Kitces.com - Advancing Knowledge in Financial Planning

Equity Compensation Planning As A Niche: Market Opportunity And Differentiated Value

June 23, 2021 07:06 am 5 Comments CATEGORY: Taxes

There are many aspects of equity compensation that benefit both employers and employees, making it an attractive and lucrative niche for financial advisors. And while some financial advisors may be met with some basic challenges to establish a practice in this space, those who invest time to learn about the industry and its planning nuances may find ample business opportunities and a rewarding level of success.

There are three primary tiers of equity compensation recipients, the first of which includes C-suite executives. These employees receive numerous and sizable grants from their company and may greatly benefit from financial planning services but, while the C-suite executive may be the most financially promising client, they are generally also the hardest to engage by advisors not already affiliated with the company, as these employees are often already provided with comprehensive advisory services (provided by a wide range of competing providers of equity compensation guidance) as part of their employer benefit packages. The second tier includes the middle management group of directors and other critical staff, who represent a client ‘sweet spot’ for advisors to target. These prospects tend to be high-net-worth individuals with substantial stock holdings and options, but without the same access to comprehensive financial guidance that C-suite executives may receive. The last tier of equity compensation recipients includes non-executives and non-key employees who tend to receive the least generous benefits. While these employees may not generate much revenue for financial advisors outright, they should not be dismissed entirely – not only do they hold potential for their own financial growth, but they also help financial advisors better understand the company’s benefit plans and can serve as a valuable referral source.

In addition to identifying and pursuing their ideal equity compensation client, advisors will also need to develop a systematic process to analyze the broad spectrum of equity compensation benefits that a company offers its employees. This process generally consists of valuation and investment risk analyses and is often followed by some degree of tax strategy modeling, depending on the complexity of the client’s benefit package and their particular planning needs. Advisors will need to gather key information not just about the equity compensation plan itself (e.g., the client’s grant summary statement and vesting schedules, along with information about the company shares the client may already own), but also about the client’s other portfolio assets and tax situation. Helping clients understand how best to manage their options through tax-efficient diversification strategies can be an invaluable service, and showing clients exactly how to optimize their assets in the broader scope of their comprehensive financial planning goals will undoubtedly go a long way not just in building client awareness and trust, but in also creating valuable referral credibility and networking opportunities through existing clients.

Ultimately, the key point is that the equity compensation niche can be an attractive and rewarding opportunity for financial advisors, and by investing resources in seeking out prospects that work for particular companies, advisors can begin to really lean into and grow their niche. Financial advisors need not be intimated by large advisory firms who may seem to be competitors in the equity compensation space, as middle-tier employees provide ample opportunities for independent advisors to offer valuable and high-quality guidance, offering both the client and the advisor a rewarding planning-oriented experience!

#FA Success Ep 234: Charging Advice Fees To Help Clients Change Their Money Script, With Yohance Harrison

June 22, 2021 07:02 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 234th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Yohance Harrison. Yohance is the founder of Money Script Wealth Management, an RIA based in Cedar Hill, Texas that offers ongoing financial planning services to 225 upwardly mobile young healthcare professionals for a combination of monthly subscription fees and getting paid for subsequent implementation.

What's unique about Yohance, though, is that the value he offers to his clients revolves around helping them identify and change their own preconceived notions about (and relationship with) money – their personal money scripts – to help them make money decisions that are better aligned with their financial goals.

In this episode, we talk in depth about how Yohance helps his clients recognize and understand their personal money scripts (which often influence our financial decisions without us even being aware it’s happening) and what Yohance does to help them subsequently change their money scripts for the better, how Yohance developed his niche serving physicians and other healthcare workers (and how he helps them not become a target for other family members when they suddenly start generating a higher income), and how early in his career, Yohance recognized that his lack of having a “natural market” meant that his best path to success would be to get better focused on a value proposition that could bring referrals to him instead.

We also talk about Yohance’s financial planning process itself, how he starts with a deep examination of a client’s budget to find the various paths they can take to make small incremental changes in order to make progress towards their long-term goals, how Yohance positions and prices his various monthly subscription fee tiers (ranging from Silver to Diamond) so he is able to effectively (and profitably) serve clients all along the complexity spectrum, and how, by going outside of his comfort zone to include a request for referrals as part of his email workflow (rather than asking for them in a meeting), Yohance has enjoyed the highest rate of growth he’s ever seen.

And be certain to listen to the end, where Yohance shares how he gives clients personal links to his calendar as a deliberate means of creating a business model that actively promotes access to financial information and advice, Yohance’s own experience with building diverse and inclusive teams and how the best way for the industry to attract diverse candidates is by putting diverse advisors into leadership roles, and how Yohance has come to appreciate how much greater his impact and reach can be as a financial advisor after he realized he needed to start building out his own team in order to reach more clients.

So whether you’re interested in learning about how Yohance helps his clients re-write their own money scripts, the process that he’s developed and honed around asking his clients for referrals, or how he actively works to create and promote access to financial advice, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Yohance Harrison.

Adopting A “Coach Approach” To Overcome Financial Planning Inaction

June 21, 2021 07:06 am 3 Comments CATEGORY: Practice Management

Sometimes it can be easy to misconstrue financial planning as a purely logical industry, as clear-cut as analyzing the numbers, adding expertise, and then giving clients the requisite recommendations. However, as all advisors quickly learn in the field, personal finance is often more personal than it is finance. The emotional ties that people have to money understandably manifest in many ways, and figuring out what clients want out of the financial planning relationship is sometimes contingent on getting clients to express what and why things are important to them. In short, because finances are deeply personal, good advice is built not just on a foundation of expertise and recommendations that accounts for the client’s capacity, but also on an emotional connection that allows the advisor to identify the client’s overall vision based on their values. By adopting a “coach approach” to financial planning, advisors focus on giving advice that clients will actually follow and that adapts to their changing financial circumstances and emotional priorities.

There are different coaching methods that advisors can use to better visualize and comprehend client goals, each that focuses on different aspects of how coaches can better connect with their coachees. This may range from client self-discovered solutions (International Coaching Federation Model) to an in-depth drill on who is sitting across from them to avoid giving the wrong advice or solving the right problems for the wrong reasons (the Who, How, What Coaching Model). Or it may focus on bridging the gap between what’s ‘Here and Now’ for the client and their desired outcome of ‘There and Then’ (Coach U Strategizing for Success Model). Each coaching method has its own emphasis, which advisors can choose to play to their strengths – or stretch themselves to learn new skills!

Once a client’s goals are clearly visualized, there still remains the issue of action, and at the same time, overcoming inaction. To this end, advisors can guide clients through areas that may be blocking their progress, such as by helping them tackle important tasks that have been difficult for them to complete. If a client feels reluctant or paralyzed by negative emotions, it may help to explore and identify options that clients may not have previously realized were available to them. Lastly, advisors can set up a systematic process with tools such as LifeCards and LifeMaps that can help clients lay out what their specific priorities and goals are—and give them something to be motivated about.

Ultimately, the key point is that advisors can consider a ‘coach approach’ as an effective way to bridge the gap between their technical knowledge and helping a client apply it to the relevant things that matter most to them. It can be leveraged to both onboard new clients and help existing ones move into action. Furthermore, when advisors use a coach approach, they place themselves at the intersection of a client’s life and money, which ultimately helps clients realize their life goals and achieve their desired quality of life!

Weekend Reading for Financial Planners (June 19-20)

June 18, 2021 02:55 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "Weekend Reading For Financial Planners" – this week's edition kicks off with the big industry news that now Goldman Sachs has officially thrown its hat into the RIA custody ring as well, announcing a significant new relationship with mega-RIA Stewardship Partners, and positioning itself to compete especially for the ongoing flow of "breakaway brokers" that may prefer the storied Wall Street brand over a more "retail"-affiliated RIA custodian?

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

The SEC is once again considering further updates to the Accredited Investor rules, including the potential to increase the income and net worth thresholds (which haven't been adjusted for inflation in decades) but also to potentially allow more exceptions for those with significant education or similar credentials
The Department of Labor is preparing yet another update to the fiduciary rules that may look into not only the compensation that advisors receive, but the titles they use when holding out to consumers

From there, we have several interesting articles on the evolution of the subscription fee model:

How subscription fees open up new segments of clients that the AUM model doesn't serve, expanding the breadth of who advisors can serve profitably
An industry benchmarking study showing that growth in subscription fee service models has reached the point where retainer-fee firms are enjoying the same high retention rates as AUM firms (even through the pandemic in 2020)
Why it's so important to set a minimum retainer fee for any client an advisory firm works with, to ensure they maximize the time they're spending with clients (and prospects)

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

Strategies to avoid the IRMAA Medicare surcharges in retirement (particularly by managing pre-tax retirement accounts and their later-years' RMDs)
The valid and not-so-valid criticisms of using annuities in retirement allocations
Despite decades of fears that a large segment of consumers won't be prepared for retirement, in practice a recent Gallup study shows that nearly 80% of retirees are satisfied with their retirement (suggesting that we may underestimate our ability to adapt to our retirement circumstances whenever they do come!?)

We wrap up with three final articles, all around the theme of finding financial contentment:

Economic conditions have improved dramatically since the 1950s, but our financial satisfaction has not, suggesting that the real challenge is not improving our financial condition, but preventing our expectations from growing faster than our reality?
When we are only ever limited in how much we can control in our lives, the key to financial happiness is not in having 'everything', but getting to the point that we feel we're in enough control to not need to worry about the future
While we focus heavily on building wealth in portfolios (and recovering from the decline of the pandemic), it's arguably investing in the bonds we have with our friends and family that builds the most happiness and life satisfaction

Enjoy the 'light' reading!

Kitces & Carl Ep 62: Do Vision And Mission Statements Really Matter For Advisory Firms?

June 17, 2021 07:07 am 0 Comments CATEGORY: Kitces & Carl Podcast

Although “statements of purpose” have, in one form or another, been around for centuries, it wasn’t until the 1970s (and especially into the 1980s) that the corporate mission statement really began to gain traction as a tool for businesses to state publicly what they do and who they do it for. It wasn’t long after that mission (and vision) statements began to elicit eye rolls, particularly from those who were all too familiar with businesses that would go through the motions of writing up such a statement… and then completely ignore it in practice (as Enron infamously included “Integrity” as a core value… right up until it collapsed in an accounting scandal). Yet, the practice of creating mission statements has persisted. And for the plethora of financial advisors who are striking out to become first-time entrepreneurs and are facing a mountain of tasks that need completing and decisions that need to be made, the question arises: is it really worthwhile to take the time and effort to come up with a mission statement (when starting the firm, or later once it is more established?).

In our 62nd episode of Kitces & Carl, Michael Kitces and financial advisor communication expert Carl Richards discuss what it means for financial advisors to have a mission statement in the first place, some of the key benefits mission statements bring to the table, and some practical and actionable ways that financial advisors can uncover and codify their core principles and personal code, both as advisors and as business owners.

As a first step, it’s important to recognize that most financial advisors who started their own practices did so because they decided that the only way they could help the clients they wanted to help in the way they wanted to help them was by simply going out and doing it themselves. In other words, there’s some core reason that they get out of bed in the morning, and that, in effect, is the anchor for a mission statement that clearly defines what it is that the financial advisor can uniquely do that their clients can’t get anywhere else.

From a practical perspective, the biggest benefit that a mission statement brings to the table for financial advisors is that it makes subsequent business decision-making exponentially easier. Because in practice, a mission statement can serve as a filter through which advisors can be intentional with the choices they make as they build their practices. Without a clearly articulated vision, it’s hard to be consistent when making key business decisions… which can eventually result in the business losing traction.

When it’s time to actually codify a mission statement, advisors have a few options. A less formal approach could be a brainstorming session facilitated by a series of questions that starts with, “Why does this firm exist?” and then digging into that answer by asking, “Why is that?” and “Why is that…” and “Why is that!”, several times over to uncover the advisor’s (and firm’s) underlying Why. Advisors who prefer a more structured approach can look into the EOS framework, which relies heavily on establishing a foundation of purpose and value, from which literally everything else that the firm does is built.

Ultimately, the key point is that a financial advisor’s mission statement is something that is already in them and is being used to make business decisions, regardless of whether they are aware of it or not. But without being cognizant of what that mission is, it’s easy to unwittingly make business decisions that aren’t well aligned. Thus, by discovering and articulating what that mission is, the financial advisor can gain the clarity of purpose that makes all the subsequent decisions around owning and operating an advisory firm much easier. In turn, when the advisor starts to add team members, the mission statement becomes even more important, because once there are more team members than can be practically managed by the advisor/owner (which usually happens once the headcount reaches about five or six), then the mission statement becomes the reference point from which the rest of the team can base their decisions on as well. As in the end, when team members have the tools to make the same decisions as the advisor/owner would make, it gets much easier to take the practice to the next levels.

Managing Clients That Use Other (Conflicting) Sources Of Advice

June 16, 2021 07:09 am 0 Comments CATEGORY: Client Trust & Communication

Humans are social creatures, and as such, we like to make decisions when we are backed with social support. This very much includes financial decisions, and research has often documented this human tendency in the context of investments and portfolio behavior. Simply said, it is normal and common to get advice from multiple sources when making an important decision. Which for financial advisors who are aiming to be the ‘quarterback’ or primary source of advice for their clients can be frustrating as the client seeks out and incorporates other (potentially conflicting) advice.

Yet, what is often not discussed is how to benefit when ‘other’ advice – given to the client by someone other than the financial advisor – finds its way into the financial planning relationship. After all, while seeking out and incorporating multiple opinions from various sources is not common in financial planning, the medical field tends to actively encourage patients to seek second opinions and even to work with multiple doctors! As ultimately, seeking out and finding additional sources of guidance to affirm – or alternatively, finding conflicting sources and eventually reconciling them – can actually build the client’s confidence that it is the ‘right’ course of action and that it is time to take action! Or stated more simply, the truth of the matter is that people are often happier about their decisions when lots of people agree with them!

Still, though, clients seeking out other (and potentially conflicting) sources of information can create frustrations and challenges in the advisor-client relationship. Accordingly, the starting point when it comes to dealing with ‘other’ advice is to get a handle on what ‘other’ advice their clients are getting, and to have a way to discuss it (and even to incorporate it into the client’s own financial plan, if it’s good advice that should be followed!).

For instance, a client who has relied on financial advice from a close family member, who they hold in very high esteem, may mention one of their recommendations that they would like to implement. In this case, it would behoove the advisor to treat the recommendation with respect and, if possible, to incorporate this 'advice’ into the client’s plan. If the recommendation is not sound, or deemed not to be in the client’s best interest, the advisor can still delve further to explore the clients’ sources of advice and even leverage the client’s existing blocking points to help them find a better path (e.g., if the client received a hot stock tip from their brother and is asking their advisor’s opinion about it, clearly they’re not yet sold on the idea or they wouldn’t be asking, and simply reflecting back to the client that they’re hesitating from acting and inviting them to consider why can help them talk themselves out of the problematic advice!).

Ultimately, though, the key point is simply to recognize that when clients seek out advice from others, it’s not necessarily a negative statement about the financial advisor, and can actually help the client build momentum towards taking action. As a result, being able to candidly discuss this other advice can be useful for advisors, either to support their consensus-seeking exercise, or at least to better understand their clients and how they make decisions. Additionally, by making small changes to the ways that advisors learn about their clients’ other relationships, financial advisors can elucidate important relationship dynamics between clients and those sources, which can result in opportunities to create more holistic plans that make clients happier!