Nerd's Eye View blog

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!

Capital Gains Strategies For Highly Appreciated Investments After A Big Bull Market Run

March 28, 2018 07:01 am 3 Comments CATEGORY: Taxes

Executives and small business owners often struggle to figure out how to diversify a concentrated investment in company stock, due to the adverse tax ramifications of liquidating a highly appreciated investment. Which leads to strategies including variable prepaid forward contractors, exchange funds or stock protection funds to facilitate diversification, or leveraging available tax laws like Net Unrealized Appreciation to mitigate the tax consequences.

But after nearly 9 years of a bull market since the bottom in March 2009, “most” long-term investors now have substantial capital gains. Not because they held a concentrated stock investment that grew, but simply because even a diversified portfolio of mutual funds and/or ETFs may be up 100%, 200%, or even 300% since the bottom. And ironically, the more tax-efficient and “tax-managed” the fund or advisor has been all along, the less turnover there’s been, and the more likely it is to have very substantial embedded capital gains now!

And unfortunately, such large embedded capital gains create real tax complications for engaging in even routine investment adjustments like periodic rebalancing, and especially in situations where the advisor might want to switch strategies (or the investor might want to switch advisors), but “cannot” do so because of the adverse tax consequences.

On the plus side, the reality is that the tax benefits of deferring capital gains are often smaller than most investors realize, as they confuse “tax avoidance” (not recognizing the capital gains) with what really is just tax deferral (the capital gains will ultimately have to be paid if the investor is ever going to use the money).

In addition, relatively straightforward tax strategies can further help investors to get comfortable with unwinding investments with large capital gains, from establishing a “capital gains budget” for the amount of capital gains to be triggered each year (perhaps targeted to stay under the threshold for the next capital gains tax bracket), setting targets for staged sales at progressively higher (or lower) prices to help investors pre-commit to making a change, or simply engaging in a “donate-and-replace” strategy that leverages the tax preferences of contributing appreciated securities for a tax deduction (and eliminating the capital gains altogether) and then replacing the investment (as a new higher cost basis) with the cash that would have been donated in the first place!

#FASuccess Ep 065: Building A True One-Stop Shop Advisory Firm To Drive Organic Growth with Peter Mallouk

March 27, 2018 07:01 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome, everyone! Welcome to the 65th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Peter Mallouk. Peter is the President of Creative Planning, one of the largest independent RIAs in the country with nearly $35 billion in assets under management for more than 20,000 clients, spanning 12 states and 21 office locations.

What's unique about Peter, though, is that he's been able to grow the firm from under $100 million to nearly $35 billion in AUM in just 15 years, and without relying on mergers and acquisitions... instead building an organic growth machine through a combination of strategic partnerships, and trying to build a "one-stop shop" with enough size and scale to deliver the kind of comprehensive value that really makes clients refer.

In this episode, we talk in depth about how Peter's firm includes not only financial planning and investment management services but also divisions for tax preparation, estate planning, and trust services (stemming from his own early days as an estate planning attorney before becoming an advisor), why he felt it was necessary to expand and deepen the services of his firm to provide real value to his clients, and why even at $35 billion in AUM Peter still views his firm as a small "boutique" in the marketplace, even as the size of the firm is allowing them to attract more and more affluent ultra-high-net-worth clientele.

We also talk about the broader trends in the advisory industry, how the consumer marketplace is splitting into pursuing either the highest value or the lowest cost (and why that's a threat to most advisors in between), why both wirehouses and the retail divisions of RIA custodians are simultaneously moving away from selling products and into financial advice, and the competitive threats that advisory firm owners must navigate in the coming years.

And be certain to listen to the end, where Peter shares why he still personally spends a whopping 70% of his time every week sitting in front of prospects and clients, and his philosophy of minimizing layers of management in order to keep the firm efficient, even as they approach 500 employees.

So whether you are interested in learning how to achieve organic growth through strategic partnerships and delivering high-value services that make you referrable to clients, how the advisory industry is splitting into pursuing either highest value or lowest cost, or are interested in how Creative Planning has minimized layers of management even while growing to $35 billion in AUM, I hope you enjoy this episode of the Financial Advisor Success podcast!

The True (Hidden) Costs Of Migrating Data To New Financial Planning Software

March 26, 2018 07:01 am 2 Comments CATEGORY: Technology & Advisor FinTech

As we live in the "Golden Age" of advisor fintech, the number of great products to help financial advisors increase the value they deliver to clients continues to expand. Yet, an unfortunate reality of switching from one technology solution to another is that such changes can often come with substantial switching costs, both in terms of the financial costs that might be incurred during the process, and also the costs of the time and effort that must be invested by staff and advisors in order to get data transferred to the new tool and the entire team up to speed on using it. And when it comes to financial planning software, these costs can be even higher, as planning software generally doesn't have an export functionality needed for migrating data from one program to another, and the required training of advisory staff is higher relative to some other types of technology (e.g., CRM and performance reporting software), since advisors increasingly need to be able to confidently use planning software "live" in the client meeting in order to not undermine their credibility with clients.

In this guest post, financial planner Matt Cosgriff shares his perspective on BerganKDV Wealth Management's recent transition from MoneyGuidePro to eMoney, including their lessons learned, how to build an internal transition team, tools for "gamifying" the process, and how the transition can actually serve as a great training opportunity for both advisors and administrative staff. As Matt notes, a successful transition is crucial not only for preserving your existing work for clients, but also understanding how much variation exists between the results of your old software and your new software and why, so that you can effectively use your new software going forward and communicate any different outcomes to clients.

So if you’re contemplating a transition from one financial planning software program to another, or perhaps are just interested in how you can incentivize staff to make progress on a large goal by "gamifying" the process, I hope that you find today’s guest post and the insights from BerganKDV's transition from MoneyGuidePro to eMoney helpful!

Weekend Reading for Financial Planners (March 24-25)

March 23, 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 news that the Investment Adviser Association, in collaboration with Charles Schwab, has begun an effort with lawmakers to both reverse the recent changes that eliminated the tax deductibility of investment advisory fees and expand the scope of the new "pass-through" business deduction (intended to support businesses that grow jobs and and hire people) to allow at least larger advisory firms that really do hire people and create jobs to be eligible for the deduction as well.

From there, we have several marketing-related articles this week, including: how most financial advisor websites are like a "bad date" that mostly talks about themselves instead of trying to connect with the other person; how Googling around to check out other advisory firms in your area can help to show you how you can better differentiate (or how undifferentiated you may actually be); the steps to follow to create a successful lead-nurturing campaign with prospective clients; key tips for starting your own Public Relations (PR) initiative in your advisory firm with (local) media; and a discussion of a unique COI referral opportunity that most advisors miss out on (working with investment bankers that facilitate the sale of small-to-mid-sized businesses).

We also have a few articles on advisor technology trends, from a look at how performance reporting software may eventually be replaced by "PFM" tools that advisors can give to their clients (which both better engage them, and are less expensive), the rise of the next wave of "robo" firms now targeting disruption in the small-to-mid-sized 401(k) plan marketplace, and a glimpse of the new "Advisor Innovation (AI) Labs" effort from Lori Hardwick and Mike Zebrowski that is aiming to create a new form of advisor desktop that would sit on top of existing broker-dealer or custodial platforms to let independent advisors be more independent (at least, if those firms will cooperate and "let" AI Labs do so with "their" data!).

We wrap up with three interesting articles, all around the theme of raising financially successful children: the first examines the results of a recently published study that took a 40 year(!) view of children in 1968 and again in 2008 to see which children traits were most predictive of the greatest financial success (and found that the "rule-breakers" were often the most financially successful in the end, despite their challenges as children); the second reviews another recent research survey, which found that while those with above-average talent often do at least make above-average income, the greatest levels of success are more commonly driven by luck than talent (or at least talent alone); and the last explores how to raise children to be more grateful, in recognition of both the long-term emotional and other benefits of having an "attitude of gratitude", and the challenges of doing so in a world where parenting styles that aimed to bolster the self-esteem of children may have unwittingly made them more entitled (and less inclined towards gratitude) in the process.

Enjoy the "light" reading!

When A Client’s Failing Retirement Plan Sometimes Isn’t Really

March 22, 2018 01:25 pm 0 Comments CATEGORY: Practice Management

As financial advisors, we never want to see a client run out of money, especially "on our watch" as the advisor. Which makes it especially challenging to deal with clients who appear to be spending "too much" and may be on an unsustainable spending trajectory... especially if you've done a comprehensive financial plan for them, and know that their current spending pattern is unsustainable. Even if it's sometimes difficult medicine to give them - telling them that their spending and lifestyle need to change - it's an essential value of good financial planning to deliver the sometimes-difficult message when it's necessary to do so. Except, in some cases, it turns out that the problem isn't actually that the client has a spending problem at all... instead, the real problem is simply that the client didn't yet trust us enough to tell us about all their assets in the first place.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we explore situations where clients who have a "spending problem" actually don't have a spending problem... they have a trust problem that leads them to be unwilling to share information about all of their assets with the advisor. A situation that may occur more and more frequently in the future, as the advisory industry continues to converge on the AUM model... and clients feel increasingly pressured to consolidate all their assets with their current advisor once the advisor "finds out" there are other assets he/she doesn't already manage!

Learning that a client has been "hiding" assets can come as a shock for many advisors. It's the situation where you thought you were being a good holistic financial planner, and giving them guidance about unsustainable spending, and then abruptly find out the client is terminating the relationship and consolidating all of their assets with another advisor. Which leads to three surprising and related realizations: (1) they actually had another advisor we didn’t know about, (2) they actually had other assets we didn’t know about, and (3) they weren’t actually overspending in the first place. We only thought they were overspending because they didn’t want to tell us about all of their assets for fear of being solicited about them!

And the reality is, as more and more of the advisory industry shifts to the AUM model and packages together financial planning and investment management, this problem is going to get a lot worse. When we look at the financial advisory market as a whole, about one-third of the 115 million US households are at least mass affluent, only about one-half of those have more than $100k that could be managed by a financial advisor (i.e., outside of a retirement plan), and only about one-third of those are actually delegators who are looking to hire an advisor. Which means, when you do the math, there may only be about 7 to 8 million households to divvy up among 300,000 financial advisors, resulting in about 21 clients per advisor (of which only 5 are millionaires!). Ironically, this means that if all clients did consolidate all of their assets with one advisor, many advisors would go out of business (or at least be compelled to pursue other advisor business models that can serve other types of non-AUM clientele!)!

Fortunately, in practice clients tend to split assets across multiple advisors (which keeps more advisors employed and engaged!), but clients don't necessarily tell us, because they don't want to be solicited to consolidate assets... which can result in a dysfunctional financial planning relationship in the process! For me, this led to the realization of the importance of being even more focused on leading with financial planning first, and to be less aggressive about insisting we "have to" be holistic and do "everything" for clients all at once. Because if clients can't trust you to do the financial planning work first and build that relationship over time, then they may never have enough trust to consolidate their assets regardless. But if you can lead with financial planning and build that trust, then you can end up eventually winning all of their business in the long run anyway. Without clients feeling so pressured that they keep some of their assets a secret in a way that further undermines the planning relationship you're trying to build.

The bottom line, though, is just to acknowledge that if you have a client who has a “spending problem” and is heavily overspending and just keeps ignoring your advice, it is possible they really have a spending problem, but it is also possible that they have a different problem – one where they don't actually trust you and feel as comfortable with you as you may have thought, leading them to hide assets from you so that you don't solicit them to consolidate. And as the industry continues to converge on the AUM model for providing both financial planning and investment management services, we'll likely continue to see more and more clients with "spending problems" that might not actually be!

How Healthcare Sharing Programs Compare To Traditional Health Insurance

March 21, 2018 07:01 am 18 Comments CATEGORY: Insurance

With health insurance premiums continuing to rise every year – in some areas, compounding at double-digit rates – more and more consumers are questioning whether it’s even worthwhile to have health insurance at all. Especially now that the Tax Cuts and Jobs Act of 2017 has repealed the Individual Mandate (effective in 2019) that would have applied a tax penalty for those who decline to enroll in health insurance through an individual exchange.

At the same time, though, rising health insurance premiums have also increased the popularity of alternatives to traditional health insurance, including so-called healthcare sharing programs. Typically organized under ministries or other religious organizations, healthcare sharing programs operate outside of traditional health insurance, and in some cases may be more restrictive with their benefits… but are also operating at a cost that is substantially less than traditional health insurance.

In this guest post, Jake Thorkildsen provides an in-depth explanation of what healthcare sharing programs are, a review of the most popular healthcare sharing programs and ministries, why healthcare sharing programs are not for everyone, and the kinds of situations where they might at least be considered.

So whether you’re simply curious to better understand an increasingly popular alternative to traditional health insurance – now covering more than 1,000,000 people – or are actually trying to evaluate and compare programs for a particular client situation, I hope this comparison and review of the various healthcare sharing programs is helpful!

#FASuccess Ep 064: Scaling Up To $1.4M Of Revenue With (Only) Hourly Financial Planning Fees with Mark Berg

March 20, 2018 07:01 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome, everyone! Welcome to the 64th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Mark Berg. Mark is the founder of Timothy Financial Counsel, an advisory firm that does purely hourly financial planning for hundreds of clients in the Chicago area.

What's unique about Mark's practice, though, is that while "hourly financial planning" is usually characterized as a purely transactional business, for less affluent middle market clients, that can't be scaled effectively... Mark's firm actually did a whopping $1.4M of hourly planning fees last year, across a team of 5 advisors and 2 support staff, and 75% of the firm's clients are recurring hourly clients!

In this episode, we talk in depth about how Mark structures the hourly fee model at Timothy Financial, with a series of 5 "Levels of Service" based on client complexity and hourly rates that vary from $280 to $400 per hour depending on which advisor is serving the client, why he publishes all of the details about his fees and service tiers on his website for clients to see before ever talking to him, and how doing so has led to a whopping 83% close rate on his qualified prospects last year.

We also talk about some of the "myths" of the hourly model, including how Mark has been able to successfully scale of the reach of the firm, why he believes that firms interested in doing hourly financial planning work should only do hourly work to focus on efficiencies, how he has been able to drive the growth of the firm because so few other advisors are effective at doing hourly financial planning for clients, the tremendous opportunity of building an hourly model precisely because so few advisors do it well, and yet why most advisors who start out fail at the hourly model despite the opportunity.

And be certain to listen to the end, where Mark talks about how he decided to come up with the name Timothy Financial Counsel – instead of just naming the firm Berg Financial Counsel after himself – and why, 17 years later, his decision to not name the firm after himself has actually helped him to scale it up with additional advisors beyond himself.

So whether you are interested in learning how to deliver hourly financial planning services in a scalable and profitable manner, how you can boost your close rate through being transparent about your services and fees, or are interested in why so many advisors are bad at delivering hourly financial planning more generally, I hope you enjoy this episode of the Financial Advisor Success podcast!

How The Product Distribution Industry Beat DoL Fiduciary By Proving Their “Advisors” Aren’t Real Advisors

March 19, 2018 07:01 am 0 Comments CATEGORY: Regulation & Compliance

Notwithstanding its recent regulatory focus in financial services, the concept of being a “fiduciary” long predates the Department of Labor’s proposed fiduciary rule. Not only because a fiduciary duty has applied to Registered Investment Advisers (RIAs) since/under the Investment Advisers Act of 1940, but also because the obligations of a fiduciary duty have existed under common law for centuries (and in other societies, for millenia) before. In fact, a fiduciary duty is what has always applied to special (advisory) relationships of trust and confidence. The primary issue is simply to determine when an advice relationship actually exists.

Accordingly, as the brokerage and annuity industries have increasingly trained their brokers and agents in more holistic advice, pursued advice-oriented education (e.g., CFP marks), and adjusted everything from their national advertising to their business cards to convey that their primary role is no longer just product sales but actual advice, it was arguably inevitable that regulators would eventually respond by applying a fiduciary duty to all those “advisor” brokers and annuity agents. As the Department of Labor ultimately did with its fiduciary rule.

Yet ironically, despite their ongoing transition into the business of financial advice, the financial product distribution industry and its representative associations – including FSI (independent broker-dealers), SIFMA (the securities industry), IRI (the annuity industry), and NAIFA (insurance and annuity agents) – have now prevailed in their 5^th Circuit Appeal against the DoL’s fiduciary rule, by successfully arguing that, notwithstanding their advertising and the titles on their business cards, their brokers and annuity agents are not advisors at all, but mere salespeople who do not have a relationship of trust and confidence with their clients, for which their (commission-based) compensation is not in any way payment for the delivery of advice but merely for effecting a product sale. Even as they continued to lament to the public and the media that the DoL’s fiduciary rule would restrict their ability to give advice to consumers (the very advice relationship they explicitly denied providing to clients in their own court briefs!).

Nonetheless, while it remains to be seen whether the 5^th Circuit Appeals decision will actually lead to vacating the rule, will lead the Department of Labor to try to walk back the rule, or whether the fact that last week the 10^th Circuit Court of Appeals upheld the DoL fiduciary rule – potentially setting the stage of a showdown in the Supreme Court – the fact that the financial product distribution industry of broker-dealers and insurance and annuity agents continues to adopt “financial advice” in their advertising to the public, it seems only a matter of time before some fiduciary rule takes hold, whether from the Department of Labor, the SEC, or a growing number of states that are taking fiduciary rulemaking into their own hands to fill the void.

Yet at the same time, the fact that the product distribution industry was able to prevail by convincing the court that their brokers and annuity agents are “just” salespeople and not advisors does emphasize the fact that there is a role for salespeople to play in the financial services industry, as distinct from actual advisors, and long recognized with separate regulation (i.e., the Investment Advisers Act vs broker-dealer regulation under FINRA). Which ultimately raises the question of whether the real issue is not whether the Department of Labor (or the SEC) are the best to issue a uniform fiduciary regulatory framework for all investment advisers and broker-dealers (and annuity agents), but whether a uniform fiduciary rule is the right solution in the first place… or whether the better path is simply to allow salespeople and advisors to continue to co-exist, but with proper regulation of titles and advertising to ensure that consumers have clear disclosures not just with respect to the products they may purchase, but the very nature of the sales-versus-advice relationship they’re engaging in the first place!

Weekend Reading for Financial Planners (March 17-18)

March 16, 2018 02:34 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 5th Circuit Court of Appeals has ruled against the Department of Labor and its fiduciary rule, and moved to vacate the DoL fiduciary rule entirely... with the caveat that a separate decision from the 10th Circuit Court of Appeals this week upheld the fiduciary rule, setting the table for a potential final showdown in the Supreme Court, and creating even greater uncertainty about the fiduciary rule in the meantime. Also in the news this week was the revelation that the SEC's own fiduciary rule proposal may be coming soon – sometime in the second quarter – and its likely to focus more not just on fiduciary disclosures, but also whether advisors and brokers need to be clearer with their titles.

From there, we have several practice articles this week, including: how to conduct effective staff/team meetings (which are especially important as your team grows!); why "compensation" problems with employees are rarely about compensation alone, and effective employee retention is about the more holistic job opportunity and offering; why rearranging your office space (and who sits where) can spur creativity and innovation in the business (albeit at the risk of impairing productivity); and a look at what it will take in the future to be a true "destination" advisory firm (for both future clients, and future employees).

We also have a few articles on retirement planning, from a look at planning strategies to discuss with clients in their 50s when they're still 5-10 years away from the retirement transition (or in the home stretch to saving enough to achieve it), to recent research that finds a disturbing spike in the mortality rate (especially for men) upon reaching age 62 and becoming eligible for Social Security, and a look at the pros and cons of so-called "bucketing" (or time-segmentation) strategies for retirement portfolios.

We wrap up with three interesting articles, all around the theme of household spending and cash flow: the first looks at the phenomenon of "lifestyle creep", and why it's so important to establish systems that aim to save your future raises going forward (so they don't automatically creep into your lifestyle spending); a fascinating study that finds, due in large part to how judgmental society is of the rich, that most affluent people actually try to hide their wealth and are hypersensitive to being judged about it); and the last looks at how, because money is often a major point of contention between couples in a marriage, that one of the best ways to reduce marital conflict over spending is to give each spouse a guilt-free "allowance" that they can spend on any discretionary expense they want (without fear of being judged!).

Enjoy the "light" reading!