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Kitces & Carl Ep 55: Implementing A Waiting List Or Just Referring Clients Out When Hitting The Capacity Wall

March 11, 2021 07:02 am 2 Comments CATEGORY: Kitces & Carl Podcast

For most of its history, the financial advice industry has been almost exclusively transactional in nature, which meant that advisors would usually interact with clients only when there was a new sales opportunity. The need for interaction only once every few years meant that advisors could have literally hundreds of clients, and it was virtually unthinkable that an advisor would ever choose to or have to turn anyone away. But, as the industry has shifted towards a more ongoing, relationship-driven model, it’s become increasingly common for advisors to find that they’ve hit a capacity wall and simply can’t take on more clients. And once at capacity, many advisors have either raised their fees (so that more prospective clients self-select out of the engagement process before ever reaching out) and/or sought to add capacity (by bringing in additional advisors and staff).

However, for those advisors who aren’t interested in increasing headcount (because they aren’t keen on managing people) or don’t want to raise fees (because their current pricing works for the particular niche they’re targeting), many have turned to implementing waitlists as a way to manage their capacity, at least in the short-term. Which, in turn, raises the question: is implementing a waitlist really the best way to handle capacity limitations, or is there a better alternative?

In our 55th episode of Kitces & Carl, Michael Kitces and financial advisor communication expert Carl Richards discuss the motivations that might drive an advisor to implement a waitlist in their practice, the unintended consequences of a waitlist, and a key mindset shift that advisors can make when thinking about their desire to manage their limited capacity with a waitlist.

As a starting point, it’s important to distinguish amongst a couple of different circumstances behind the use of a waitlist. On the one hand, for the advisor who is actively expanding their capacity by hiring more staff, a short waitlist might be unavoidable if there’s been a sudden influx of new clients, and it’s logistically impossible to onboard everyone all at once. On the other hand, some advisors have intentionally capped their growth pace, and implement a waitlist that (in some cases) might be up to 18 months.

For that second subset of advisors, it’s important to recognize that their decision to put prospective clients on a waitlist comes from a deep desire to help, while realizing that it’s impossible to help everyone (because an advisor who says “yes” to more professional opportunities than they can handle is also actively saying “no” to other things in their life). Unfortunately, though, that decision comes along with some unintended consequences, as people who reach out to financial advisors invariably do so when they have an acute pain point that they need help with right away, and telling those people, “yes, but” means that they often aren’t getting the help they need when they need it (and will just go elsewhere anyway). Instead, it’s perhaps the better response for advisors to simply say they aren’t accepting new clients at the moment and (as an alternative) recommend those prospects out to other advisors who do have the capacity to offer the immediate help the prospective client is seeking.

Ultimately, the key point is that, while it may make sense to implement a waitlist as a way to manage growth and capacity, the reality is that the longer the waitlist gets, the more the risk that advisors end out rejecting clients who, not knowing where to turn, may not get the help they need (or worse, seek it from an advisor who doesn’t do a good job for them). And while some advisors may worry that referring potential clients out will empty out their pipeline and leave them without prospects when spots do open up, it’s important to realize that simply getting to a point where there isn’t room for more clients means that the advisor must be doing something right, and can move away from the scarcity mentality all advisors have as they build their businesses. Because advisors who are at capacity and choose to refer prospective clients to good advisors, at the end of the day, are actively helping those people and moving the profession forward.
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The American Rescue Plan Act Of 2021: Tax Credits, Stimulus Checks, And More That Advisors Need To Know!

March 10, 2021 07:05 am 58 Comments CATEGORY: Taxes

As is often common after a national election, a new administration brings a new set of priorities, resulting in new legislation to implement those priorities… for which the Internal Revenue Code is still one of the most common ways for government policy to be implemented. And so, as the Biden administration closes out its second month, this week ushers in its first major piece of tax legislation: the American Rescue Plan of 2021, intended to drive $1.9T economic stimulus and provide fiscal relief in response to the ongoing COVID-19 pandemic.

The lead of the American Rescue Plan is another (third) round of so-called “Stimulus Checks”, in an amount of $1,400 per eligible individual. Though notably, eligibility in this cycle has been expanded from including ‘just’ children under the age of 17 to all dependents in the household (which can include children in the later years of high school, or in college still claimed as dependents, as well as parents who are claimed as dependents). At the same time, though, the phaseout limitations of the new stimulus checks are more restrictive, with a near-cliff-style phaseout (starting at $75,000 for individuals and $150,000 for married couples) so sharp that some families could see marginal tax rates in excess of 100% through the phaseout range! Which in turn, will require a special focus on navigating a series of three checkpoints that households can pass through to potentially be eligible (based on their 2019, 2020, or 2021 tax returns).

In addition to stimulus checks, the American Rescue Plan also significantly expands the Child Tax Credit, from $2,000 to $3,000 (and up to $3,600 for children under the age of 6), a slightly higher age threshold that will allow 17-year-old children to qualify in 2021, a new system that will pay a portion of the Child Tax Credit in advance over the last 6 months of the year… and yet another set of phaseout thresholds (again at $75,000 for individuals and $150,000 for married couples) for the new Child Tax Credit amount (while the original $2,000 base amount of the Child Tax Credit still phases out at higher thresholds of $200,000 and $400,000, respectively).

Other notable aspects of the American Rescue Plan include a significant increase in the Dependent and Child Care Credit (including higher eligible expense limits and Applicable Percentage amounts that be claimed); new extensions on various Unemployment Compensation benefits that were otherwise set to expire; increases in the Premium Assistance Tax Credit for households buying health insurance from the state exchanges (including coverage down to the first dollar for lower-income households below 150% of the Federal poverty level, and new eligibility for the tax credit for households with income above 400% of the Federal Poverty Level if health insurance exceeds 8.5% of their AGI); a new provision that provides a 100%(!) tax credit to employers to offset the cost of COBRA coverage for 3 months for any employees who are involuntarily unemployed; and a provision that will make student loan debt forgiveness tax-free in the future (albeit without including any actual provisions for student loan forgiveness in this legislation). On the other hand, the popular provision of RMD relief was not included in the final legislation (nor was the widely debated increase in the Federal minimum wage to $15/hour).

Notably, most of the new provisions under the American Rescue Plan are for 2021 only (or in limited cases, until 2022 as well), making them only “temporary” relief. However, the potential remains for additional tax legislation in the coming months as well, raising the question of whether some of the changes – particularly to the Child Tax Credit – may become a permanent feature of tax law in the future, and what else (e.g., student loan forgiveness) may still be on the horizon. Which means the potential for even more legislation-driven tax planning opportunities for clients likely through the remainder of 2021!

#FASuccess Ep 219: Serving Families Of Multi-Generational Wealth By Tackling The Personal Problems That Money Exacerbates, With Coventry Edwards-Pitt

March 9, 2021 07:03 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 219th episode of the Financial Advisor Success podcast!

My guest on today’s podcast is Coventry Edwards-Pitt. Covie is the Chief Wealth Advisory Officer at Ballentine Partners, a wealth management firm headquartered in Waltham, Massachusetts, that oversees nearly $8 billion dollars for just over 230 ultra-wealthy families.

What’s unique about Covie, though, is that when her firm has almost $8B of AUM for “just” 230 family households, it means their average client has almost $35 million of investable assets… and as a result, Covie’s firm has a unique focus on the issues that reach beyond ‘just’ doing a great job when it comes to the technical aspects of wealth management, and to the problems that very large sums of money can exacerbate rather than solve, helping families navigate the decisions that can affect multiple generations… and the unintended consequences those decisions often have when not carefully considered first.

In this episode, we talk in-depth about how Covie helps ultra-wealthy families (many of whom did not “come from money” and have suddenly found themselves in uncharted parenting waters after experiencing a liquidity event) pass along valuable lessons about money when default parenting scripts about limits – like “we can’t buy that because we can’t afford it” – suddenly don’t hold sway anymore, what Covie has learned about children from ultra-wealthy families who are well-rounded (and well-grounded), and the common experiences they share around gaining a foundational sense of self-esteem and achievement outside of what they were born into, and why Covie and team at Ballentine may not introduce these deeper discussions until years after the client relationship begins and once all the initial complex technical wealth management work has been done (and clients are ready to have those more personal money conversations).

We also talk about how Ballentine Partners organizes its own internal structure around Senior Client Advisors, who both manage the client relationships as both “generalist experts” and also lead internal Knowledge Management Teams and service a client load of “just” 10 to 15 ultra-high-net-worth (and ultra-complex and high service) clients, why the firm settled on an annual flat fee structure at the family office level (and the myriad of topics and issues that the firm covers with clients), and the matrix structure that the firm employs to be able to build the sort of institutional knowledge that comes from managing 230 ultra-high-net-worth family relationships.

And be sure to listen to the end, where Covie shares her own journey that eventually led her into a senior role at an ultra-high-net-worth firm, how the challenges of trying to help families where family relationships had already been damaged was part of what pushed her to write two books about the wealthy, and why it was the pursuit of her passion around writing that helped open new doors both for herself and for her firm in the first place.

So whether you’re interested in learning what it’s like to work with ultra-high-net-worth clients, why it’s the deeper conversations around helping them raise well-grounded children that really differentiates a firm like Covie’s, or how such a firm structures itself and its fees, then we hope you enjoy this episode of the Financial Advisor Success podcast.

Jumpstarting Growth With The Strategy, Management, Innovation (SMI) Business Planning Model

March 8, 2021 07:02 am 0 Comments CATEGORY: Practice Management

To run a healthy business, firm owners need to have a good handle on what aspects of their business are actually working well, and where key parts of the business may be trending negatively, in order to implement improvements to whatever is most critically in need of change. But if business owners don’t have a clear handle on the data and Key Performance Indicators that drive the business forward, making decisions about which areas of the business to improve can become unwittingly arbitrary and unfocused. As a result, good strategic planning isn’t just about trying to create the ideal “One Page Business Plan”… more directly, it’s about advisory firm owners figuring out which are the right things to change, to ensure that the decisions they make really do impact the business in the most positive way.

In this guest post, Angie Herbers – Chief Executive and Senior Consultant at Herbers & Company, an independent management and growth consultancy for financial advisory firms – discusses the Key Performance Indicators to track, and the key questions to ask that focus on three principal business planning phases: Strategy, Management, and Innovation (SMI). By examining each of these key areas in sequence, firm owners can develop workable strategies to tackle the most relevant problems that may be impeding business growth.

The phases of the SMI process begin by examining Strategy, which involves identifying the most relevant – and measurable – problems of the firm and the Key Performance Indicators (KPIs) that will be used to measure the efficacy of the Solution to be implemented. The Strategy phase involves choosing a Solution that will fix or mitigate the selected problem, the Tactics to use to implement the Solution, and the expected Trend of how the KPIs should move to monitor the efficacy of the Solution. (A key point, as many firms implement solutions without a framework to track whether they’re actually working to achieve the desired results!)

When assessing their firm’s Management, financial advisors often consider what is most urgent and important in the present moment, but it’s crucial to also recognize the important-but-not-urgent that may be holding them back from really solving the firm’s challenges, including and especially identifying any broken systems in the company’s infrastructure. By addressing issues that detract from a well-run Management system, the firm will be able to effectively focus on the other phases of the business planning process.

Using Innovation to improve the business begins with identifying the firm’s competitive Advantage in client service, generating Ideas to win with the firm’s main Advantage (as in practice, most advisory firm innovation is about doubling down on what the firm already does well, not creating something entirely fantastical and new!), and then selecting one – and only one – idea to implement. For some ideas that are more complex or potentially expensive, the firm may also need to conduct some degree of market research to choose a Delivery process to execute their ideas most effectively.

Once the firm has reviewed their SMI elements, the next step is to take the information gathered from the process to develop the right goals for the business. Goals for each phase of SMI can be identified and monitored, and once those goals are accomplished, the firm can then revisit the process to reassess their SMI areas to identify further areas of focus.

Ultimately, the key point is that business planning with the SMI model can help financial advisors choose the right problems to target and strategies to implement in order to improve their firms, by guiding them through a systematic process to outline objectives for where they are now, where they are trying to go, and how they are different. And by identifying the most salient problems and establishing the right goals for the firm, advisors can facilitate efficient growth and ensure that their client service continues to operate at a high level!

Weekend Reading for Financial Planners (Mar 6-7)

March 5, 2021 02:59 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "Weekend Reading For Financial Planners" – this week's edition kicks off with a recent academic study that evaluated the activities that advisors engaged in with their clients in the midst of the pandemic and its market volatility last spring, which found that clients of financial advisors really did appear to sell less and buy more during the downturn, driven in large part by an uptick in proactive communication that advisors engaged in with their clients that helped keep client expectations positive (i.e., that the markets and economy would bounce back soon enough).

From there, we have several articles on the value of financial advice itself, including:

A reminder that in the end, financial advice isn't just about helping people identify and set a path towards their goals, but in navigating the complexities that arise along the way (that can block us from achieving those goals, without an advisor's help to navigate around them)
A framework to define an advisor's value across three dimensions of Portfolio, Planning, and Personal (and how to vocalize it in a prospect meeting)
Why it's so important to frame a value proposition in terms of how the client benefits, not just the positive traits of the advisor (e.g., "I'm a CFP professional" or "I'm a fiduciary")
How the value of financial advice is increasingly shifting towards financial wellness because of the way that money touches virtually everything in our lives

We've also included a number of articles focused on improving client communication:

6 'simple' but impactful actions that can be taken to show clients that you really care and are thinking about them
How the Asset Map software helps provide a one-page visualization to simplify a client's complex financial life
The power of being a client's "Chief Empathy Officer" (CEO) when often the blocking points to our goals are mental, not financial
How a personal finance columnist engaged a financial planner himself to navigate the challenges of his father's ALS diagnosis, and what she did to provide value to him along the way

We wrap up with three final articles, all around the theme of how we can try to become a little happier and wiser:

Why it's how we spend our time (not how we spend our money) that becomes the biggest driver of our happiness and wellbeing
The incredible impact that a simple compliment can have on making someone happier and more content
How the path to knowledge is about reading and learning, but also getting the broader perspective that often only comes with trying something and making a mistake, providing a pathway to wisdom through self-reflection and self-correction

Enjoy the 'light' reading!

Using Probability-Of-Success-Driven Guardrails To Manage Safe Retirement Spending

March 3, 2021 07:02 am 13 Comments CATEGORY: Retirement Planning

Retirement income guardrails strategies – i.e., planning strategies that predefine thresholds that would trigger an increase or decrease in retirement spending – have been noted to have some significant communication advantages for managing retirement spending expectations. For instance, an approach like Guyton-Klinger’s guardrails – perhaps the most popular guardrails strategy of all – can be presented in a manner that not only tells a client when a spending change would occur, but also how much of a spending increase or decrease would result from ‘hitting’ a guardrail. The caveat to such approaches, however, is that guardrails strategies are generally based on portfolio withdrawal rates, which can be rather crude metrics that may not capture a lot of retiree-specific nuances that could warrant the use of higher or lower guardrails in a given retiree’s situation.

By contrast, one of the most significant strengths of Monte Carlo simulations is their ability to incorporate retiree-specific nuance into a simulation. From capturing unique cash flows and goals to varying longevity assumptions and portfolio composition, Monte Carlo simulations shine in their ability to model scenarios that better reflect a given retiree’s goals and preferences in retirement. The caveat to Monte Carlo simulations, however, is that there are a number of weaknesses regarding the communication and presentation of the results these simulations provide. The common focal point for reporting Monte Carlo simulation results is the ‘probability of success’ of a plan, which is not only often misunderstood by retirees (e.g., by assuming ‘failure’ is more devastating than the ‘adjustment’ that failure scenarios actually imply), but also ignores entire dimensions of planning results (such as the magnitude of spending change) that are crucially important to setting both good short- and long-term retiree expectations regarding retirement income planning.

Fortunately, however, bringing these two approaches together can provide the best of both worlds, as ‘probability-of-success-driven guardrails’ capture both the communication advantages of the guardrails approach and the analytical advantages of Monte Carlo simulation. Essentially, an advisor would define an initial probability of success target (e.g., 95%), an upper probability of success guardrail (e.g., 99%), a lower probability of success guardrail (e.g., 70%), and some spending adjustment rule in the event that a guardrail is hit (e.g., reset to the initial target 95% probability of success). With these parameters in place, an advisor could then solve for dollar values (both portfolio levels and spending levels) that would summarize the guardrails and the changes that would occur in the event that they are hit, and then communicate that to a client, which provides information that is far more insightful to the client than merely telling them what spending level is associated with an X% probability of success.

Furthermore, while software could ideally help speed up the process for advisors and provide some more relevant long-term metrics, the most fundamental advantages of the probability-of-success-driven guardrails approach involve managing shorter-term expectations, which can be captured using even the most basic Monte Carlo simulation software and without ever needing to utter ‘probability of success’ to a client (unless the client wants the detail, of course). Additionally, advisors could easily substitute historical simulation, regime-based Monte Carlo, or other more advanced modeling methods for traditional Monte Carlo simulation at the modeling level, and still carry out the process of communicating results in a simpler and more effective manner to clients.

Ultimately, the key point is simply to acknowledge that probability-of-success-driven guardrails can bring together both the analytical advantages of Monte Carlo simulation and the communication advantages of guardrails approaches, providing advisors with an opportunity to have better conversations with clients regarding their Monte Carlo results!