Nerd's Eye View blog

Weekend Reading for Financial Planners (Jan 5-6)

January 4, 2019 02:53 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with a deep dive from Bob Veres into the Consultant's Report recently released by FPA that was reportedly the driver of their recent OneFPA Network initiative to dissolve and consolidate all the FPA chapters... which, as it turns out, wasn't actually a recommendation from the Consultant in the first place, and in fact the Consultant had cautioned FPA that chapters were concerned about how National was encroaching on chapters and that they valued their autonomy! And raising troubling questions about who is really driving the OneFPA Network initiative.

From there, we have a number of articles about advisory industry trends, including two interesting retrospectives on the major events in 2018 (e.g., fiduciary rulemaking and RIA consolidation) and the potential industry issues still looming in 2019 (will a new advocacy organization emerge for the growing RIA channel?), a discussion of whether recent market volatility will impair the valuation of advisory firms and potentially even bring an end to the current seller's market (or whether revenue decreases from the market decline will just make buyers push even harder to acquire more to grow their revenue instead!), and how a cottage industry is forming around the FINRA expungement process to cleanse brokers' BrokerCheck records (which helps to clean up frivolous customer complaints, but with a 93% expungement rate, may be proving too easy to remove bona fide regulatory black marks as well?).

There are also a number of cash-flow and budgeting oriented articles this week, from a look at how bankruptcy judges are starting to reconsider whether student loans should be adjusted in bankruptcy, how to do a credit freeze for a child (now that Congress has passed a law allowed any parents to do so, for free), tips for navigating the financial conversation in a (new) couple's relationship, and some tips about how to determine what is "reasonable" spending for ultra-wealthy clients who really can afford almost anything.

We wrap up with three interesting articles, all around the theme of self-improvement and creating (good) new habits in the New Year: the first explores the research on how to cultivate better habits (drawing on James Clear's recent "Atomic Habits" book); the second looks at how to minimize being "stupid" (i.e., overlooking or dismissing conspicuously crucial information, or avoiding avoidable mistakes and errors); and the last provides some further food for thought about how to better meet goals even as we all struggle from time to time with our own willpower to do so by creating habits that avoid any need to have or rely on willpower in the first place (and just let the automatic habit take hold instead!).

Enjoy the "light" reading, and Happy New Year!

Setting A Proper Bonus Structure For (Non-Advisor) Advisory Firm Employees

January 3, 2019 02:13 pm 0 Comments CATEGORY: Practice Management

For larger (or even mid-sized) advisory firms, bringing on additional back-office and support staff is just a normal part of the ongoing growth process. But for the solo advisor who may be starting to approach (or has already hit) a capacity wall and needs some operational help, hiring that first employee is a huge decision. Because, in one fell swoop, that once-solitary practitioner has not only suddenly doubled their business’s headcount (from you to two!), but they’ve also just given themselves a whole slew of new responsibilities as an employer that, no matter how good they are at delivering great advice to their clients, they may have little to no experience in.

Because, once you have employees, you have to figure out the best way to keep them challenged and motivated, and how to financially reward them while keeping their interests aligned with those of the business.

For many firms, the easiest way to accomplish that goal is by doling out bonuses, and so in this week’s #OfficeHours with @MichaelKitces, my weekly broadcast via Periscope, we discuss the pros and cons of various employee bonus structures, why sometimes monetary/financial rewards are less than optimal, and why it’s important to remember that business owners and employees aren’t always challenged and motivated by the same things.

Because our industry has its roots in product sales and commissions, the most common bonus structure is to share in the “sales” to new clients by sharing a percentage of new client revenue… where any new revenue that’s generated is split amongst advisors and the support team in such a way that recognizes their various levels of participation in the process of generating that revenue in the first place.

However, as the advisory industry shifts from upfront commissions to ongoing recurring revenues (e.g., AUM fees), firms that are hiring often have even more recurring revenue than new revenue, and it’s equally important for employees to not just help get new clients and revenue but retain the existing clients and revenue as well. Consequently, another approach for bonuses is to base them on a percentage of the firm’s gross revenue instead of off new revenue from new clients. Which not only rewards team members when the firm grows by adding new clients, but motivates them to work hard and provide great service to retain existing clients, too.

The caveat, however, is that in a business model that aims to create and increase annual recurring revenues over time, percentage of revenue bonuses – whether tied to new or gross revenue – have the potential to become quite large after a number of years, and can even compound to the point where they end up hindering the firm’s ability to reinvest into the business itself. Which, in turn, has prompted some firms to adopt a fixed-dollar bonus based on measurable (but not always static) business goals that can be adjusted over time based on ongoing firm growth and staffing needs, and (importantly) structured in such a way that manages employee expectations and keeps them focused on supporting the ever-evolving goals of the business (which naturally change over time).

Of course, bonuses don’t have to be monetary at all, as financial rewards on top of base salaries may be motivating initially but can become less so over time once employees begin to expect them as just another (implicitly-guaranteed) piece of their compensation, especially for otherwise-successful firms that regularly hit their bonus targets anyway. Instead, firms can offer experiential rewards for the whole team (and even their families!), which can often be a better sustaining motivator for people whose work requires creativity and original thought anyway.

Perhaps most significantly, though, is simply that advisory firm business owners must remember that their motivators are often quite different from their employees, who might actually respond much better in an environment that offers stability in compensation and job security (rather than risk-based upside potential). Because, if they were interested in taking the types of business/career risks that offered big potential upside as well as the possibility of many sleepless nights, then they would likely have chosen a different path in the first place!

Ultimately, though, in a world where it’s hard enough to find reliable and trustworthy employees in the first place, it only makes sense that one of the most important tasks when hiring that first employee is to figure out a bonus structure that works for them (as well as the ongoing needs of the business)… rather than just the one that you personally might find appealing as an employer!

Scarcity: How This Rather Innocuous Sounding Economics Concept Actually Impacts Decision-Making

January 2, 2019 02:12 pm 0 Comments CATEGORY: General Planning

The basic concept of “scarcity” is rather straightforward – when there isn’t enough of something, that resource is scarce, which may mean it’s something we can’t get, must pay more for, or must find an alternative to, given its scarcity.

Yet recent research finds that the concept of scarcity, and its impact on decisions, goes far beyond just the economic framing of how scarcity may impact price and the economic supply and demand curves. Instead, scarcity also appears to take a more direct toll on our brains themselves and impacts the ways we make decisions in the first place.

In this guest post, Senior Research Associate Meghaan Lurtz explores the recent research of Sendhil Mullainathan and Eldar Shafir on how scarcity can cause “tunneling,” which limits our ability to fully weigh the pros and cons of a decision and also a “bandwidth tax,” which makes it difficult to fully focus on anything when the weighty consequences of scarcity are looming.

And notably, their research finds that it’s more than just financial scarcity that can impact us. Scarcity of time can be similarly damaging to financial scarcity, and the toll that scarcity takes on the brain and our decision-making process is present both in the face of actual scarcity and even just perceived scarcity. In other words, if we think we don’t have enough, it can still impair our decision-making process… potentially leading to less favorable decisions that really do amplify scarcity. A perverse “scarcity trap” that can feed upon itself.

So what’s the alternative? Trying to find “slack,” whether by releasing time commitments or earning more money to actually reduce the objective amount of scarcity. Or trying to deliberately focus more on the times of abundance – even if they’re just moments – to give our brains a break from the toll that scarcity otherwise takes. Although in reality, even those facing near-term scarcity won’t necessarily be facing scarcity in the long run… which means often the best thing a financial advisor can do is simply to put a currently-scarce situation in a longer-term context, reducing the scarcity-induced tendency to tunnel only on the near-term, and setting the pathway for making better long-term financial decisions!

#FASuccess Ep 105: Growing An Advisory Firm By Pairing Young Advisors To Acquired Books Of Business From Retiring Advisors, With Chip Munn

January 1, 2019 07:01 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 105th episode of Financial Advisor Success Podcast!

My guest on today's podcast is Chip Munn. Chip is the co-founder and managing partner of Signature Wealth, a hybrid wealth management firm on the Raymond James platform that has quickly grown from $300 million to over $1 billion of assets in just the past few years.

What's unique about Chip, though, is the way that he's grown the firm, with an acquisition strategy focused on buying books of business from advisors who are retiring and leaving the industry, and then handing them off to younger advisors who can service the clients, and using the credibility and experience of the firm and its team to help clients get comfortable with the transition to their new young advisor.

In this episode, we talk in depth about what it was like for Chip's firm as they transitioned from a regional broker-dealer to the independent model under Raymond James, how trying to hire staff and gain economies of scale created challenges growing the advisory business, why Chip ultimately decided to create an option for other advisors to affiliate under Signature to solve those challenges for other solo advisors, and why there's still such an opportunity to support advisory firms that have chosen the independent model, because being independent doesn't necessarily mean that we want to be alone.

We also talk about Chip's process for acquiring advisory firms. How they created a structured questionnaire for the advisor to dictate answers to in order to quickly build a historical record of all of a client's relevant information, the way they focus on telling the story of Signature Wealth and its greater resources to persuade the clients to stay through the transition, how they position young lead advisors as part of a team to get transitioning clients comfortable, and how they do semi-annual events for clients in each branch office location to keep clients engaged with the firm.

And be certain to listen to the end, where Chip talks about his own evolving role in the advisory business as it grows. The way he's reallocated a portion of his time from developing client relationships to developing team members, how he's identified his own unique ability, and the way that he repositioned leadership duties with his business partner, in recognition that he's a visionary and his partner is the business integrator.

How To Better Attract Your Ideal Clients By Crafting A Specific Client Persona To Market To

December 31, 2018 07:07 am 1 Comment CATEGORY: Marketing

Arguably, the hardest thing for most financial advisors is not just learning their craft, but rather generating leads and finding new prospective clients to get in front of in the first place. As no matter how good an advisor is at giving great advice and helping people move towards their goals in life, the sad fact is that there aren’t that many folks who wake up in the middle of the night in a cold sweat because they suddenly realized they don’t have a comprehensive financial plan! Which means that an advisor not only needs to be good at what they do, but they also need to learn how to effectively market their services and communicate their value to people that they might do business with. Because if there aren’t prospective new clients coming through the door, eventually the practice simply won’t be a viable business anymore.

For most advisors struggling to grow, the natural solution is to cast an ever-wider net to try and attract anyone who might be willing to pay for advice. Unfortunately, though, such an approach makes it remarkably difficult to differentiate yourself… as when trying to market to everyone, it’s almost impossible to be differentiated for any of them. Instead, by focusing in on a specific and narrow target market, it becomes much easier to create and distribute very targeted marketing messages that resonate with your chosen niche.

Yet just saying that you serve a particular niche isn’t enough. To truly gain a deep understanding of the type of client you want to attract and figure out how to market to them effectively, Katie Godbout, the director of sales and marketing for Covisum, highlights in this guest post one of the most powerful tools any marketer can use to get very specific about who they’re targeting and how to reach them… the client persona.

The client persona is a detailed description of an ideal target client, which describes (among other things) their demographics, specific pain points and goals, where and how they spend their time and money, and (most importantly) how your services meet their specific needs. Which matters because, as Katie explains, by putting yourself in the shoes of these hypothetical clients you can determine if your messaging will really resonate with prospective clients, if the marketing channels you choose would actually reach them in the first place, and if the client experience you create will really foster the creation of a long-term relationship (so that you can effectively systematize and replicate that experience for other similar target clients as well).

Ultimately, by painting a crystal clear picture of an ideal client and targeting them accordingly, advisors will find that they come across prospects that aren’t a good match and might be better served by another advisor whose service offering meets their needs. But in a world where an advisor can create a wildly successful business by serving 50 (or fewer) of their ideal clients, getting very specific about the details and characteristics of the exact ideal client you want to serve will go a long way towards ensuring that when you do find one, your marketing messages resonate and attract him/her to actually become one of your ideal clients.

Weekend Reading for Financial Planners (Dec 29-30)

December 28, 2018 03:01 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with an interesting look at industry trends looming in 2019, as the "war" between wirehouses on the one end and independent RIAs on the other end continues... but the real winners may be the rise of "New Nationals" (from certain independent broker-dealers to entirely independent advisor support platforms) that are providing the requisite support infrastructure around independent advisors that help them to remain independent while providing at least some of the benefits of size and economies of scale.

From there, we take a deeper look into the swirling trends around broker-dealers, including a look at the rising level of upfront recruiting checks being paid from independent broker-dealers (but often with problematic strings attached), how despite criticism the withdrawal from the Broker Protocol appears to be going well for Morgan Stanley and UBS and actually improving their retention, how regional broker-dealers are on the rise (in large part by the success they're still having in pulling brokers away from wirehouses), and tips on how brokers can better navigate their broker-dealers to get the level of customization or exceptions they want in ever-growing bureaucracies.

There are also a number of marketing articles this week, from a high-net-worth investor study finding that most prospects can't distinguish advisors at all based on their undifferentiated websites, tips on how to write better email subject lines so your marketing messages actually get read, why it's better to describe your financial planning process as a series of accomplishments (rather than just a series of chronological steps), and how the most successful version of "content marketing" for advisors requires not just producing broad-based personal finance content by hyper-targeted specialized content that truly demonstrates the advisor's unique expertise.

We wrap up with three interesting articles, all around the theme of thinking differently: the first is a fascinating reminder that for many businesses, the most valuable asset (that a bad employee can lose) is not the firm's computers or other equipment, but the attention of clients and prospects and their willingness to read your emails and other messages (which means attention is an "asset" that should be respected and even obsessed over); the second looks at the phenomenon of a "scarcity mindset", why it was evolutionarily advantageous to focus on and always be worried about the next scarcity, and how doing so in today's environment may be taking away from our ability to enjoy the great richness the world currently has; and the last explores the "spaced retention" approach to learning, and how - whether we're trying to study for the CFP exam, deepen our expertise in a niche, or simply learn something new for ourselves - that cramming and rote memorization are actually terrible ways to learn, and that repeatedly taking in small amounts of information over a sustained period of time is far more effective to really learn it!

Enjoy the "light" reading!

Hiring Children In The Family Business For Tax (And Other) Benefits

December 26, 2018 12:01 pm 20 Comments CATEGORY: Taxes

Becoming a successful small business owner is one of the hardest things that a person can do. For decades, the chances of a small business with employees making it past the five-year mark has been remarkably consistent, at roughly a 50/50 proposition. And at 10 years, the numbers are even worse, with only around a third of the original businesses still hanging on.

With the chances of success being so statistically low, one has to ask themselves, “Why are there still so many people willing to take on the long odds?” And while the answers are surely varied, one of the most common reasons individuals seek to become business owners is that they are able to have more control over decisions. Those decisions include, among others, what types of solutions the business will offer, how it will service its clients/customers, who the business will use for vendors, and who the business will hire (and fire).

And as the IRS’s own website itself says: “One of the advantages of operating your own business is hiring family members”. That family member can be a spouse, sibling, parent, or even a child. In fact, while hiring a child may not seem like a top-of-mind move for many businesses owners, if you play by the rules, there can be a surprisingly broad array of tax (and other) benefits to doing so!

In fact, with the Tax Cuts and Jobs Act increasing the Standard Deduction up to $12,200 (in 2019), children employed in a family business can earn that much in income and enjoy a 0%(!) tax rate on their income (at least for Federal tax purposes), all without facing the Kiddie Tax (which only applies to unearned income). In addition, many states will also permit children employed in the business to avoid unemployment (FUTA) taxes, and children working for their parents’ sole proprietorship, partnership, or LLC may also avoid employment (FICA) taxes as well (which can be a material tax savings for many families, and especially those with high-income parental business owners). Furthermore, employing a child in the business also creates earned income that can qualify the child to make a Roth IRA contribution, and/or qualify the child for other employee benefits.

The caveat, though, is that employing a child in the business still requires that he/she do bona fide (age-appropriate) work in the business (i.e., a “real” job), for a “reasonable” (and not excessive for tax purposes) wage. The work must also comply with both Federal Fair Labor Standards Act (FLSA) rules (which fortunately are fairly flexible for parents employing their children in their own wholly-parental-owned business), and state child labor laws as well.

#FASuccess Ep 104: How Financial Coaching Skills Enhance The Financial Planner’s Value Proposition, with Saundra Davis

December 25, 2018 07:03 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 104th episode of Financial Advisor Success Podcast!

My guest on today's podcast is Saundra Davis. Saundra is the founder of Sage Financial Solutions, which provides training and develops certification programs to teach people the skills of financial coaching.

What's unique about Saundra, though, is the way that she's integrating together financial coaching with low-income financial counseling on one end, and also with financial planning for more affluent clients at the other end, and highlighting how, regardless of one's income and affluence, anyone can struggle from time to time in their ability to align their financial behaviors with their financial goals.

In this episode, we talk in depth about what the financial coaching approach really entails and how it both differs from and complements financial planning, because, as Saundra puts it, financial planning covers the what, but financial coaching covers the why in order to jointly arrive at the how, how the process of financial coaching leads the advisor to ask substantively different questions and navigate the client discovery process in a different way, and how financial coaching helps to address the common challenge that we face as financial planners, where clients come in and engage us for financial planning and then fail to actually follow through and implement the recommendations that would clearly benefit them.

We also talk about some of the key tenets of effective financial coaching itself, including why the essence of financial coaching is not about asking questions about the client's financial situation in order to get data but instead about asking powerful questions that both extract information for the plan and help clients make their own self-discoveries about their financial thinking. Why financial education is necessary but not sufficient to bring about financial behavior change, because, as Saundra says, you can't do better if you don't know better, but knowing better doesn't necessarily mean you'll do better. Why it's essential to hold your clients in high esteem and not judge their prior financial decisions and actions in order to help them, regardless of what you may personally think about their financial situation, and a recognition that in the end, we as financial planners can't actually change our clients' financial lives, but we can help them to change their own financial lives for the better.

And be certain to listen to the end, where Saundra shares information about the FFC and APFC financial coaching designation she's developed to help train financial planners in financial coaching skills, how Saundra drove her career success forward by making her own commitment to put $10,000 a year towards her professional education, and her advice to financial planners that the best way to really learn about the power of financial coaching is to put yourself through the process, for which she actually has coaches going through the Accredited Personal Financial Coach designation who are looking for prospective clients to practice on, for any advisors who might be interested.

So whether you're interested in learning more about ways to help clients implement the advice you give them, how financial coaching can enhance your value proposition to clients, or various pathways for advisors who are new to the profession, then we hope you enjoy this episode of Financial Advisor Success with Saundra Davis.

2018 Highlights – The Top 20 Nerd’s Eye View Blog Posts You Might Have Missed

December 24, 2018 07:12 am 0 Comments CATEGORY: Nerd's Eye View

As we enter the holiday season and 2018 winds to a close, I am once again so thankful to all of you, the ever-growing number of readers who continue to regularly visit this Nerd’s Eye View blog (and share the content with your friends and colleagues, which we greatly appreciate!). Over the past year, our readership has grown yet another 16%, with more than 220,000 unique readers visiting Kitces.com in the past month. But the journey for us is never done… as this year, we’ve added a number of new team members both writing for the blog and supporting us behind the scenes, as we gear up for an even bigger and better 2019 with back-end enhancements to the platform, new industry research studies, and new types of content that we hope you will continue to find valuable.

Yet we realize that the sheer volume of content that’s released from the Nerd’s Eye View can be overwhelming at times, and that, even though so many of you have made this blog a weekly habit, it’s not always possible to keep up with it all. Which means an article, once missed, is often never seen again, “overwritten” by the next day’s, week’s, and month’s worth of content that comes along.

Accordingly, just as I did last year and in 2016, 2015, and 2014, I've compiled for you this Highlights list of our top 20 articles of 2018 that you might have missed, including some of our most popular episodes of the Financial Advisor Success podcast. So whether you're new to the blog and #FASuccess podcast and haven't searched through the Archives yet, or simply haven't had the time to keep up with everything, I hope that some of these will (still) be useful for you! And as always, I hope you'll take a moment to share podcast episodes and articles of interest with your friends and colleagues as well!

In the meantime, I hope you're having a safe and happy holiday season. Thanks again for another successful year in 2018, and I hope you enjoy all the new features and content we'll be rolling out in 2019, too!

Weekend Reading for Financial Planners (Dec 22-23)

December 21, 2018 02:54 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with a fresh look at the rise of T shares and Clean shares, which emerged after the Department of Labor's fiduciary rule as a way to provide less conflicted mutual fund share class options for broker-dealers to make available on their platforms... though with the DoL fiduciary rule being struck down, T shares have vanished almost entirely and Clean shares are primarily surviving in their "semi-bundled" form that still permits at least some revenue-sharing payments to platforms. Though with the explosive growth of truly-no-revenue-sharing Clean shares in fiduciary retirement plans, the potential remains for a Clean shares resurgence amongst individual financial advisors as well... particularly if the regulators re-emerge with a new fiduciary rule in 2019.

From there, we have a number of retirement planning articles this week, including a look at how couples often benefit significantly from a financial perspective by not retiring at the same time (facilitating everything from delayed Social Security for the higher-earning spouse to employer-provided health insurance to bridge the gap from retirement to Medicare at age 65), the factors that drive when couples do (or don't) retire together, how Baby Boomers are emerging as the "loneliest" generation in retirement (due to lower rates of children and higher rates of divorce) with substantial loneliness-related health complications, and the rise of a new model for promoting social connectedness for seniors called the Villages (started with the Beacon Hill Village in Boston) that encourages "younger" senior citizens in their 50s, 60s, and 70s to support and interact with older seniors in their 80s and 90s with a social pay-it-forward ethos.

There are also a number of practice management articles, from rising fee pressure amongst asset managers driving them into the wealth management business where they're increasingly competing with financial advisors themselves, to some ideas about how advisors can better differentiate in an increasingly crowded advisor marketplace, the ways that advisors sometimes unwittingly negotiate "against themselves" on their advisory fees (conceding pricing discounts for all based on just a few outlier clients), and a look at how one advisory firm rolled out a "Milestone Rewards" loyalty program that discounts client fees if/when they stay with the firm for at least 3 years.

We wrap up with three interesting articles, all around the theme of advisor regulation in 2018 and 2019: the first looks at how tumultuous the changes in advisor regulation have been in Australia, which went through an even more extreme version of fiduciary rulemaking back in 2012 and is now struggling with the aftermath consequences of product manufacturing firms that employed their own advisors and continued to give conflicted advice anyway; the second explores how the regulatory shift in Australia is fundamentally shifting power away from investment product manufacturers and into the hands of advisors and clients themselves (which is good for advisors and consumers, but not something the industry is willing to let go of lightly!); and the last is a look at some of the issues that may play out with the SEC's own looming "Regulation Best Interest" proposal anticipated to be issued in revised form in 2019, which has already been under fire not only from fiduciary advocates but even the study that the SEC itself commissioned RAND to conduct, that found that the disclosure-based Form CRS only confuses consumers even more about the actual differences between the standards of care that apply to brokers versus investment advisers.

Enjoy the "light" reading!