Nerd's Eye View blog

2018 Roth Conversion Planning After The Tax Cuts And Jobs Act

April 11, 2018 07:01 am 1 Comment CATEGORY: Taxes

The Tax Cuts and Jobs Act (TCJA) eliminated recharacterizations of Roth IRA conversions made in 2018 or later, as while Roth recharacterizations were originally created as a means to "undo" a Roth conversion for someone who later discovered they were over the conversion income limits (which were in place until repealed in 2010), in recent years they were increasingly used as a proactive strategy to increase the value of Roth conversions... and thus became perceived as an "abuse" and "loophole" that Congress felt the need to crack down on. Nonetheless, while Roth recharacterizations are now gone, it doesn't change the fact that Roth conversions themselves can still be effective tax planning tools for helping clients reduce their long-term tax liabilities. However, the elimination of the Roth recharacterization changes the optimal timing and execution of Roth conversions going forward!

In this guest post, Jeffrey Levine of BluePrint Wealth Alliance shares some Roth conversion planning strategies and considerations after the TCJA, including the even greater importance of due diligence before completing Roth conversions, a potential shift in the best time of year to complete Roth conversions, and new best-practices strategies like Roth IRA conversion-cost-averaging, and Roth IRA conversion "barbelling".

Notably, recharacterizations of Roth contributions are still permitted, so clients who contribute to a Roth but end up with income above the contribution limit can still change their Roth contribution back to a traditional IRA contribution... but recharacterizations of conversions that happen in 2018 and beyond are no longer permitted (though prior-year 2017 conversions can still be recharacterized until October 15th of 2018).

The elimination of all recharacterizations of conversions puts even greater emphasis on getting a conversion right the first time, as the most common reasons for wanting to complete a recharacterization (e.g., market decline, client income was higher than expected, or a client simply changing their mind) could result in considerable client dissatisfaction if a conversion isn't done right the first time (or if the client doesn't understand the implications of new changes). Further, less commonly noted implications of Roth conversions, such as the potential to increase Medicare Part B and Part D premiums, should not be overlooked!

In the past, completing Roth conversions as early as possible in the year was generally ideal, as a means to both maximizing the time available to consider a recharacterization, and because of the general trend for markets tend to go up more than they go down (which meant it was best to get the dollars into the Roth as early as possible so that growth would happen inside the tax-free account). Now, however, the inability to undo Roth conversions (including partial recharacterizations of an excess conversion) means it will often be more effective to implement conversions towards the end of the year, when income (and deductions) can be projected more accurately with greater confidence. More generally, clients may now want to consider various Roth conversion timing strategies, as Roth IRA conversion-cost-averaging (to diversify conversion timing risk), Roth IRA conversion "barbelling" (to balance both growth potential and over-conversion risk), in addition to simply still making a full conversion as soon as possible (to maximize Roth growth potential), or just waiting until the end of the year for all of it (to be safe).

Ultimately, the key point is to acknowledge that Roth conversion strategies are still useful after the TCJA. Although many popular Roth conversion strategies are no longer viable after the elimination of the recharacterization of Roth conversions, the attractiveness of recently reduced tax rates arguably makes Roth conversions even more appealing... with the caveat that it's more important than ever to consider the timing!Read More...

#FASuccess Ep 067: The Future Of The Broker-Dealer Model As Advisor Support Without FINRA Or Products with Elliot Weissbluth

April 10, 2018 07:01 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome, everyone! Welcome to the 67th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Elliot Weissbluth. Elliot is the founder and CEO of HighTower Advisors, a back- and middle-office support platform for independent advisory firms that now oversees more than $50 billion of assets under management with nearly 600 employees.

What's unique about HighTower, though, is the way they built their own data platform that houses all of the data of all of their advisors and clients, making it possible for them build deeper integrations between popular independent advisor software programs than what virtually any other advisory firm can accomplish on its own... yet still be able to easily swap out for a newer best-in-class software solution in the future should one come along.

In this episode, we talk in depth about how HighTower structures its service model, why platforms like HighTower have been successful by leveraging their size, scale, and sophistication to reduce costs for independent advisory firms while bringing new capabilities, and why even at a cost of 15% to 20% of the firm's revenues, the HighTower model can ultimately produce a significant cost savings relative to the overhead expense of the typical large independent advisory firm.

We also talk about HighTower's unique structure with a subsidiary broker-dealer – used not to implement new commissionable products like mutual funds and annuities – but instead for the original purpose of a broker-dealer, to help facilitate the implementation of trades, and the way that HighTower leverages the control it has through its broker-dealer subsidiary structure to pit RIA custodians and clearing firms against each other, as a way to ensure the vendors compete for HighTower's business by offering better service and lower execution prices for advisors and their clients.

And be certain to listen to the end, where Elliot shares his own personal background, as a child who was diagnosed with and struggled with severe dyslexia when he was young, yet was still able to find ways to not only cope with the challenge, but turn it into skills that have ultimately allowed him to excel in the business world.

So whether you are interested in learning more about how platforms like HighTower reduce costs for independent advisory firms, how HighTower pits RIA custodians and clearing firms against one another to achieve better execution prices for advisors and their clients, or are interested in how Elliot turned adversity into skills that allowed him to excel in the business world, I hope you enjoy this episode of the Financial Advisor Success podcast!

Surveying The Advisor FinTech Landscape And The 2018 Advisor Software Survey

April 9, 2018 07:01 am 2 Comments CATEGORY: Technology & Advisor FinTech

Historically, the best financial advisor software was available from the largest advisory firms that had the size and scale to develop best-in-class proprietary software solutions… while independent advisory firms languished with a small subset of “homegrown” solutions that one advisor might have made for themselves and then sold to other independent advisors. But with the rise of the internet, the ability to deploy software efficiently through the cloud, and the availability of APIs to easily facilitate cross-software integration, a boom has emerged in the world of independent advisor software.

In fact, the greatest problem for many advisors today is just keeping track of all the choices that are available in each of the various categories, and figuring out how they potentially fit together! Accordingly, we’re excited to announce what will become the first of a continuously (monthly) updated map of the advisor FinTech landscape… so advisors have a reference tool to identify the potential options in various categories!

In addition, the rise of independent surveys like the T3 Advisor Software Survey is now providing, for the first time ever, some perspective on not just what software is available, but what software is actually “good”, based on User Ratings from real advisors who actually use the software. Revealing that there is still substantial room for improvement in many advisor software categories (in particular, portfolio performance reporting tools), while others that have received a lot of buzz – like “robo” digital advice tools – may actually just be overhyped (with both poor user ratings and poor advisor adoption!).

Nonetheless, with more venture capital than ever coming in to support advisor software startups, and a wider range of solutions than ever, arguably we’re seeing the Golden Age of financial advisor software today. And in fact, with more and more competitors entering the space, the pace of advisor software innovation may only accelerate from here!

Weekend Reading for Financial Planners (Apr 7-8)

April 6, 2018 02:59 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the big announcement that FPA National has dissolved its affiliation agreement with its New York chapter and spun up a new alternative FPA chapter entity in its stead, in what started out as a dispute about whether certain local chapter board members were inappropriately using lists of consumer contacts from the chapter's public awareness events to prospect for clients, but has now turned into concerns about whether FPA National is taking too much control of its independent chapter entities.

Also in the news this week is a look at how state efforts on fiduciary standards appear to be slowing (now that the Department of Labor's fiduciary rule is in limbo, and the SEC is expected to propose their own in the coming months), the announcement of a class action lawsuit against Edward Jones alleging that the firm was too aggressive in shifting clients out of commission-based accounts and into fee-based advisory accounts (compounded by the fact that those advisory accounts may have been investing into Edward Jones' own proprietary products), and a discussion of some of the talking points that other advisors are using when talking clients through the recent market volatility.

From there, we have several practice management articles this week, including: a review of advisor compensation (and the rising impact of the young-advisor talent shortage) from the latest Schwab and Fidelity benchmarking surveys; tips on how to properly structure partner compensation (broken into base compensation, incentives, and profit distributions) for firms that must transition into more formal partner roles given their growth; how employee turnover can cause poor performance (and how to get control of a turnover problem with clearer definitions of the work, the worker, and the workplace); why advisory firms should be more specific about their vision, mission, and strategy, to avoid what sound like "phony" slogans; and a hard look at the consequences of taking "too much" cash out of your advisory firm instead of reinvesting for growth.

We wrap up with three interesting articles, all looking at the changing landscape of broker-dealers in an increasingly fiduciary future: the first is a review of the latest 2018 Financial Advisor magazine broker-dealer survey, with interviews from most of the leading B/D executives who themselves note that the entire broker-dealer model is going through a big "rethink" for the future; the second looks at how broker-dealers need to re-engineer their technology for managing broker commissions into a more holistic "advisor compensation management" platform that provides business intelligence and workflow support as well; and the last explores how, ironically, it was the independent broker-dealer movement that really helped financial planning to first gain traction 20-30 years ago, even as it's now the fiduciary financial planning movement that is forcing broker-dealers to reinvent entirely in order to survive (or, alternatively, to simply become giant national RIAs instead!?)!

Enjoy the "light" reading!

How To Choose The Best Independent RIA Custodian (For You)

April 5, 2018 02:19 pm 0 Comments CATEGORY: Practice Management

Advisors who are interested in starting their own advisory firm, or breaking away from an existing one, face a number of important business decisions – from how they want to structure their firm, to what clientele they will target, what software they will adopt, and when/whether they want to hire staff or outsource certain responsibilities. For advisors who want to provide investment management services to their clients, though, and intend to play an active role in managing and implementing client portfolios, one of the most important decisions they face is which RIA custodian they should work with.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we explore how to choose the best independent RIA custodian for your business, including the advantages of working with one of the "Big Four" custodians (Schwab, Fidelity, TD Ameritrade, and Pershing Advisor Solutions), as well the reasons why some firms may find a better fit among smaller "second-tier" custodians with more niche offerings for certain types of RIAs!

The first thing to consider when contemplating an RIA custodial relationship, is whether a custodian is actually needed in the first place. For advisors who are simply going to charge financial planning fees, and bill clients with a third-party payment processing solution for those finanical planning fees, and while letting clients continue to be self-directed with their actual portfolios (or serve clients who simply don’t have portfolios to invest), then the advisor does need to become an RIA, but doesn't necessarily need an RIA custodian. However, given the dominance of the AUM model, and the number of advisors who do want to manage investments, most independent RIAs will ultimately form a relationship with one or more of the top RIA custodians.

For those independent RIAs that do need to use an RIA custodian, the overwhelming majority ultimately custody their assets at one of four major firms: Schwab, Fidelity, TD Ameritrade, and Pershing Advisor Solutions. Due to their sheer size and market reach, these providers all already provide the core technology necessary to trade in client investment accounts, hold a wide range of standard investment assets, facilitate the advisor's AUM billing, and do it all at an incredibly low cost. In fact, there is generally no platform fee to work with these custodians at all, and instead these platforms make their money indirectly through ticket charges, asset-based wrap fees, 12b-1 and similar revenue-sharing fees via their NTF (No Transaction Fee) platform, receiving a fee for serving as the transfer agent, or making a small spread on the money market or other cash positions that clients hold.

Notwithstanding how commoditized the core services of an RIA custodian have become, though, each does still have its own style or area of focus. Pershing Advisor Solutions aims to work primarily with larger RIAs that are specifically focused on growing a large enterprise business. TD Ameritrade is known best for their VEO One platform, which essentially functions as an open architecture hub that most other advisor technology can integrate into. Fidelity is increasingly being known for their Wealthscape platform, which is increasingly being positioned as a “true” all-in-one platform, especially for comprehensive wealth management firms that combine together investment management and financial planning. And Schwab, as the largest of the four, is arguably the least differentiated, but handles the widest range of firms with what is usually the lowest cost, in part because they’ve literally been doing it longer than (and are larger with more scale than) any of the other RIA custodians.

Despite the popularity of the Big Four custodial firms, there are also a wide range of "second-tier" custodial firms (meaning "second-tier" in terms of size, not necessarily quality) that offer solutions for many independent RIAs, many of which have lower (or zero-AUM) minimums that make them especially appealing to the new startup RIA. Shareholders Service Group (SSG) is a platform that is actually built on top of the Pershing platform, but SSG specifically services the “small RIA” marketplace, and may be of particular interest to newer firms which do not meet the typically $10 to $20 million AUM minimums of many custodians (including zero-AUM RIA startups). TradePMR is particularly well known for their EarnWise mobile solution that allows you to manage most of your investment needs as the advisor directly from a smartphone or tablet. Trust Company of America is best known for their really efficient model-based trading tools, appealing to both advisory firms that systematize their investment process, and TAMPs that serve other RIAs. Folio Institutional is also known for being a particularly tech-savvy platform, for advisors that want to be completely paperless, and have good tools to manage model portfolios, as well as those who work with smaller clientele where Folio’s ability to trade fractional shares is very appealing. Apex Clearing is a newcomer that is actually so “tech-savvy” that they’re basically just a giant lattice-work of technology APIs that communicate with other advisor technology APIs, but without much of an “interface” layer on top (and as a result, most independent RIAs that work with Apex will work with them through another middleware provider like RobustWealth, AdvisorEngine, or InvestCloud to replace the kind of advisor dashboard and workstation that most of the other RIA custodians already provide). Other notable firms include Millennium Trust Company for RIAs that do a lot of alternative investing, and National Advisors Trust Company for firms that do a lot of trust business (and/or want the opportunity to be a shareholder in their platform).

Of course, even once you narrow down your potential RIA custodian options based on fit, it's important to spend some time really looking at their technology, and their investment options, and make sure that their core systems really do fit what you do, how you serve your clients, and how you want to do business. But the key point is to acknowledge that no single custodian is best for all advisors, and given the substantial costs of switching from one RIA custodian to another, it is worthwhile to try to figure out upfront which custodian is the best for you, and not just in the short-term, but ideally in the long-run too!

Why Households With Significant Debt Tend Not To Pay It Down

April 4, 2018 07:35 am 0 Comments CATEGORY: General Planning

One considerable (and unfortunately common) challenge for financial planners is getting clients to focus on the goals they ought to focus on from a purely financial perspective, despite the psychological and behavioral biases which may direct their attention elsewhere. For instance, many households overemphasize accumulating assets (when they should be paying down debt), or overemphasize paying down debt (when they should be accumulating assets). To further complicate things, household preferences for accumulating assets versus paying down debt can sometimes shift in a seemingly confusing manner. However, an interesting new line of research points to one seemingly irrelevant factor which can be lurking in the background and influencing how clients perceive their wealth: whether their total net worth is positive or negative.

In this guest post, Dr. Derek Tharp – a Kitces.com Researcher, and a recent Ph.D. graduate from the financial planning program at Kansas State University – examines research on how our net worth may influence our perceptions of and preferences for holding assets and debt, and particularly the tendency to prefer having more assets when our net worth is negative, but less debt when our net worth is positive.

Mental accounting is a key concept of behavioral finance, which refers to the ways in which we mentally categorize assets, transactions, and other financial information in our heads. In theory, all of our resources should be fungible – dollars are dollars, regardless of what (liquid) account they’re in – but in practice, this is not how we typically behave. A study by Abigail Sussman and Eldar Shafir explores one particular form of mental accounting – the ways we tend to categorize assets and debt based on our net worth. By presenting participants with financial profiles that were equivalent in net worth but varying in the structure of their balance sheets, the researchers found that people tend to prefer having more assets when net worth is negative, but less debt when net worth is positive. For instance, despite the fact that net worth is actually the same -$100,000 in both scenarios, households tend to indicate a preference for having $100,000 in assets and $200,000 in debt over just $10,000 in assets and $110,000 in debt. However, if the assets and liabilities in the scenario above were reversed (i.e., net worth was positive $100,000 instead), then households would tend to prefer simply paying down their debt (even if it means having less in liquid assets)!

And this finding is notable, as it has several important implications from a financial planning perspective. For instance, it can help explain why people struggling with debt tend to accumulate assets and not pay down their debt, even if they're keeping cash in a 0.25%-yield savings accounts while compounding 22% credit card interest rates. Additionally, this may be why affluent clients who can afford lots of leverage still often want to pay down their mortgage. Which, ironically, may mean that the people who can afford to "prudently" use leverage tend to eschew it, while those who can least afford leverage tend to engage in high-debt-profile behaviors that may actually amplify financial fragility! Further, preferences may seem to shift suddenly, particularly as households pay down student debt and begin to move into positive net worth territory, which may (or may not) align with what they should actually be focusing on. And for those who enter positive net worth territory quickly, there may be an overemphasis on paying down debt relative quickly (now that they "can"), rather than saving into investment accounts which may grow at a higher rate in the long-run.

Ultimately, the key point is to acknowledge that seemingly irrelevant factors (such as a household’s net worth) can influence how households perceive their financial situation, the decisions they make as a result, and their willingness to keep accumulating assets (while not paying down the debt) versus liquidating assets to reduce their debt profile as well. As a result, the way we as financial planners communicate with clients and frame these discussions can have a big impact on whether clients do (or do not) ultimately adopt our recommendations. Which means it's important to understand the factors which may be lurking in the background and influencing client behavior, even if those factors should (in theory) be irrelevant to a client's behavior!

#FASuccess Ep 066: Turbocharging Inorganic Growth With Outside Capital To Fund Mergers & Acquisitions with Adam Birenbaum

April 3, 2018 07:01 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome, everyone! Welcome to the 66th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Adam Birenbaum. Adam is the CEO of Buckingham Strategic Wealth and BAM Advisor Services, a combination of wealth management firm and TAMP platform that oversees more than $30 billion of assets under management.

What's unique about Adam, though, is that he took over as the CEO of the Buckingham companies just over 10 years ago at the age of just 32, when the company was "only" $6 billion of AUM, and has nearly quintupled its size since then, as one of the youngest CEOs of any major advisory firm.

In this episode, we talk in depth about the Buckingham and BAM growth strategy, particularly on how a major investment by Focus Financial has helped to power the firm's growth, giving Buckingham access to capital from Focus at 0% interest rates to fund its acquisitions (because Focus ultimately profits from the growth as an owner anyway), and the way Adam and Buckingham have been able to leverage the capital to accelerate their inorganic growth.

We also talk about the actual structure of Buckingham and BAM itself, why Buckingham has chosen to grow offices in multiple locations, how BAM Advisor Services aims to work with advisory firms by providing what they call a "Turnkey Wealth Management Platform" that provides back office services but does not require its advisors to use standardized investment models, and how the company is positioning itself for an increasingly competitive environment with threats from both low-cost robo-advisors and also large financial services firms like Schwab, Fidelity, and especially Vanguard getting into the advisory business.

And be certain to listen to the end, where Adam talks about what it's like to be the CEO of a $30 billion AUM firm, where he focuses his own time as a leader in the business, and why he believes that strategy is important, but the real determinant of the most successful advisory firms of the future will be all about the firm's ability to execute, and deliver on the client experience.

So whether you are interested in learning more about using outside capital to fund mergers and acquisitions, how you may be able to utilize a Turnkey Wealth Management Platform in your business, or are simply interested in what it's like to be a CEO of a $30 billion AUM firm, I hope you enjoy this episode of the Financial Advisor Success podcast!

The Latest In Financial Advisor #FinTech (April 2018)

April 2, 2018 07:01 am 0 Comments CATEGORY: Technology & Advisor FinTech

Welcome to the April 2018 issue of the Latest News in Financial Advisor #FinTech – where we look at the big news, announcements, and underlying trends and developments that are emerging in the world of technology solutions for financial advisors and wealth management!

This month's edition kicks off with the big news that former Envestnet executive Lori Hardwick is joining the Riskalyze Board of Directors, almost 2 years to the day after she left Envestnet (and the end of a likely-2-year non-compete requirement!?), and just as Riskalyze increasingly pivots towards a more holistic advisor platform that puts it on competitive collision course with Envestnet itself… especially if Riskalyze is paired with the next generation advisor dashboard that Hardwick’s own start-up AI (Advisor Innovation) Labs is reportedly creating?

From there, the latest highlights also include a number of interesting advisor technology announcements, including:

Tamarac launches a new QuickStart platform in an attempt to expedite the onboarding process for breakaway brokers who need to get up-and-running quickly;
Orion Advisor Services expands into compliance technology solutions to ease the burden of RIAs for both ongoing compliance oversight and especially the increasingly-frequent SEC examination;
RobustWealth launches its own Direct Indexing solution as Indexing 2.0 becomes the hot advisor technology topic of 2018 (following on the Model Marketplace buzz of 2017!);
Trizic raises a $10M Series A round to accelerate the growth of its robo-advisor-for-advisors solutions in the bank channel, building on its partnership with FIS.

Read the analysis about these announcements, and a discussion of more trends in advisor technology, in this month's column, including “document automation” provider Conga acquiring Orchestrate and Process Composer to compete with LaserApp and DocuPace on the Salesforce platform with large advisory firms, former TD executive Tom Bradley joins the advisory board of MaxMyInterest as advisor interest grows (no pun intended!) in helping clients get better yields on cash than what RIA custodians typically provide, Advizr lifts out four Morgan Stanley executives to scale up its financial planning software solution in the small broker-dealer and insurance agent marketplace (where it’s about not just the software itself, but practice management training to help them transition for salespeople to advisors), and Blueprint Income launches a new tech solution aiming to deliver Deferred Income Annuities directly to consumers as a means to build their own “Personal Pension” plans with ongoing systematic monthly contributions.

And be certain to read to the end, where we also highlight the launch of Joel Bruckenstein’s new “Virtual Exhibit Hall” that aims to not only be a comprehensive directory of advisor technology but also an advisor review site of technology solutions, and a first look at 55IP, a new investment proposal generation solution (that also aims to help facilitate portfolio implementation on the back end)!

I hope you're continuing to find this new column on financial advisor technology to be helpful! Please share your comments at the end and let me know what you think!

*And for #AdvisorTech companies who want to submit their tech announcements for consideration in future issues, please submit to [email protected]!

Weekend Reading for Financial Planners (Mar 31 – Apr 1)

March 30, 2018 02:56 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the big news that the CFP Board has officially approved its new CFP Code of Ethics and Standards of Conduct, which for the first time will require CFP professionals to be a "fiduciary at all times"... albeit while leaving most CFP Professionals on their own in determining what conflicts of interest are, or are not, permissible to engage in without breaching that fiduciary obligation.

From there, we have several more articles related to advisor regulation, from the news that the National Association of Fixed Annuities (NAFA) has decided to withdraw its Appeal fighting the DoL fiduciary rule now that the 5th Circuit has already ruled against the DoL (to avoid creating a further split amongst the Appeals Courts), to a look at how fiduciary rulemaking is likely to play out in the coming year under the SEC if the DoL fiduciary rule really is vacated, the rise of a "point-in-time" fiduciary as the scope of fiduciary advice is applied to one-time advice interactions (rather than what was historically just ongoing regular interactions between the advisor and client), and a look at why just charging AUM fees alone doesn't necessarily ensure the advisor is properly managing their conflicts of interest (especially if the firm charges different AUM fees for equities versus fixed-income allocations).

We also have a few advisor technology articles, including: the launch of the Orion "Compass" solution that provides additional compliance reports for RIAs using its performance reporting software (which may be especially helpful the next time the SEC shows up for an exam); the rise of estate planning "FinTech" solutions like EverPlans and Yourefolio as estate planning increasingly shifts from estate tax planning to actual planning around the distribution of the estate itself; and the new "Quick Start" offering from Tamarac that aims to make it easier for breakaway brokers to get up-and-running quickly on their trading and performance reporting software tools.

We wrap up with three interesting articles, all by industry commentator Bob Veres, about various trends in the advisory industry: the first explores how even as the CFP Board lifted up its Standards for the first time in 11 years to expand its fiduciary duty, it is still accommodating a wide range of sometimes-questionable commission compensation models under the auspices that certain products and solutions simply aren't available or feasible for non-commission advisors... which may become a moot point in the coming decade as more and more firms finally launch "advisory" product solutions and technology makes it easier and easier to serve an ever-widening range of clients; the second details a painful list of the true costs of the low bar of suitability for brokers, which isn't about the majority of brokers that still do the right thing for clients anyway (simply because it's good business), but the extent to which bad behavior by a small subset of especially bad actors can and is condoned under the low suitability bar; and the last raises the interesting question of whether in the long run it's a problem for us to have so many "overlapping" membership associations all serving financial planning and wealth management, whether it would be a better use of resources for them to merge and consolidate together, or if instead it's actually better to have so many different organizations because the nature of competition helps to ensure that they collectively keep pushing to advance the financial planning profession forward (if only to out-compete the others trying to do the same thing).

Enjoy the "light" reading!

How Brokers And Agents Can Get Paid Directly For Delivering A Financial Plan

March 29, 2018 03:27 pm 3 Comments CATEGORY: Practice Management

For decades, financial planning was compensated primarily by the insurance or investment products that were implemented at the end of the plan. But as advisors increasingly become more financial-planning centric, and bring financial advice to clients who don't necessarily want or need to implement products - they just want the advice - there is a growing desire from many advisors to simply get paid directly for the financial planning advice they provide and the plans they deliver. With the caveat that technically, it's not permissible to be paid a standalone fee for financial planning advice as a broker or insurance agent!

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we explore how advisors are licensed to deliver financial advice, why you can't receive fee-for-service compensation through a broker-dealer or insurance agency, and how you must be registered in order to get paid a planning fee (if your firm will allow it!)!

Most "financial advisors" are licensed and registered in one of three ways: either you are a registered representative of a broker-dealer, an agent of an insurance or annuity company, or you are an investment adviser representative (IAR) of a Registered Investment Adviser (RIA). These licenses dictate what advisors can, and cannot, do, and how they may be legally compensated: if you have an insurance license, you can sell insurance... If you have a securities license, you can sell securities... And if you have a license to be an investment adviser, then you can "sell" (and get paid for) investment advice.. Of course, some advisors are licensed multiple ways, but the fundamental point is that technically, getting paid for advice is only associated with the third category: having your Series 65 and being an IAR of an RIA.

As a result, advisors increasingly are becoming dually-registered with their broker-dealer and a corporate RIA, or operating as a hybrid with their own standalone independent RIA separate from their broker-dealer in order to get paid for their financial plans. Because again, you do need to be associated with an RIA to get paid for financial advice... though when you're also with a broker-dealer, it must be disclosed to a broker-dealer as an Outside Business Activity, which in turn must be approved by your B/D). Which means in practice, not all advisors at a broker-dealer can actually charge for a financial plan, either because the broker-dealer does not have a corporate RIA, won't allow the advisor to have an outside RIA as an OBA, or both. And even broker-dealers that do permit such activities still have the ability to decide which advisors will be approved to do so... and how.

As a result, the ability to become dual-registered and operate under the broker-dealer's corporate RIA, or have your own independent RIA as a hybrid, is increasingly turning into a differentiator itself in the selection of a broker-dealer. Which has implications both for the control that the advisor has over their financial planning services and compliance oversight, and also the financial split of the fees between the broker-dealer and the advisor. Not to mention the technology that the advisor can, cannot, or must use to process those financial planning fees.

Nonetheless, the fundamental point is that if you’re at a broker-dealer or an insurance agency, and you want to actually get paid directly for a financial plan and giving financial advice, you need to operate under an RIA. It can be your broker-dealer’s corporate RIA, or your own independent RIA if your broker-dealer will allow it (or you can just break away from the broker-dealer and start your own RIA), but one way or another, you need to pass your Series 65 and be affiliated with an RIA if you are going to receive "fee-for-service" compensation for financial advice!