As Monte Carlo analysis becomes increasingly popular in retirement plans, financial planners are talking more and more about the probabilities of a client's success or failure. Yet in the end, most planners evaluate client goals, look at the probability of success (defined usually as not running out of money), and the client makes a decision about whether they like the result or not. Oddly enough, planners rarely take the next logical step: ask the client what probabilities they would like to see, and use that risk/success metric to determine what the other answers - such as retirement spending or the retirement year - could be.
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Enjoy the current installment of "Weekend Reading For Financial Planners" – this week's edition kicks off with the news that a recent benchmarking study suggests that a number of RIAs are looking to move 'upmarket' and work with wealthier clients by expanding their service menu to include family office services, investment banking, and/or trust services. Nonetheless, given that adding services requires an investment on the part of the firm (often in the form of increased staffing to offer high-touch services and add needed expertise), firms appear to be analyzing the costs and benefits of offering these services in-house versus adding value to clients by referring them to trusted professionals in these areas to ensure that they can truly scale profitably (and not 'just' grow in terms of assets).
Also in industry news this week:
- While many pre-retirees feel unprepared for retirement, longitudinal survey data suggest most will end up living a comfortable retirement, suggesting a role for financial advisors to show them projections of what their retirement could actually look like
- According to a recent survey, high-net-worth individuals are largely satisfied with their financial advisors, though some respondents indicated that communication with a client's other advisors (e.g., attorney and accountant) could be improved
From there, we have several articles on investment planning:
- How the "60/40" portfolio has historically offered a strong 'win rate' of positive returns for long-term investors, even when adjusted for inflation
- The factors that could drive the future correlation between stock and bond returns amidst concern that the "60/40" portfolio has lost some of its diversification value
- Why private investments could potentially play a valuable diversifying role in an 'alternative' 60/40 portfolio
We also have a number of articles on advisor marketing:
- 3 ways advisors can adjust their websites to convert more referrals into clients
- Best practices for financial advisors looking to win referrals from fellow advisors, including the importance of demonstrating emotional intelligence
- Recent research indicates that client referrals are 'contagious', with previously referred clients more likely to make referrals themselves
We wrap up with 3 final articles, all about thank-you notes:
- Why sending thank-you notes throughout the year (and not just for major occasions) can offer benefits for both the writer and the recipient
- An argument against written thank-you notes and alternative options to show gratitude
- A 4-sentence structure for writing thoughtful (and efficient) thank-you notes
Enjoy the 'light' reading!
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My guest on today's podcast is Mark Tibergien. Mark is the former CEO of Pershing Advisor Solutions, a former Principal with Moss Adams Consulting, and is a longtime practice management consultant and thought leader in the financial advisory industry.
What's unique about Mark, though, is how, over the course of a 50-year career in financial services, he has seen firsthand the evolution of the financial advice industry, and has measured, tracked, and through his expertise has helped to define the best practices for advisory firms looking to not just "size up" but truly "scale up" to build enduring advisory businesses.
In this episode, we talk in-depth about how Mark views the difference between simply growing in size versus truly gaining scale as an advisory firm (with scale only occurring when revenues are growing faster than expenses, not just growing in line with rising asset or client headcount growth), why Mark thinks advisory firms should aim for a 30%–35% operating margin, with a higher profit margin potentially indicating a lack of reinvestment in the business and a lower margin implying some problem around pricing, client or service mix, or team productivity, and how Mark sees the differences among advisory practices (which revolve around the founder), versus businesses (which start to add employees and build processes and procedures for them to follow), and advisory enterprises (which have professional management, career paths, and organization-wide measures of accountability).
We also talk about Mark's perspective on the ongoing trend of industry consolidation (that was foretold decades ago and now seems to be coming to fruition), including the 3 types of firms looking to buy RIAs: financial buyers looking to make a return over 5–7 years, tactical buyers seeking to purchase a complementary business, and strategic buyers aiming to create a large branded enterprise, how Mark thinks, despite some predictions to the contrary, that smaller advisory firms can continue to thrive amidst consolidation within the industry by being leaders in their local area or by serving a specific client type (akin to how solo accounting and law practices continue to operate despite their respective industries' immense consolidation of national law and big-4 accounting firms), and why Mark believes that relying on client referrals will be insufficient for firms truly looking to scale, as top-growing firms tend to market far more proactively, with clear branding and positioning in their particular industry segment.
And be certain to listen to the end, where Mark shares why he doesn't think there's anything wrong with the AUM model but he does believe that advisory firms thinking in only terms of assets and basis points may be camouflaging some of their own problems (even from themselves), why Mark believes that especially as an advisory business grows and adds headcount beyond its founders, it becomes increasingly important for firm owners to proactively create a succession plan to ensure their firm will continue to operate according to their vision when they are no longer in the picture, and why Mark thinks it's important for advisors to define what success means to them, not just in terms of business size and personal income, but also on the impact they'll have on their family, community, and the profession as a whole… which can ultimately change the business decisions and trade-offs they make about whether and how they build and scale their firms.
So, whether you're interested in learning about building an enduring advisory business by "scaling up" rather than just "sizing up", the changes that come with being an advisory practice, business, or enterprise, or recent trends in RIA consolidation and what it means for smaller firms, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Mark Tibergien.
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Enjoy the current installment of "Weekend Reading For Financial Planners" - this week's edition kicks off with the news that a new study indicates that while financial advisory firms are largely satisfied with their tech stacks, they take a range of approaches to applying tech: from "innovators" that invest in tech to differentiate themselves from their competition and to enhance the client experience to "operators" that invest in technology largely to improve operations and internal efficiency to firms that say they don't prioritize technology or use it effectively. The survey found that most firms fall into the middle category, utilizing tech in categories that provide an assessed high return on investment (e.g., financial planning, CRM, portfolio management), while taking a more tailored approach to selecting tech in other categories.
Also in industry news this week:
- A Federal judge struck down the Federal Trade Commission's ban on non-compete agreements before it could go into effect, though potential appeals mean the battle over the regulation might not be over
- A U.S. District Court this week ruled that Missouri's rules that targeted investment advice based on factors other than return maximization was unconstitutional and preempted by Federal law, striking a blow against state efforts to regulate the activities of SEC-registered advisers
From there, we have several articles on retirement:
- 7 factors that can help a client choose the best retirement location for their needs, from maintaining social ties to having adequate medical care available nearby
- Considerations for clients who are considering moving abroad for their retirement (and their advisors), including the potential implications for the client's taxes and investments
- How advisors can help clients determine the most tax-friendly states for retirement, which goes well beyond the 'headline' income tax rate to also include each state's unique treatment of different retirement income streams
We also have a number of articles on practice management:
- How advisory firm owners can consider the benefits and tradeoffs of a hybrid work environment to create a structure that best meets the needs of both the firm and its employees
- The keys to holding effective team-building exercises and 17 potential options, from in-person retreats to volunteer days
- Why creating and reevaluating a collaboration plan is a crucial part of maintaining an effective hybrid work policy
We wrap up with 3 final articles, all about pets and finances:
- With the average annual costs of caring for a pet reaching $4,800, these expenses can represent a major (and often unexpected) line item on a client's budget
- The pros and cons of pet insurance, from the ability to defray veterinary bills that can add up to thousands of dollars to the sometimes-complicated maze of coverage options and exclusions
- How a "pet directive" or pet trust within a client's estate plan can help ensure their pet will be well taken care of after the client's death
Enjoy the 'light' reading!
Irrevocable trusts lie at the heart of a variety of estate planning strategies, as gifts to irrevocable trusts can allow for the transfer of assets outside of an owner’s estate for estate tax purposes with more structure than an outright gift. The downside, however, is that irrevocable trusts are "irrevocable" and can't easily be undone; in moving assets to the trust, the original owner gives up their authority over the assets, with the trustee taking over the management and distribution of the assets according to the trust's instructions. Sometimes, though, the original owner may want to take a 'mulligan' when the assets inside the trust would be more advantageous back inside their estate. Including the power of substitution when establishing the irrevocable trust can provide the opportunity to redo the funding of the trust, without jeopardizing the estate tax benefits that the trust conveys.
In this guest post, Anna Pfaehler, CFP, AEP, a Partner and Wealth Advisor at Constellation Wealth Advisors, discusses how "swap powers" – the ability to exchange assets in an irrevocable trust with other assets of equivalent value – can be used to add flexibility and income tax efficiency to an irrevocable trust.
At a high level, swap powers are often included in trusts because, under the Internal Revenue Code, they turn an irrevocable trust into a Grantor Trust where any income generated by the trust assets is taxed to the grantor (i.e., the assets' original owner). This can be advantageous given the generally higher tax rates imposed on trusts compared to individuals. If the trust is drafted as an Intentionally Defective Grantor Trust (IDGT), the trust's assets are also considered outside of the grantor's estate for estate tax purposes, giving the grantor the best of both worlds when it comes to income and estate taxation.
However, while grantors often include swap powers in their trust provisions to convey Grantor Trust status, many never actually use the swap power for its nominal purpose of exchanging assets within the trust with others of equivalent value. But swap powers can create planning opportunities to take advantage of the differences between types of assets and to optimize the trust's balance sheet as circumstances shift over time.
For example, if an asset within an irrevocable trust has substantially grown in value, that asset will not receive a step-up in basis when the grantor passes away if it remains in the trust, resulting in significant capital gains tax if it is sold later. But if the grantor uses a swap power to exchange the asset for something equivalent in value but with a higher cost basis, they can maximize their benefit from the step-up in basis by keeping the lowest-basis assets on their own balance sheet and the highest-basis assets in the trust. Swap powers can also be used to meet liquidity needs by exchanging more liquid assets in the trust, or to move assets with higher expected growth into the trust to shield their future growth from estate taxation.
The key point is that life goes on even after an irrevocable trust is drafted and funded, and shifting circumstances after the fact can leave grantors wishing for a do-over. And although swap powers won't necessarily solve every potential issue with the irrevocable trust that could arise after the fact – since there needs to actually be property of equivalent value that can be swapped into the trust to use them – it does at least create the flexibility to optimize the trust for whatever the situation at hand may be. Ultimately, advisors can help clients navigate their changing circumstances by recognizing opportunities to re-optimize their financial situation and by making the adjustments (such as a well-executed asset swap) that increase the chances of a better outcome as the client's future unfolds!
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My guest on today's podcast is Eric Wulff. Eric is the CEO of Marcum Wealth, an RIA based in Cleveland, Ohio, that oversees $2.5 billion in assets under management for approximately 2,700 client households.
What's unique about Eric, though, is how he has built Marcum Wealth into a multi-billion-dollar firm under the umbrella of a national accounting firm, in large part by cultivating mutually beneficial relationships with the firm's internal CPAs to get them comfortable providing referrals of their accounting clients to his financial planning business.
In this episode, we talk in-depth about Eric's process for generating internal referrals from the accounting firm's CPAs, which do not necessarily come automatically despite the affiliation between the accounting firm and his RIA, how Eric's firm takes a "give to get" approach with CPAs and their accounting clients to demonstrate the value it can offer both them and their clients (so that advisors in his firm are top of mind when accounting clients have questions on financial planning topics or face a life transition), and how Eric's firm's exit planning services in particular have been able to drive referrals by helping the accounting firm's CPAs maintain their long-term relationships with their business-owner clients as the owners plan to monetize their businesses, encouraging a continued relationship between that client and the financial advisor and CPA when they sell their company (and may no longer need traditional business accounting services anymore).
We also talk about how Eric has created a systematized planning process to create a common standard across its multiple advisor offices nationwide, how Eric's firm uses a centralized planning team to prepare financial plans in a consistent manner (and to allow its advisors to spend more time working directly with clients), and how Eric has found success presenting financial plans to prospects before they become clients, despite the unpaid work upfront that it takes to prepare and present them, as it shows the prospects specifically how Marcum Wealth can meet their planning needs and encourages them to start an ongoing planning relationship to implement the planning recommendations.
And be certain to listen to the end, where Eric discusses the key differences between CPA firms and RIAs, particularly the contrast between the goal of CPAs to maximize the efficiency of their billable hours and the more long-term client relationship-building done by financial advisors, how Eric approaches acquisitions, targeting younger or mid-career advisors who want to grow and develop their practice within the local office of the CPA firm (rather than approaching retiring firm owners for acquisition as they exit), and how Eric's firm not only survived the 2008 Great Financial Crisis, which occurred less than 2 years after he opened Marcum Wealth, but was able to use it as a growth engine for the firm as the Wall Street implosion led more consumers to begin showing a preference for the benefits of the RIA model for financial advice instead.
So, whether you're interested in learning about cultivating client referrals from CPA firms, leveraging a centralized planning team to give advisors more time to spend with clients, or systematizing the planning process to create consistent standards across multiple offices, then we hope you enjoy this episode of the Financial Advisor Success podcast, with Eric Wulff.
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Enjoy the current installment of "Weekend Reading For Financial Planners" – this week's edition kicks off with the news that a recent survey indicates that clients of financial advisors are more confident than others about their financial preparedness for retirement and are more likely to have a financial plan in place that can weather the ups and downs of the economy (perhaps increasingly relevant given recent market volatility), indicating that advisors have an opportunity to frame the value of their advice in terms of the real-world outcomes their clients experience beyond their portfolio value, including greater confidence and peace of mind with their financial situation!
Also in industry news this week:
- With a potential SEC regulation requiring RIAs to engage in enhanced "know your customer" practices under consideration, the Investment Adviser Association is arguing for a more tailored approach to identifying risky clients and a longer implementation period to relieve the potential burden on RIAs
- The SEC is investigating the cash sweep programs at multiple wirehouses as these firms, as well as RIA custodians, consider raising their rates to make them more competitive with other (higher-yielding) alternatives for client cash
From there, we have several articles on retirement savings:
- The pros and cons of maxing out 401(k) contributions, from the ability to take a more flexible approach to tax planning to the potential to create liquidity challenges
- Why the tax benefits of investing in 401(k)s compared to taxable brokerage accounts might not be as significant as might be assumed in certain circumstances
- A proposed hierarchy of tax-preferenced savings vehicles, from "triple-tax-preferenced" Health Savings Accounts to (grantor) dynasty trusts
We also have a number of articles on estate planning:
- The potential advantages for individuals of gifting during their lifetime rather than waiting until their death, including the ability to 'preview' how a recipient will handle the gift before receiving a potentially larger inheritance
- While providing a "living inheritance" can be a tax-efficient way to give money to loved ones, it comes with a range of potential considerations, from the sustainability of the giver's financial plan to the potential intra-family conflict it could cause
- Why gifting privately held business interests while alive can be a potentially tax-savvy move for business-owner clients
We wrap up with three final articles, all about couples and money:
- How understanding the deeper feelings that money generates can help advisors better navigate financial conversations with client couples
- How couples in America are organizing their finances today, from the decision of whether to have joint or separate accounts to how they divide expenses
- Why financial "translucency" can help couples with different spending philosophies navigate potential money conflicts
Enjoy the 'light' reading!
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Enjoy the current installment of “Weekend Reading For Financial Planners” - this week’s edition kicks off with the news that a Federal district court in Texas has put a stay on the effective date of the Department of Labor’s (DoL’s) new Retirement Security Rule (aka “Fiduciary Rule 2.0”), which had been scheduled to become effective in September, and related amendments to prohibited transaction exemptions. Further, the court indicated that its ultimate decision is likely to favor groups opposing the regulation, which could lead to an appeal by the DoL and leave advisors waiting (potentially much longer) for a final answer on what will be required of them going forward.
Also in industry news this week:
- A recent survey finds that a majority of 401(k) plan participants think their financial situation warrants financial advice and are much more likely to trust human-provided guidance over computer-generated advice
- With the SEC’s new “T+1” settlement rule going into effect, RIAs could face related record-keeping requests during upcoming examinations
From there, we have several articles on investment planning:
- Why historical data and forward-looking projections suggest that small-cap stocks potentially continue to merit an allocation in client portfolios, despite their relative underperformance in recent years compared to their large-cap counterparts
- While international stocks have lagged the U.S. market during the past decade, historical data suggest that they could serve as a helpful ballast against sharp inflation-adjusted drawdowns in U.S. stocks
- The downsides to allocating to ‘fancy’ investments, from illiquidity to the often-high costs of buying, selling, and even holding these assets
We also have a number of articles on advisor marketing:
- How advisors are using Substack to amplify their content marketing efforts beyond traditional advisory firm blogs
- Why shorter marketing email subject lines with a clear value proposition tend to lead to strong returns for advisors
- How podcasting represents a relatively efficient marketing tool for advisors, though this method tends to take time and commitment to bring results
We wrap up with three final articles, all about work-life balance:
- Why striving for work-life “harmony” rather than “balance” can create greater flexibility and less stress
- 7 relatively simple ways advisors can weave mindfulness practices into their busy schedules to become more “present” in their daily lives
- Tactics advisory firm owners can use to bring more balance into their work and professional lives, which can ultimately lead to a more sustainable business and greater overall wellbeing
Enjoy the ‘light’ reading!
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!