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Weekend Reading for Financial Planners (July 31-Aug 1)

July 30, 2021 02:41 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 the CFP Board is proposing updates to its disciplinary Sanction Guidelines and Procedural Rules, which would make the Failure To Report a disciplinary violation to the CFP Board result in a public censure (not just a private one)... and even more significantly, that the CFP Board is seeking input on whether it should begin to apply monetary sanctions on CFP professionals for violations of its Standards of Conduct, where the fines it levies would be used to fund subsequent enforcement as the CFP Board continues to try to weed more 'bad apples' from its ranks. (For those who are interested, a public comment period will be open until September 21st for those who have something to say about it!)

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

The SEC announces a series of fines, ranging from $10,000 to more than $90,000, on both RIAs and broker-dealers that still aren't distributing Form CRS to clients and posting it for prospects on their website as required under Reg BI
A new research study finds that more and more consumers are seeking financial planning advice, and that younger clients are actually the most likely to be seeking out a new financial advisor now

From there, we have several articles on advisor marketing:

The latest Schwab benchmarking study shows that the top growth firms are the ones most effectively leveraging digital marketing strategies to outgrow their peers
Why financial advisors need to have a sound financial footing themselves to get clients (or else your need to close the prospect and get the sale will end out killing the deal)
The beliefs that hold advisors back from getting referrals, including that most clients actually do want to refer their advisor, but don't because they're not sure who they know that would qualify for their advisor's minimums

We've also included a number of retirement-related articles, including:

How retirees are increasingly seeking 'non-financial' retirement advice, because the factors that most drive wellbeing in retirement are a function of health and wellness (not finances)
How retirement dreams can quickly cascade down into 'retirement hell' for those that struggle with having too much free time
Confessions of a young tech multi-millionaire about how she struggled greatly when an IPO suddenly brought her an 'unexpected' $6M fortune

We wrap up with three final articles, all around the theme of what it takes to build wealth and how it benefits us:

How 'true' wealth is about being able to control our time, have freedom to say what we want (without fear of reprisal from work), and simply not need to worry about money anymore
A Northwestern University study on siblings and twins shows what appears to be a causal effect between mid-life money (in our 40s) and our subsequent longevity
The "Go Big, Then Stop" approach to saving for retirement (because if you save enough early enough, you literally don't have to keep saving at all to retire, and can simply let the early compounding take over!)

Enjoy the 'light' reading!

Kitces & Carl Ep 65: Handling Clients Who Bring Their Own ‘Hot’ Investment Ideas

July 29, 2021 07:04 am 4 Comments CATEGORY: Kitces & Carl Podcast

If there is one constant in the world of investing and financial advice, it’s that there will always be a seemingly unending procession of “next great things”. Human progression being what it is, there have been some incredible opportunities for people to be rewarded for investing in innovation. However, for every “home run” like Amazon, Google, Microsoft, Ford, and McDonald's, there are just as many (or more) missteps, such as Enron, Long-Term Capital Management, Theranos, and Pets.com (to name just a few). The trick, of course, is knowing which is which, and (unfortunately) there’s just no real way to tell at the early stages. But that doesn’t stop the barrage of messaging that the public is exposed to across a plethora of media channels, telling them that they need to load up the proverbial boat in the next big game-changer and industry disruptor. And for financial advisors who (inevitably) start fielding client inquiries about such things, the question arises: what is the best way to respond when clients show interest in new (but still unproven) investment opportunities?

In our 65th episode of Kitces & Carl, Michael Kitces and client communication expert Carl Richards discuss the reasons advisors are so often skeptical of new investment opportunities, how they can communicate with clients as their views evolve, and how advisors who may have previously been too dismissive of a client’s interest in a new investment can rebuild any trust that may have been lost.

As a starting point, it’s important to acknowledge the fact that people of means are frequently targeted by less-than-forthcoming salespeople with investment opportunities and products that are often too good to be true. And in an effort to be expeditious with a client’s time, advisors frequently develop heuristics to quickly filter out investments that are too new, unproven, or just plain illegitimate. However, it’s also the case that some of those opportunities do turn out to be worthy of further investigation (as was the classic case with pioneering internet stocks in the ‘90s). Which means it’s not only challenging to screen out those too-early investments… but can also be a challenge to communicate to clients who expressed interest in a new investment that was too speculative or risky if/when things may have actually changed!

In such cases, it can be helpful to reiterate that part of an advisor’s job is to manage their investments according to their timeframes and risk tolerances and in a way that aligns with their long-term goals and core principles. From there, advisors can walk clients through the process of what it takes for something to be a qualified investment opportunity, and why the fundamental risk/reward calculus may have changed. And for advisors who feel they may have been too quickly (and emphatically) dismissive of an early stage opportunity, it’s important to apologize for being short and then follow up with an explanation of the firm’s criteria for investments, and why thoroughly researching every emerging opportunity that comes along is an inefficient (and expensive for the client!) use of time.

Ultimately, the key point is that there will always be a ceaseless parade of next great things, and regardless of whether or not they pan out, all new and innovative investment opportunities have some level of speculation and risk. And while there is a place for speculation and risk, it’s an advisor’s job to ensure that changes to a client’s investment portfolio align with their values and goals. Because, at the end of the day, clients who ask their advisors about a new opportunity are likely skeptical themselves, and are (deep down) looking to be either validated or cautioned. And when it comes to clients who lobby hard for every new thing that comes along, and push back on their advisors for taking a more measured approach… then the client may not end out being a good fit for the firm if always investing in the next new hot idea is really what they want?

Can A Charitable Remainder UniTrust (CRUT) Truly Replace The Benefits Of The “Stretch” IRA?

July 28, 2021 07:08 am 9 Comments CATEGORY: Taxes

The Setting Every Community Up for Retirement Enhancement (SECURE Act) was passed into law on December 20, 2019, dramatically changing the post-death distribution rules for most non-spouse Designated Beneficiaries. Whereas in the past, such beneficiaries were generally able to ‘Stretch’ distributions from their inherited retirement accounts over their life expectancy, the SECURE Act generally imposes a new 10-Year Rule on such beneficiaries (Non-Eligible Designated Beneficiaries). And since (as compared to the ‘Stretch,’ the 10-Year Rule generally reduces tax deferral and increases the size of the average distribution (in the years such distributions take place), raising the chances that a beneficiary will be bumped into a higher tax bracket, practitioners have been exploring ways to mitigate this change.

One way that some practitioners have suggested to mitigate the impact of the ‘death’ of the ‘Stretch’ is to name would-be Non-Eligible Designated Beneficiaries as the income beneficiaries of a CRUT, and then naming that CRUT as the beneficiary of the individual’s retirement account (instead of naming the Non-Eligible Designated Beneficiaries directly on the beneficiary form). Notably, CRUTs have the potential to offer certain individuals similar benefits as would have been provided by the ‘Stretch’, such as tax deferral, and the ability to distribute assets annually individual’s (or group of individuals) life expectancy. And similar to the ‘Stretch’, income beneficiaries of a CRUT pay taxes on the distributions they receive (from the trust) on their personal returns.

To establish a valid CRUT, a trust must comply with certain rules and restrictions. CRUTs, for instance, are required to provide no less than 10% of the actuarily projected future value of the trust be left to a qualified charity. Such trusts must also distribute a fixed percentage between 5% and 50% of their assets annually to the CRUT’s income beneficiaries. Distributions retain the tax characteristics of income (e.g., ordinary income, long-term capital gain, etc.) received by the CRUT, and are distributed on a Worst-In, First-Out (least-tax-efficient income first) basis.

But while, on the surface, CRUTs can appear to approximate many of the qualities of the ‘Stretch', they are rarely the optimal choice for those retirement account owners who are primarily interested in transferring as much wealth as possible to heirs. Such trusts are generally not even possible to establish with lifetime distributions for beneficiaries in their early 20s, or younger. Older beneficiaries, meanwhile, often can’t (or don’t) live long enough to diminish the projected ‘loss’ of (at least) 10% of the CRUT assets to charity to a point where it is outweighed by the gain of extended tax deferral (compared to the 10-Year Rule).

While each scenario should be evaluated separately, in general, if a retirement account owner is looking to use a CRUT as a wealth maximization vehicle, the ideal fact pattern would include:

A young, healthy beneficiary (but not so young that the CRUT can’t actually be established),
who projects to be in a high tax bracket, and
expects to have significant long-term returns with at least a reasonable amount of turnover, and/or interest or dividends.

Even where the pieces ‘line up,’ though, it can often take three or more decades for the CRUT beneficiary to reach the breakeven point and ‘catch up’ to a beneficiary who inherited assets via the 10-Year Rule. Thus, there is almost always a substantial mortality risk associated with the use of a CRUT. CRUTs also limit the optionality of a beneficiary, as well as increasing organizational and operational expenses.

But while CRUTs have probably been over-hyped for purely their wealth transfer ability, for retirement account owners looking to satisfy both legacy (to heirs) and charitable goals, they can be a powerful tool. In many situations, the result of such planning will be a modest reduction in the wealth passed to heirs, in exchange for a much larger increase in the amount that goes to charity.

Ultimately, if just the right circumstances present themselves, or if a retirement account owner is sufficiently charitably inclined, naming a CRUT as the beneficiary of a retirement account is a planning strategy worth exploring. But for retirement account owners solely looking to maximize the transfer of wealth to heirs, the bottom line is that a CRUT is generally not a great (or is at least a “risky”) option.

#FA Success Ep 239: Creating Advisor Value By Helping Clients With Complexity Regardless Of Assets, With Ryan Frailich

July 27, 2021 07:08 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 239th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Ryan Frailich. Ryan is the founder of Deliberate Finances, an RIA located in New Orleans, Louisiana that serves young professionals using a monthly subscription fee model.

What's unique about Ryan, though, is that he’s intentionally built his advisory business in such a way that allows him to help people in their 20s, 30s, and 40s navigate the inevitable financial complexities in their lives… regardless of whether or not they have liquid assets that need managing.

In this episode, we talk in depth about Ryan’s experience that, while the industry typically assumes clients with limited assets have little financial complexity, in practice, it’s often the journey of getting to the point of actually having assets to manage that is the more complex part of the journey, why Ryan finds that the tendency of financial advisors to not specialize (unlike other professionals, such as doctors, who use different titles to differentiate amongst specialties), makes it challenging for consumers to find someone who can help with their particular pain points, and how Ryan has structured his subscription model with a varying price range specifically to align to the specialized and complex needs of his younger clientele as their own careers evolve and their income grows.

We also talk about Ryan’s commitment to remaining a solo advisor and how that makes focusing on making sure he is serving only his ‘ideal’ client all the more important to the success of his business, the third-party services that Ryan refers clients out to for their estate planning, insurance, and even investment needs (which ultimately allows Ryan to maximize the time he spends in the planning areas where he adds the most value), and why Ryan has implemented surge meetings in order to achieve the sort of work/life balance that is important to him and his family.

And be certain to listen to the end, where Ryan shares why he provides a Client Engagement Standard in his onboarding process as a way to set clear expectations around both his and his clients’ relationship responsibilities (especially given his lifestyle practice), the expertise that Ryan has developed around student loan planning as a way to differentiate himself even further, and why Ryan’s background as a teacher coming into the financial planning business has allowed him to eschew the industry’s ‘traditional’ definitions of success and create his own business goals to maximize his financial and family wellbeing.

So whether you’re interested in learning how Ryan’s structured his business to serve clients who aren’t good fits for the traditional AUM model, how he helps his clients with student loan planning, or why he’s committed to remaining a solo advisor, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Ryan Frailich.

Scaling Financial Advice: What Actually Drives Efficiency And Advisor Productivity

July 26, 2021 07:08 am 0 Comments CATEGORY: Practice Management

Improvements in worker productivity over time are one of the biggest drivers for increasing an entire country’s standard of living. In the context of an individual business, productivity becomes the driver for growing revenue faster than the associated costs to support that revenue – otherwise known as “scaling” the business. For most businesses, investments in technology are one of the factors – if not the single greatest factor – that brings productivity improvements.

Except, perhaps, when it comes to the business of financial advice. As despite an incredible boom in advisor technology over the past decade, advisor productivity – whether measured by the average number of clients served by each professional in the firm, or the average revenue generated by each professional – has remained entirely flat for nearly 10 years. Instead, technology improvements have shown up in the back-office efficiency of advisory firms – where productivity ratios have improved significantly.

Yet in practice, the stagnation of advisor productivity – or at least, the apparent inability of technology improvements to have measurable increases in advisor productivity – isn’t entirely surprising, once it’s recognized that clients ultimately hire a (human) financial advisor precisely to gain expertise and support beyond what technology alone can provide. (Or else the client would simply solve their challenges themselves using the internet!)

Fortunately, though, this doesn’t mean that advisor productivity cannot be improved. Instead, recent Kitces Research into “How Financial Advisors Actually Do Financial Planning” finds that enhancements in advisor productivity are driven by three (non-technology) factors: client variability, advisor expertise, and (professional) staff support.

When it comes to client variability, the challenging reality is that because most financial advisors build their businesses in the early years by taking nearly anyone who will just agree to be a client (and compensate the advisor for their advice), the typical advisory firm ends out with an extremely wide range of clientele. Yet in practice, when advisors get more focused into a particular niche or specialization, enabling them to develop more ‘repeatable expertise’ simply by targeting a more consistent group of clients who have more consistent needs to be serviced in the first place, the average advisor ends out spending 13% less time doing middle- and back-office support work, can service 14% more clients, and is able to attract more affluent clients (who pay higher fees), such that the top 10% niche/specialized advisors earn nearly 67% more than the top 10% non-niche advisors (earning $660,000 versus $395,000, respectively).

Similarly, because of the complexities involved in giving advice to clients (who almost by definition tend to have more complex issues and needs… or else they wouldn’t be seeking out and willing to pay a professional financial advisor for support), advisors who invest in their own expertise are able to complete the financial planning process with clients in significantly less time. Specifically, CFP professionals complete the financial planning process in nearly 22% less time on average than non-CFP advisors. And for experienced advisors – who tend to attract even more complex clients – the differences expand further, with experienced non-CFP advisors averaging 52 hours in the first year to complete the financial planning process, compared to only 29 hours for CFP professionals (a 44% improvement in time efficiency!).

And because of the time-intensiveness of client meetings themselves – where advisors typically spend at least as much time preparing for and following up after the client meeting as the time in the meeting itself – one of the greatest improvements in advisor efficiency comes from leveraging professional support staff (i.e., paraplanners and associate advisors) to aid in the planning process. In fact, the cumulative difference in how the top 25% of advisors spend their time compared to the bottom 25% advisors amounts to as little as 1 hour per day in additional client meetings by leveraging paraplanners to aid in the meeting preparation… which results in a 64% increase in the average number of clients serviced, and a whopping 80% increase in advisor take-home pay!

Ultimately, technology may still provide incremental improvements in advisor efficiency along the way as well, especially as more technology tools arrive specifically to aid in the efficiency of the most time-consuming areas of the advisor’s day like meeting preparation and follow-up time. Nonetheless, the research shows that in the end, the greatest differences in advisor productivity are not actually driven by their technology adoption, but instead by the variability of their clientele, the expertise of the advisor themselves, and how the firm leverages professional (not ‘just’ administrative) staff support to focus the advisor’s time where it has the most impact: in meetings with clients!

Weekend Reading for Financial Planners (July 24-25)

July 23, 2021 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 industry buzz that a new Senate bill would remove the "Specified Service Trade Or Business" (SSTB) limitations on the Qualified Business Income deduction, effectively opening the door for financial advisors to claim the 20%-of-income deduction... with the caveat that those financial advisors under $329,800 of income (as married couples, or $164,900 for individuals) could already claim the QBI deduction, while the new rules would begin to phase out the QBI deduction for everyone above $400,000 of income. Which means high-income advisors who couldn't claim the QBI deduction still won't be able to under the new rules anyway (if they're even passed by Congress, which remains to be seen).

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

A Capgemini World Wealth Report highlights that high-net-worth investors are increasingly becoming adopters of robo-advisors... and also increasingly want to hire human advisors for their more complex advice needs beyond what an automated investment platform can provide
Vanguard is ramping up its own push into financial advice, as the 0.30% AUM-fee Personal Advisor Services platform surpasses $200B of AUM (albeit mostly from Vanguard users who weren't likely to hire a higher-cost independent advisor anyway?)

From there, we have several articles on the current regulatory environment:

The SEC issues a new Risk Alert on hybrid advisors whose brokerage platforms may be 'double-dipping' on wrap accounts by also earning fees on underlying products
Massachusetts charges Schwab with failing to oversee an independent advisor who was billing clients even after his licenses were terminated... raising questions of what role RIA custodians should play in compliance oversight?
The CFP Board's new Managing Director of Enforcement responds to criticism about whether CFP Board is really ready to take enforcement seriously and says CFP Board is stepping up

We've also included a number of articles on advisor marketing, including:

Consumers are reporting that they don't place much trust in media financial personalities, raising questions about media PR as an advisor marketing strategy
Advisors often don't claim enough credit for their own improvements to clients, and should 'market' their new offerings
Tips on which social media platforms really drive new leads to advisors (hint: it depends on the type of clientele you're trying to attract!)

We wrap up with three final articles, all around the theme of productivity and focus:

How to distinguish between being "busy" and really improving your "productivity" (which isn't about efficiently doing more, but finding the focus to do the fewer things that really matter)
Tips to get yourself 'unstuck' if you feel like you're spinning your wheels and can't move forward
How being more willing to change your mind may seem scary (no one wants to be seen as a "flip-flopper") but research shows it is actually associated with greater wellbeing!

Enjoy the 'light' reading!