also in industry news this week:

While the number of RIA M&A deals has not surged in 2024, the average size of deals has increased, demonstrating interest from (often private-equity-backed) firms in pursuing larger targets
Off-channel communication tops the list of concerns amongst RIA compliance professionals, with advertising and marketing coming in a close second, according to a recent survey

From there, we have several articles on retirement planning:

How the timing of inflationary periods, as well as a client's spending patterns, can influence whether their portfolio will last throughout their retirement
A recent study suggests that many near-retirees reduced their savings rate and tapped existing assets during the recent inflationary period, with some retiring sooner, reducing the assets available to support their retirement income needs and demonstrating the potential value of a financial advisor to help them navigate this period
How advisors can incorporate "sequence-of-inflation risk" into client plans to account for the volatility of inflation and its impact on the sustainability of a retired client's financial plan

We also have a number of articles on client communication:

How the use of visuals can give advisors more confidence in their knowledge of complex financial topics and explain them more effectively to clients
Why those who receive advice (financial or otherwise) sometimes ignore it, from incongruent lived experiences between the advice giver and recipient to the "Curse of Knowledge", and what advisors can do to increase the likelihood of client follow-through
While behavioral 'nudges' can be effective at getting individuals to make one-time decisions, additional action is often needed on the part of financial advisors to help clients fully understand the implications of the choice being made and stick with it for the long run

We wrap up with 3 final articles, all about Artificial Intelligence (AI):

While the AI field has received significant hype during the past couple years, its momentum appears to be slowing, with companies facing questions about their long-run profitability and impact
7 workplace use cases for the current generation of AI tools, from email organization to summarizing lengthy articles and data sets
Why AI adoption amongst businesses might take longer than initially thought, despite the initial surge in interest in the technology

Enjoy the 'light' reading!

Kitces & Carl Ep 143: Taking Over Clients From An Advisor With A Different Personality And Communication Style

July 25, 2024 07:01 am 0 Comments CATEGORY: Kitces & Carl Podcast

Kitces & Carl Ep Taking Over Clients From An Advisor With A Different Personality And Communication Style

About a decade or so ago, one of the most pressing issues facing the financial advice industry was the threat of an imminent deluge of advisor retirements coupled with a paucity of succession plans to transition clients to the next generation. While that scenario has yet to materialize as initially feared, the fact remains that transitions do occur on a regular basis, often as older advisors either sell their practices in one fell swoop or gradually offload part of their book while still staying engaged with a smaller group of core clients. In reality, the process of transitioning clients from one advisor to another is often challenging, especially when the legacy advisor and the next-gen advisor approach financial planning from different angles.

In our 143rd episode of Kitces and Carl, Michael Kitces and client communication expert Carl Richards explore the ways that next-gen advisors can navigate transitioning clients who may be accustomed to a more quantitative approach to financial planning, the 3 dimensions that the legacy and next-gen advisors should have alignment in order to increase the odds of a smooth transition, and the importance for advisors to ensure that they have some flexibility if not all of the transitioning clients turn out to be good fits.

As a first step towards making a client's transition away from a legacy advisor – particularly when the paired advisors have different communication and/or planning styles – as smooth as possible, the next-gen advisor might seek to replicate the legacy advisor's meeting structure and agenda in order to keep clients on an even keel. In an ideal world, the legacy advisor would participate in that meeting as well, chiming in as needed to reassure that the client is in capable hands. And, as a way to begin building rapport and trust, the next-gen advisor could reserve a few moments at the end of the meeting to introduce some of the foundational questions meant to establish a deeper relationship, including such hits as "Why is money important to you?" or "Is there anything that's top of mind right now that maybe we haven't addressed yet?" From there, the next-gen advicer could wrap up the meeting by reassuring the client that they've been heard and suggesting that whatever their answer was would be a framework for subsequent conversations.

In practice, even before a transition is initiated, advisors should give careful consideration to 3 broader planning dimensions. Specifically, the odds that a transition will be successful are increased when the paired advisors 1) have similar fee structures, 2) are aligned on investment philosophy, and 3) aren't polar opposites in regard to communication style. Even then, not every client will be a good fit, making it important for advisors to factor that possibility into the deal structure. For instance, rather than a fixed up-front payment, advisors could make an initial payment that's 60–70% of the total price, with the final 30–40% contingent on at least 90% of the revenue still being there a couple of years down the road.

Ultimately, the key point is that a next-gen advisor doesn't have to be a carbon copy of the legacy advisor or adapt their styles indefinitely to facilitate a smooth client transition. It does help, though, to keep transitioning clients on familiar ground, at least initially, and then gradually introduce new ways of framing the relationship and initiating meaningful conversations around money. And as an added bonus, the next-gen advisor can even offer the client the opportunity to reset by asking how they'd like the relationship to work. Because, at the end of the day, what matters most is doing work that is most meaningful for the client and that helps them progress toward their long-term goals!

Untangling The IRS’s New Finalized (And Proposed) Regulations On RMDs: The 10-Year Rule, Trust Beneficiaries, Spousal Beneficiaries, Annuities, And More!

July 24, 2024 07:02 am 0 Comments CATEGORY: Regulation & Compliance

When the original SECURE Act was passed in December 2019, it brought sweeping changes to the post-death tax treatment of qualified retirement accounts. One of the biggest changes was to eliminate the prior "stretch" treatment of post-death distributions for most non-spouse beneficiaries, who are now subject to the so-called 10-Year Rule requiring beneficiaries to fully distribute inherited retirement accounts by the end of the 10th year following the original account owner's death.

In early 2022, when the IRS issued its initial Proposed Regulations regarding the SECURE Act's provisions, it included another bombshell: Not only would so-called "Non-Eligible Designated Beneficiaries" be subject to the 10-Year Rule, but, if the original account owner had been subject to Required Minimum Distributions (RMDs) prior to their death, the beneficiary would also need to take annual RMDs throughout that 10-year period (in addition to fully distributing the account by the end of the 10th year).

And now, in its new Final Regulations issued on July 18, 2024, the IRS has confirmed the requirement for Non-Eligible Designated Beneficiaries to take RMDs annually (although for beneficiaries who would have been required to take RMDs in 2021–2024 but didn't, the IRS has confirmed that there will be no penalty and no requirement to make up the missed distribution, meaning the new regulation effectively starts with RMDs required to be taken in 2025).

Beyond the confirmation of the general post-death RMD rules, the 260-page Final Regulations document offers a slew of other regulatory guidance for specific circumstances where the new rules for Eligible and Non-Eligible Designated Beneficiaries apply. These include:

New rules for handling undistributed RMDs in the year of an account owner's death;
A new "Hypothetical RMD" rule for surviving spouses who initially elect to use the 10-Year Rule but later choose to roll over or treat the inherited account as their own;
Specification that when a plan participant has 100% of their plan balance in a Designated Roth account, any Non-Eligible Designated Beneficiaries are not required to take annual RMDs during the period of the 10-Year Rule;
Clarification of the requirements for successor beneficiaries who, depending on the circumstances, may need to either begin a new 10-year period after which the account must be fully distributed or finish out the original beneficiary's 10-year period;
New definitions of which beneficiaries of a See-Through Trust are also considered beneficiaries of the retirement account and which may be disregarded for retirement account purposes;
A new rule providing that when a See-Through Trust is divided into separate trusts for each beneficiary upon the death of the retirement account owner, the RMD rules will be applied individually for each trust beneficiary rather than uniformly across all beneficiaries based on the beneficiary with the shortest required distribution timeline; and
Clarification that when a retirement account (including IRAs) owns both annuity and non-annuity assets, those assets can be aggregated together for the purposes of calculating the participant's RMD and that payments from the annuity can count against the total RMD for both annuity and non-annuity assets.

Along with the new Finalized Regulations, the IRS also released a new set of Proposed Regulations dealing with some unanswered questions around the SECURE 2.0 Act passed in late 2022. Most notably, the new Proposed Regulations confirm that the RMD age for individuals born in 1959 is 73 (since a drafting error in the final legislation inadvertently set that RMD age to both 73 and 75) and fill in rules around the SECURE Act's new provision allowing surviving spouses of retirement account owners to elect to be treated as the decedent for RMD purposes – although, as the Proposed Regulations make clear, the treatment for surviving spouses won't really be identical to the decedent's since the surviving spouse must still calculate RMDs based on their own life expectancy, and none of their own beneficiaries will qualify as Eligible Designated Beneficiaries.

As a whole, these regulations introduce significantly more complexity to the process of tax planning around retirement accounts, particularly after the death of the account's original owner. Which makes it all the more valuable for financial advisors to get familiar with the new rules and their planning implications for different circumstances, since clients will be more reliant on sound advice to give them clarity and help them avoid pitfalls when deciding what to do!