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Weekend Reading for Financial Planners (June 5-6)

June 4, 2021 02:56 pm 2 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "Weekend Reading For Financial Planners" – this week's edition kicks off with a fascinating industry study of more than 70,000 financial advisors showing that 2020 actually witnessed record client retention rates across the industry (94.6%) but also one of the slowest years for new client acquisition (ostensibly at least in part because so few clients were willing to change advisors in the first place?), as the advisory industry at large continues to shift into increasingly stable ongoing fee-based AUM relationships with its affluent clients (though in practice, the majority of affluent clients are also maintaining unmanaged brokerage accounts for at least some of their investable assets as well!).

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

A new white paper from Bob Veres and Matthew Jackson highlights how niche financial planning is becoming the new frontier (though arguably, fee-only financial planning already has been a niche for the past 20 years?)
An Arizent study finding that the majority of advisors wish to stay at least partially working from home as the pandemic subsides... although not significantly more than the number of advisors who already worked at least partially from home pre-pandemic!?

From there, we have several interesting articles on cryptocurrency:

The FPA's latest Trends In Investing survey shows a significant spike in the number of advisors looking to allocate more to cryptocurrency in the coming year (at 26%, up from fewer than 1% of advisors just 1 year ago)
Schwab may be gearing up to soon make cryptocurrency investing available on its platform
Why the dominance of cryptocurrency in the consumer media means advisors have to talk to clients about it, even if the advisor's view is that it's not (yet?) worth investing into

We've also included a number of articles on the growing buzz around inflation:

A recent study highlights the investments that perform better or worse when economies transition into higher inflation environments
The heat is coming off forward-looking inflation expectations as investment markets increasingly assume the Fed may act
How to have the 'inflation conversation' with clients by focusing on the Rule of 72 and how long it takes for prices to double

We wrap up with three final articles, all around the theme of adding value in client relationships:

The opportunities for even fee-only advisors to add value to clients with advice about their insurance policies (even and especially if the advisor isn't the one selling them)
Tips on how to have more productive annual client review meetings by breaking them into backward-looking and forward-looking sections of the meeting agenda
How to think about restructuring advice fees into Service Fees and separate Access Fees to better align the interests of the client and their advisor to provide ongoing value

Enjoy the 'light' reading!

Kitces & Carl Ep 61: Taking The Leap To Launch When You Don’t Have The Capital To Finance It

June 3, 2021 07:03 am 0 Comments CATEGORY: Kitces & Carl Podcast

Up until the last twenty years or so, it was relatively uncommon for financial advisors to strike out and launch their own practice without the support of a larger advisor platform (e.g., a broker-dealer or insurance company). However, technological advances, a shift towards holistic financial planning (versus the more traditional transactional model to which broker-dealers and insurance companies were historically attached), and evolving fee models, have come together to make it exponentially easier for advisors to become entrepreneurs (particularly under the independent RIA model). However, one thing that hasn’t changed is that, even for advisors who are starting from zero, there is still a need to be sufficiently capitalized, not only to actually open shop, but to survive the first few years with little-to-no income as the advisory business ramps up. Which means that insufficient starting capital remains a common blocking point for advisors who may otherwise be ready to launch their own practice.

In our 61st episode of Kitces & Carl, Michael Kitces and financial advisor communication expert Carl Richards discuss why a lack of capital may not always be the root cause for an advisor’s reluctance to start their own business, a key mindset shift advisors can make to get a little more comfortable with the risks associated with being an entrepreneur, and some practical tips for sourcing the necessary funds to launch.

As a first step, it’s important to consider that, for advisors who have never done it before, the thought of starting a business can be scary. As while a lack of capital may actually be a blocking point, sometimes the real reason advisors are reluctant to begin the process of starting their own practice is simply that they’re scared that they’ll fail. Which, of course, is perfectly normal. Being ultimately responsible for every aspect of running a business is daunting for many, and it’s important to understand that there’s more than one way to have a successful and fulfilling career as a financial advisor that doesn’t involve starting a business from scratch.

However, advisors who are ready to take the entrepreneurial fork in the road, but are still concerned about not succeeding, can always take a moment to consider what the worst-case scenario really would be. After all, advisors who are ready to “go solo” should already have the technical and interpersonal skills to both bring in new business and provide great service to clients. Which means that, at the very worst, if the business proves to be unsuccessful, then the next logical step is to simply go find a job as an experienced advisor at an established firm (for which there is only a growing demand for hiring and a shortage of talent to fill the roles), and earn a healthy salary to get back on financial track!

And when it’s time to solve the “not enough capital” puzzle, there are a few options. As a first step, advisors can leverage their skills (and natural proclivities) to plan for their goal of saving and/or raising the necessary capital. And if time is of the essence, then they can follow in the footsteps of other successful advisors who have either taken out a loan, found someone to partner with, or taken on equity partners.

Ultimately, the key point is that the reason that advisors hesitate when launching their own firm is often less about not having enough capital, and more about being worried about things not working out. But, by acknowledging that it’s perfectly normal to be anxious about starting a business, and considering the worst-case scenario (and how there’s often still a very strong fallback choice!), advisors can make a more informed decision about whether or not they truly want to hang their own shingle. And if they do, there are several ways to source the necessary capital for those who conclude that they really do want to scratch that entrepreneurial itch.

Accelerating 2021 Business Sales To Navigate Biden’s Proposed Capital Gains Tax Increase

June 2, 2021 07:01 am 2 Comments CATEGORY: Taxes

When investments appreciate in value, their capital gains are subject to preferential tax rates, which were first established to incentivize taxpayers to invest their available savings for growth. However, President Joe Biden’s recently proposed American Families Plan, calling for substantial tax reform, includes a number of changes that would dramatically reshape the taxation of capital gains. In particular, the proposal would – at least for high-income individuals – eliminate the preferential rates for long-term capital gains, reverting their tax rate to the top ordinary income tax bracket (which itself would rise from the current 37% to a new 39.6% rate under the proposal).

Notably, the new 39.6% rate on long-term capital gains would only apply directly to taxpayers with income in excess of $1 million, allowing most to avoid the new capital gains bracket. However, because assets can appreciate substantially over very long periods of time, and potentially be taxed all at once in the year they are ultimately sold, the newly proposed capital gains tax rate could also potentially impact other taxpayers who don't annually earn anywhere near $1 million, but do have a once-in-a-lifetime (or few-in-a-lifetime) taxable event(s), such as the sale of a business, that can temporarily push their income over the $1 million mark (if only due to the capital gains event itself).

While the recent Biden budget proposal for Fiscal Year 2022 assumes the capital gains changes are made retroactively to April 2021, the reality of both the political climate and the practical challenges associated with such a retroactive change means that the most likely outcome would be a January 2022 effective date for any changes. Accordingly, business owners who are considering the potential sale and exit of a business – that may potentially have a ‘lifetime’ of growth all taxed in a single year of sale – will seriously want to consider liquidating the business before year-end, in an effort to ‘harvest’ capital gains at current 20% top capital gains tax rates, and avoid potentially substantial capital gains income from being subject to the proposed 39.6% top tax rate in the future (which at the margin, is a 19.6% tax rate savings on what could be one or several million dollars of appreciated business value!).

Additionally, business owners selling in 2021 whose sales may qualify for the installment method may wish to proactively opt out of such treatment, and instead report all gain from the sale in 2021, to avoid having capital gains spill into future years, where they may again be taxed at the newly proposed higher rate. Opting out of such treatment, however, could leave certain business owners with liquidity challenges that should be proactively addressed.

Ultimately, the price of liquidating capital gains (or having them treated as liquidated upon death) is likely about to be dramatically increased for high-income taxpayers (and others with highly appreciated assets that they will sell). And while most will be able to avoid the capital gains exposure – simply because they don’t earn $1M+ per year in the first place – those contemplating the sale-of-a-lifetime (e.g., a business whose value has been built over years or decades) in the coming years will want to seriously consider whether to accelerate (or not) the sale in 2021 given the sizable one-time tax savings that may be available! Which, notably, not only includes the clients of financial advisors, but even financial advisors themselves considering retirement and the potential sale of their own advisory firms!

#FA Success Ep 231: From CPA Lifestyle Practice To Billion Dollar Multi-Generational RIA Enterprise, With Michael Goodman

June 1, 2021 07:03 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 231^st episode of the Financial Advisor Success Podcast!

My guest on today’s podcast is Michael Goodman. Michael is the Founder and President of Wealthstream Advisors, a fee-only RIA headquartered in Manhattan that manages over $1b in assets for 350 client families.

What’s unique about Michael, though, is that he used his early experience as a CPA to transition into a career as a financial planner, starting first as a solo practitioner before making a deliberate decision to build out a large ensemble firm that can persist and sustain even after he retires.

In this episode, we talk in depth about the convergence of the tax planning and financial planning professions, how early CPAs pioneered the wealth management model by running what were essentially family offices offering affluent clients comprehensive tax and financial planning that expanded into RIAs helping with investment management as well, how the breadth of business knowledge that CPAs obtain as part of their stringent education offers a unique perspective on the planning process (and as Michael put it, “a bigger lens to work from”), and how working with a consultant was the catalyst to help Michael change his mindset from maintaining a CPA lifestyle practice to building an enduring RIA enterprise (and how building and being part of a larger team ended out being the aspect of business ownership that Michael enjoys the most!).

We also talk about Michael's own journey through the financial services industry, why doing audits of small- to mid-sized business as a young CPA gave him the equivalent of an MBA education in business management (while getting paid to do the work that was giving him such an invaluable education), how Michael moved to what at that time was a Big Six accounting firm but ultimately found the work unsatisfying because he lost the human element he enjoyed so much, and how Michael’s involvement with the AICPA’s Personal Financial Planning membership was the pathway to finding mentors that he could model after as a planner and business owner.

And be certain to listen to the end, where Michael shares the specific hires he made as his practice began to expand (including a lead advisor as well as a COO to free up his time to work on the business rather than in the business), the specific types of traits and experience Michael was looking for as he filled those roles, the mechanics of the valuation process Michael went through in order to bring in shareholders in order to build for the next generation, and how changing Michael’s mind around hiring younger planners just out of college has turned out to be a hugely satisfying professional experience.

And so whether you're interested in learning more about Michael's journey from starting out as an accountant and ending out as a financial planner, the deliberate steps he took to transition from a lifestyle practice to a multi-generational firm, or how he structured the sale of equity in his firm, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Michael Goodman.

Why (Virtual) Experiential Learning Is The Future Of Financial Planner Training

May 31, 2021 07:07 am 1 Comment CATEGORY: Personal/Career Development

As the total number of CFP certificants crosses 90,000 – nearly 1/3^rd of all financial advisors – and the number of undergraduate and graduate school CFP Board registered programs continues to grow, the pathway of a college degree plus CFP certification is increasingly becoming the way new financial planners learn how to do financial planning. Yet the reality is that while a theory-based education may provide the “book smarts” and an understanding of the regulatory and legal sides of the practice, it doesn’t necessarily give future financial advisors the full scope of understanding and skills needed to thrive as emerging professionals. While at the same time, ‘on-the-job’ training is still far too often focused on teaching the sales skills it takes to get new clients… but not necessarily what new financial planners need to learn to deliver good advice that clients will actually implement. Which means, simply put, that the emerging pathway for training new financial planners may not be providing the full base of knowledge and education really needed to be successful as a financial planner.

Fortunately, though, other established professions have long since determined an alternative approach to teaching and training new professionals to figure out how to actually apply their book knowledge in real-world situations: experiential learning. From veteran craftsmen to train apprentices, to experienced doctors who train residents, to simply getting an internship with an experienced professional, getting an opportunity to learn by “seeing how it’s done” in practice remains a remarkably effective way to learn. In the context of financial planners, in particular, this means shifting from a purely technical-focused training or one that only practices sales techniques to turn prospects into clients, into an experiential learning approach that allows for the practice of advice techniques to convince clients to actually implement the advisor’s advice.

However, experiential learning opportunities have been limited in practice. Conferences can be costly and take time to vet out which ones are genuinely applicable to people who have not truly entered the industry yet. Internships, while useful (at least when well implemented), are limited in number and often only provide the scope of how one particular firm does financial planning. And few firms have the depth of team or capability to implement a systematized apprenticeship-style training program for a large number of aspiring financial planners.

The good news is that the rise of the pandemic has driven such a newfound focus to online learning, that it is also creating new opportunities and best practices for experiential learning to go online as well. A case-in-point example is the FPA Externship, which launched in 2020 as an 8-week intensive online experiential learning program. Similar to an internship, the goal of the FPA Externship is to provide new financial planners an opportunity to get exposed to the real-world practice of financial planning. However, the virtual environment makes it possible to give participants exposure and experience to many different firms’ styles and strategies, while ensuring a rotation through all the different areas of financial planning (not just the one area that one particular firm is focused on). In other words, aspiring financial planners get to see a wide range of what it actually looks like to be a financial planner and do financial planning for various types of clients with varying needs delivered by experienced advisors with a wide range of planning styles.

The significance of programs like the FPA Externship is that the financial services industry is in the midst of a shift from sales-based “financial advisors” to advice-based financial planning, but new financial planners often can’t tell which jobs are which until it’s too late. Consequently, a break can emerge between what new advisors saw in education and what they witness in practice. Which in turn can lead to disillusionment and many talented financial planners leaving the profession… not because of lack of interest, but because they never get to see what the financial planning profession is truly capable of at its best.

Ultimately, the key point is that technical and sales training can take future advisors far, but without experiential learning to understand what the financial advice business is really about, new financial advisors will at best be under-trained when they first begin to work with clients, and at worst can face disillusionment as they begin their careers (and potentially leave the profession before they even really start!). Fortunately, though, programs like the FPA Externship – which is soon to close its summer 2021 enrollment! – are emerging that can fill this gap and provide advisors an understanding of the true power of financial planning, thus developing a stronger generation of financial advicers for years to come!

Weekend Reading for Financial Planners (May 29-30)

May 28, 2021 02:59 pm 62 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "Weekend Reading For Financial Planners" – this week's edition kicks off with the big industry headline that Bank of America is banning new Merrill Lynch advisors from cold-calling, in what many are calling the "end of an era" of how financial advisors are recruited into the business, as the company looks to shift to a combination of digital marketing (through LinkedIn) and internal referrals of bank clients into its wealth management division, in what Bank of America says it hopes will reduce advisor churn, better support paying advisors viable starting salaries to avoid the hazardous "eat-what-you-kill" approach of the past, and expand advisor diversity by not needing to hire advisors who already have their own natural market... and also improve Bank of America's own client retention and reduce future advisor breakaways by hiring 'less entrepreneurial' advisors who are more likely to be reliant on the bank for their clients and support in the first place?

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

President Biden unveils the blueprint for his $6 trillion Federal budget for the coming year... though, in the end, the real question is what Congress will pass (or not)
A new study finds that wealth preferences are shifting, with fewer people viewing wealth as "peace of mind" and more associating wealth with happiness, success, and influence instead

From there, we have several interesting articles on investing:

Vanguard launches a new private equity investment option for its own retail clients (or at least those who are accredited) as the firm continues to move 'upmarket' to a more affluent clientele (who historically may have hired an independent advisor instead?)
Why the growing focus on ESG is leading to newfound scrutiny on how the "Big 3" index providers (Vanguard, Blackrock, and State Street) are proxy voting for their massive $15 trillion in investable assets
How I Bonds are getting some 'fresh love' as the government bond yields 3.54% (consisting of a fixed 0% rate and 3.54% inflation rate) in the current environment (albeit with a cap of just $10,000/year in new purchases)

We've also included a number of articles on broader industry investing trends:

The ongoing evolution of 529 plans to include more automated glidepath funds (that make changes in smaller, more gradual increments over time)
Why Millennials are actually not poorer (in terms of income or wealth) than prior generations, though student loan burdens have been especially damaging to a subset of Millennials
The launch of a new "Onramp Invest" platform to help advisors support their clients who are choosing to invest in cryptocurrencies (by facilitating integrations from popular crypto platforms to the advisors' own software systems)

We wrap up with three final articles, all around the theme of investing in oneself as an expert:

Why and how to position yourself as a "Visible Expert" to both attract more clients and be able to command higher advisory fees
How the primary benefit of being curious is often to discover opportunities you weren't even looking for (but never would have found without being curious)
Why the best bet you can make is often to 'bet on yourself'... which sometimes means being willing to take the scary leap into the unknown and believe in yourself that it will work out (which is what provides the courage and focus for the prediction to become a self-fulfilling prophecy!)

Enjoy the 'light' reading!