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#FASuccess Ep 057: Marketing Your Way To $1B Of AUM In 10 Years With E-Books And Radio Shows with Ted Jenkin

January 30, 2018 07:01 am 1 Comment CATEGORY: Financial Advisor Success Podcast

Welcome, everyone! Welcome to the 57th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Ted Jenkin. Ted is the co-founder of oXYGen Financial, a wealth management advisory firm under Kestra that manages nearly $1 billion of client assets.

What's unique about Ted, though, is that his firm is focused almost entirely on serving Gen X and Gen Y clients – thus the "XYGen" part of the oXYGen Financial name – and gets paid through a combination of AUM fees, a small portion of insurance implementation commissions, and a $99 per month "technology fee" that they charge their clients for their own personal financial management dashboard... which is provided by aggregating their accounts through eMoney Advisor.

In this episode, Ted shares how oXYGen Financial grew from scratch to over 1,500 hundred clients over the past 10 years since it was founded, how the firm executes its digital marketing strategies by producing a high volume of "e-books" – some as short as 1 or 2 pages – that they offer online prospects in exchange for their email address and phone number, the way oXYGen Financial drives visitors to its website by getting visibility on "not-advisor-traditional" radio shows like sports programs, and the way the firm follows up with those prospects who contact them online.

In addition, we also talk in depth about oXYGen's actual four-meeting financial planning process with clients, that starts with an Initial Client Meeting which talks clients through a "Key Money Concerns" checklist the firm created, to a Data Gathering meeting that the financial advisor themselves doesn't even sit in, followed by a Plan Presentation meeting that oXYGen frames as a "Strategy Session" to talk about potential planning strategies to implement, and then wraps up with an actual implementation meeting that includes transferring assets for oXYGen to manage.

And be certain to listen to the end, where Ted talks about the challenges he went through in leaving a 17-year career as a Vice-President-level manager at a major broker-dealer to go out on his own with his business partner Kile Lewis, how he plowed money into marketing in the first year to not just get clients but set the groundwork for building the oXYGen Financial brand, and how he focused on building relationships with other local small business owners in the Atlanta area to grow the firm.

So whether you are interested in learning more about reaching prospective clients online through e-books, curious how you can grow your business through radio shows, or simply want to learn more about how you can profitably serve Gen X and Gen Y clients, I hope you enjoy this episode of the Financial Advisor Success podcast!

Second Public Comment Letter To CFP Board On Revised CFP Professional Standards Of Conduct

January 29, 2018 07:01 am 3 Comments CATEGORY: Regulation & Compliance

Over 2 years ago, the CFP Board began its process to updated the Standards of Professional Conduct for all CFP certificants, for the first time since the last set of changes took effect in the middle of 2008. And after an initially proposed last June, followed by a public comment period, the CFP Board issued a second revised proposal in December, for which a second (and likely final) public comment period is now open.

In today’s article, I am publishing in full my own second public comment letter to the CFP Board. As you will see, I remain supportive of the CFP Board’s direction with the new standards, which is to expand the fiduciary standard to all CFP professionals at all times (and not “just” when doing financial planning or material elements of financial planning, as in the past).

However, the recent revisions to the proposed Standards of Conduct did introduce a number of new concerns for CFP professionals, while also failing to resolve some of the problems of the original proposal. Of greatest note is the fact that the revised proposal effectively creates two forms of advice from CFP professionals – financial planning advice, and non-financial-planning financial advice – which are both subject to a fiduciary standard, but have different disclosure requirements, and will be evaluated by different Practice Standards. Which means CFP professionals will be able to routinely avoid being held accountable to following the CFP Practice Standards by not giving financial planning advice, even as the CFP Board’s own Public Awareness campaign continues to advocate “for financial planning, work with a CERTIFIED FINANCIAL PLANNER professional”.

Also notable in the revised proposal for the new Standards of Conduct is what still hasn’t been resolved, including the fact that “reasonableness” is used as a key term to determine whether a CFP professional is guilty of wrongdoing a whopping 28 times (even though the CFP Board has no formal mechanism to issue Guidance, and raising the legitimate concern that such terms will only be defined after the fact through enforcement), serious gaps or outright conflicts for CFP professionals who are switching from fee-only to commission-and-fee compensation or back the other way, and a serious gap in the definition of what constitutes a “financial planning engagement” that could legitimately subject an advisor’s cocktail party conversations to a fiduciary standard.

Ultimately, I remain hopeful that the CFP Board will move forward with its proposed changes to the Standards of Professional Conduct, which represent a positive step forward for the financial planning profession. But only after the remaining issues are given serious consideration, particularly with respect to the unintended consequences of murky definitions of what triggers a fiduciary engagement, fulfilling the CFP Board’s Public Awareness campaign promise that “for financial planning, [consumers should] work with a CERTIFIED FINANCIAL PLANNER professional” (which already presumes that CFP professionals will be doing financial planning!), and developing a framework to provide ongoing guidance to interpret and clarify a large number of key definitions so CFP professionals don’t have to learn through the process of rulemaking by enforcement. Especially given the CFP Board’s strategic priority of Accountability!

In any event, I hope that you find this (second) public comment letter to be helpful food for thought, and that if you haven’t yet, you submit your own Public Comment letter to the CFP Board by emailing [email protected] – the deadline is this Friday (February 2^nd)!

Weekend Reading for Financial Planners (January 27-28)

January 26, 2018 02:49 pm 2 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 battle over the CFP Board's expanded fiduciary standard is heating up, with both SIFMA and FSI (lobbying firms for broker-dealers) calling for the CFP Board to postpone their fiduciary proposal until at least next year to see what the SEC does, and the CFP Board responding that it still intends to move forward (and putting to rest the criticism that CFP Board is solely beholden to its large-firm broker-dealer stakeholders).

Also in the news this week is the announcement that administration of the Broker Protocol is being shifted to a new law firm called Capital Forensics (after complaints arose that the prior law firm Bressler Amery & Ross sat on the news that Morgan Stanley was leaving the protocol and failed to communicate it to the other protocol participants in a timely manner), and a look at how despite the de-regulatory agenda of President Trump the financial advisory industry is facing a slew of new and additional regulatory activity in the coming year from both the SEC and FINRA (not to mention what is already underway with the Department of Labor's fiduciary rule).

From there, we have a series of practice management articles this week, including: a look at some of the new additions on Form ADV that will be required in the coming weeks as firms do their annual updates; the regulatory and compliance issues to consider when hiring non-advisor employees (who still must be overseen by the firm); why fiduciary compliance does not actually require advisors to always use the absolute lowest cost solution for clients; the rise of the "quasi-independent" model of breakaway brokers who join existing independent RIAs that provide solutions to the advisors who often become partners of the firms; the various Millennial archetypes (beyond the increasingly popular "HENRYs") that financial advisors should consider working with; and how to think about developing a special treatment program to deepen your relationship with your top clients (and what we can learn from the airline industries about how to provide differentiated service to your most valuable clients/customers).

We wrap up with three interesting articles, all around the theme saving and spending habits: the first looks at how, in a world of retargeting ads and email marketing, often the best way to save and buy less is simply... to buy less in the first place (which keeps you from being signed up for all those lists in the first place, and helps you get more comfortable in simply enjoying what you already have); the second is a look at how sometimes the best strategy to succeed is simply by using brute force, which can apply to everything from investing (don't try to pick stocks, and instead just own all of them with an index fund) to accumulating for retirement (if your savings rate is aggressive enough, it hardly matters what you actually generate in investment returns!); and the last is an interesting exploration into what is worth spending a little more money on, particularly for those who may be financially successful (or fully financially independent) precisely because they lived a lifetime of frugality... and now can't find out how to flip the switch and actually try to enjoy the money they have!

Enjoy the "light" reading!

How Advisors Pay For #FinTech And Why It Matters: Cost Of Revenue Vs Overhead

January 25, 2018 02:32 pm 9 Comments CATEGORY: Technology & Advisor FinTech

Most advisory firms that do “wealth management” – some combination of financial planning and investment management – will have three core technology platforms they use: portfolio accounting software to track the investment portfolios, financial planning software to build the financial plans, and CRM software so you can just keep track of all the clients. And this software will come with a cost, but one thing that's interesting about financial advisor #FinTech, is how much (or how little) we are willing to pay for different types of software.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we examine how financial advisors pay for different types of technology, why these dynamics influence how much we are willing to pay for software, and what this means for the future of financial advisor #FinTech!

As a starting point, just consider how much this software costs for a typical advisor to use. CRM software in our industry is typically about $500 to $1,000 a year. Financial planning software is a little more expensive, with packages like MoneyGuidePro or RightCapital at about $1,000 to $1,500 a year (and some, like eMoney Advisor, are a bit more expensive at over $3,500 per year). Portfolio accounting solutions, though, are typically the most expensive at all, with costs like $40 to $70 dollars per year per account, which means 80 clients who each have an average of 3 accounts leaves the advisor paying about $10,000 to $15,000 per year. Which raises the question: why the huge discrepancy, and why are advisors willing to pay so much more for some software solutions that others? Or stated more simply, why isn't there a $15,000/year financial planning software solution, as there is for portfolio accounting software?

We can gain some insight by looking at the typical financials of an advisory firm. The classic advisor's Profit and Loss statement reduces gross revenue by both Direct Expenses (the costs it takes to actually get the revenue in the door and service it, such as client-facing advisors), and Overhead Expenses (e.g., administrative staff, rent, E&O insurance, and technology) to arrive at the bottom line: Net Profits. In essence, there are two primary “categories” of expenses here, direct expenses that produce the revenue, and overhead expenses that support the operation of the business, like admin staff and office space and technology.

The reason this distinction matters is that typically, we will pay a lot more for direct expenses than we will for overhead expenses, precisely because the cost tends to produce more revenue and it "pays for itself" over time. Yet while advisor technology is typically classified as an overhead expense of the business, but it's not actually always the way we think about the costs when we decide what to buy. After all, for advisors running the typical assets under management model, the reality is that portfolio accounting software isn’t really just an overhead expense, but more of a direct expense, because advisors need portfolio accounting software to validate their AUM fees. By contrast, even for firms that do rigorous financial planning as part of their AUM fee, the planning software isn't a core requirement for generating that AUM fee. It's still good to do good planning work, but you can do good planning work more profitably by reducing the cost of this overhead expense! Thus, we’ll pay 10 times the cost for portfolio accounting software than financial planning software because, when we run an AUM model, we think of portfolio accounting software as something that drives revenue, while financial planning software is just a cost to be managed. And pay accordingly.

In fact, if you extend this line of thought further, it actually becomes clearer why and how it is that even within existing advisor technology categories, some software providers charge a lot more than others. For instance, while financial planning software is typically an “overhead cost to be managed”, MoneyGuidePro costs about $100 a month while eMoney Advisor costs over $300 a month. Both are good financial planning software packages, but what eMoney Advisor does have, that MoneyGuidePro does not, is its client portal. And it matters, because when clients link all their accounts to the portal and engage with the portal, they tend to be “stickier” clients, who are less likely to leave, and therefore the firm has a higher retention rate and keeps more revenue. Thus why eMoney Advisor charges triple the fee of MoneyGuidePro... and similarly why Riskalyze charges nearly double the price of FinaMetrica... because that is what happens when software is positioned as a revenue driver (that can be used for business development and revenue growth and retention), instead of an overhead cost!

And the other reason why all of this matters is the implications for the future of advisor technology. As more and more advisors converge on the AUM model, it’s getting very competitive to gather new assets, and it’s driving advisory firms to focus more and more on financial planning to differentiate themselves (or even become their primary revenue model). And as investment management shifts to the background as a “supporting service” that financial planners offer, there’s going to be immense pressure on portfolio accounting software solutions to bring their costs down, as they get shifted from a revenue-driving software to an overhead expense to be managed. At the same time, if we are primarily in the business of doing financial planning and financial planning fees are driving our revenue, then we will also pay a lot more for financial planning software as a revenue driver. And if advisors were will to pay $15,000 per year for financial planning software, how awesome could that financial planning software be!?

The bottom line, though, is just to recognize that it is the ability of software to drive revenue that makes us willing to pay so much more for some software than others. And with the coming divide between advisor technology for planning-centric firms and investment-centric firms, we're going to see a shift as increasingly financial-planning-centric firms that typically treated planning software as an overhead expense to be managed begin to treat it as a direct expense to generate revenue, while simultaneously beginning to cut back on portfolio management expenses (including portfolio accounting software). Which may mean some big changes for the future of advisor technology, as it is exciting to think about what some software types could look like if advisors were willing to pay 10X more than the tools they currently use!

Do Losses Truly Loom Larger Than Gains?

January 24, 2018 07:01 am 5 Comments CATEGORY: General Planning

Loss aversion—the idea that losses hurt more than gains feel good—is one of the most well-known insights of behavioral economics. Originally developed by Daniel Kahneman and Amos Tversky in the late 1970s as a component of “prospect theory”, loss aversion has since come to be seen as the driving force behind a wide range of phenomena such as the endowment effect, status quo bias, the disposition effect, and even the equity risk premium. However, a new article forthcoming in the Journal of Consumer Psychology makes the provocative claim that despite widespread belief to the contrary, losses are not actually more impactful than gains as a general psychological principle.

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 – takes a deep dive into this provocative paper… examining the evidence on why losses may not truly loom larger than gains, and why it may be better to look at loss aversion as a concept that applies (only) in some specific circumstances.

In their forthcoming paper, researchers David Gal of the University of Illinois at Chicago and Derek Rucker of Northwestern University examine the history of loss aversion research, beginning with Kahneman and Tversky’s seminal paper and growing into one of the most widely accepted ideas in social science. Developed out of a need to address anomalies which could not be addressed by expected utility theory, Kahneman and Tversky provided a clever explanation for why loss aversion could result in people being risk averse when evaluating gains and risk seeking when evaluating losses. However, based on Gal and Rucker’s review of the research that has emerged since the development of prospect theory, as well as some of their own research which has attempted to isolate the effects of loss aversion relative to alternative explanations, the authors conclude that loss aversion has been greatly overgeneralized. Instead of being a general psychological principle, loss aversion appears to apply more or less based on the specific circumstances of a given situation, and it cannot be said that losses simply loom larger than gains.

As a result, financial planners should be careful not to assume that loss aversion applies in situations in which it may not. From career considerations to portfolio management strategies and even retirement income planning… clients may not actually be as loss-avoiding as we once believed, and the research suggests there really are situations where they may prefer to seek gains than to simply minimize risk of loss. Some more nuanced perspectives related to perceptions of losses and gains also provide potential insight for financial planners relevant to topics ranging from clients chasing gains to the ways in which financial planners sell and package their services. But ultimately, the key is to acknowledge that, despite conventional wisdom, losses may not truly loom larger than gains!

#FASuccess Ep 056: The Opportunities In Providing Hourly As-Needed Financial Advice For The Middle Market with Sheryl Garrett

January 23, 2018 07:01 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome, everyone! Welcome to the 56th episode of the Financial Advisor Success Podcast!

My guest on today's podcast is Sheryl Garrett. Sheryl is the founder of the Garrett Planning Network, a financial advisor support network for fee-only RIAs with a focus on bringing financial planning to the middle market by making it available on an hourly, as-needed basis.

What's unique about Sheryl, though, is that what started out as a very unique business model in the late 1990s turned out to be so popular, that it attracted other financial advisors to her to emulate the model... and as a result, what started out as something Sheryl wanted to do for her own clients turned into a network of several hundred advisors all delivering the same hourly model in their own local markets.

In this episode, Sheryl shares her own path through the financial planning industry, how she struggled early on in a broker-dealer that required her to cold call and sell products, how she dropped her FINRA licenses and shifted to an early fee-only RIA, then picked her FINRA licenses back UP a second time for another broker-dealer firm, only to drop them again by transitioning once more into the fee-only channel for good... albeit by becoming a partner in a new fee-only RIA, only to quickly discover that the partnership wasn't going to work, which is what ultimately led her to finally start a firm of her own, a full 10+ years into her career.

In addition, Sheryl shares what it took for her to finally launch the Garrett Planning Network, what she's learned about the success and challenges of the hourly model for financial planning, why referrals from other advisors can actually be one of the best ways to build an hourly practice, how – just as with other advisory firm models – many hourly planners build lifestyle practices, while some endeavor to grow larger businesses, and how one of the appeals of the hourly model for her is that it kept her focused on trying to be as efficient as possible with her clients to help them manage their cost of advice.

And be certain to listen to the end, where Sheryl talks about the value of organizations like the Garrett Planning Network, where it's great to have the advisor support services... but in the end, the most powerful effect is simply finding a community of fellow advisors, pursuing a similar business model with a similar clientele, from whom you can learn, and with whom you can share best practices. Whatever your target clientele and business model happen to be.

So whether you are interested in learning more about the Garrett Planning Network, curious how you can grow your business by generating referrals from other financial advisors, or simply want to learn more about the hourly financial planning business model, I hope you enjoy this episode of the Financial Advisor Success podcast!

Introducing AdvicePay And The Automation Of Billing Financial Planning Fees (Without Custody)

January 22, 2018 07:01 am 2 Comments CATEGORY: Technology & Advisor FinTech

In recent years, the rise of the robo-advisor has driven a realization amongst most financial advisors that it’s absolutely essential to provide value beyond “just” portfolio management itself to attract and retain clients. This surge of interest in delivering financial planning is driving the growth of CFP certification to record levels (now more than 80,000!), but is also causing many financial advisors to question the entire AUM business model altogether; after all, if the future is all about getting paid for financial planning and not investment management, then will consumers eventually compel advisors to move away from the AUM model and towards fee-for-service financial planning?

Yet the caveat of this transition is that there’s an incredible operational efficiency to charging AUM fees. They’re straightforward to calculate, the infrastructure already exists to sweep fees from investment accounts and remit them to advisors, and the AUM fee is psychologically easier for clients because it happens automatically on their behalf. By contrast, charging directly for financial planning requires managing invoices, collecting and cashing physical checks, and a process to collect for late/missed payments. And from the client’s perspective, writing lots of checks for fees often just makes clients more fee-sensitive.

To address this challenge, we’re excited to announce the launch of AdvicePay, a new payment processing platform for financial advisors specifically created to facilitate fee-for-service financial planning fees (both one-time and especially recurring retainers). Because the reality is that while there are already a lot of other payment processing platforms out there, from PayPal to PaySimple, to the Quickbooks Merchant account, most don’t even meet the compliance requirements of state regulators to avoid custody and provide proper notifications to clients, some prohibit financial advisors from using them at all, and none are built to integrate with the existing systems of financial planners (nor do they appear to have any intention to ever do so!)!

Yet after registering a few hundred independent RIAs with state regulators in just the past 2 years alone at XY Planning Network, we’ve learned exactly what regulators really expect and are looking for to ensure consumers are appropriately protected, especially when it comes to charging ongoing recurring retainer fees. And while we originally built AdvicePay simply to solve this problem just for XY Planning Network, we’ve realized that with the entire advisory industry shifting towards financial planning – leading to a growing demand for a payment processing system to handle all those fee-for-service payments – there is an opportunity to help even more financial planners, and more consumers who want to work with them. Especially given how many people might need financial planning, and would be willing to pay for it, but don’t even have liquid investment assets to manage – and need a way to pay for financial planning directly from a bank account or credit card.

As a result, we’ve spent the past several months expanding the capabilities of AdvicePay to handle the wider needs of the financial advisor community, raised $500,000 of venture capital funds to support further development, and are excited today to be rolling out AdvicePay to the entire financial services industry… so anyone who wants to build a fee-for-service financial planning business will now have the tools to do so (in a compliant manner!).

In the long run, we’re not certain if financial planning fees will simply become a supplement to the AUM model, replace it entirely (where advisors charge for financial planning, and give away asset management for free!), or branch out further into its own path as a means of serving new consumer segments who can’t be served by AUM fees alone. But we’re excited to see what AdvicePay can do to help support the ongoing growth of the financial planning profession!

Weekend Reading for Financial Planners (January 20-21)

January 19, 2018 02:47 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the fascinating letter that Blackrock CEO Larry Fink sent to business leaders, stating that they must make a positive contribution to society (in addition to delivering financial performance) to command Blackrock's interest (as the world's largest institutional investor)... and raising the question of whether SRI/ESG investing is about to make the shift from niche to mainstream (which, ironically, eliminate any potential performance differential for such strategies as they literally become the market!).

Also in the news this week was the first-time-ever release of a FINRA budget, that (finally) sheds some light on how the organization collects revenue and spends its resources... and recognizes that it must be "right-sized" with fewer staff and lower costs to be sustainable in the face of a shrinking base of broker-dealers. And the U.S. Supreme Court has granted certiorari to hear the case of Ray Lucia v. SEC, which may strike down the SEC's current process of selecting its administrative law judges as being unconstitutional (and force the SEC to adopt a more independent and better-reviewed appointment process, instead).

From there, we have several articles on retirement planning and research, including a look at how not to split an IRA in a divorce (and why it's essential to split an IRA after the divorce decree is finalized), why so-called "cash buffer" or "cash bucketing" strategies don't actually improve retirement income sustainability (and can actually harm it), and how the availability of reverse mortgages may change the 4% rule (taking an initial withdrawal rate equal to 1/25th of the available retirement assets) into a Rule of 30 (taking a 3.33% initial withdrawal rate against the combined value of the retirement portfolios and equity in the home, using a reverse mortgage line of credit to tap the equity in the future if/when/as needed).

We also have a few articles on financial advisor marketing strategies, including a reminder that the best way to get fresh new marketing ideas is not to ask other advisors what works but to ask your target clientele instead, a look at how to refine what your firm delivers to clients to truly create a differentiating client experience (beyond "just" trying to deliver better client service), and a great way of thinking about differentiating as a financial advisor by being capable of delivering something that other advisors either can't, or don't deliver themselves (though in the long run, a can't differentiator may be more sustainable).

We wrap up with three interesting articles, all around the theme of personal growth and development in an evolving business or career path: the first looks at why personal progress is all about continuously taking ourselves out of our personal comfort zone (because in the end, "if you want something in life that you have never had, you will have to do something that you have never done"); the second explores the "four elements of entrepreneurship", recognizing that it's more about the mental attitude of being willing to make decisions and attempt new things in the face of uncertainty than any particular skill or ability; and the last delves even further into the steps that successful advisors (and especially advisory firm founders) must take to avoid becoming the bottleneck in their own businesses as they grow.

Enjoy the "light" reading!

The Coming Golden Age Of The (Focused) Solo Financial Advisor

January 18, 2018 01:48 pm 10 Comments CATEGORY: Practice Management

With an ever-growing wave of mergers and acquisitions, and industry consolidation, amongst both broker-dealers and RIAs, there is an increasingly common view that the solo financial advisor is "doomed" in the coming years. Whether due to the burdens of managing the firm, meeting the rising volume of fiduciary compliance obligations, handling increasingly complex investment or insurance solutions, or just doing all the financial planning work… the presumption is that all together it will simply become “unmanageable” – or at least impossible to do in a cost-effective manner – for the typical solo financial advisor in the future. Thus requiring solo advisors to either be acquired, or at least be "tucked in" to larger firms, in order to access their resources and have better economies of scale. Yet the reality is that "the death of the solo financial advisor" has been forecasted for nearly two decades now, and in the meantime solo financial advisors have actually become more profitable than ever!

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we take a deeper dive into the current state of the solo advisor, why it's actually becoming easier to be a successful independent solo financial advisor, and why the coming decade is more likely to be the GOLDEN AGE of solo financial advisors than the death of them!

As a starting point, it is helpful to pause and reflect on the current state of solo financial advisors as they exist today, nearly 20 years after Mark Hurley famously issued his 1999 report forecasting the death of the solo advisor. Because the current industry benchmarking studies reveal some striking trends, including that the best solo financial advisors take home as much hard-dollar cash compensation as the typical partner in a billion dollar advisory firm! In fact, the top solo advisors are keeping in their pocket as much as 70 to nearly 90 cents of every dollar of revenue that they generate, after accounting for all expenses (technology, office space, staff, etc.). In hard dollar terms, the typical standout solo advisor is netting almost $600,000 per year in take-home profits, on $700,000 to $800,000 of total revenue. So to put it mildly, solo advisory firms are not exactly struggling and dying in today’s marketplace! And while these figures are based on about the top 25% of solo firms - so clearly not all solo advisors are doing this well - even the average solo advisor can do very well on much lower levels of revenue with the potential for a 60% to 80% profit margin!

Accordingly, even if costs rise substantially (say, another 10% on overhead), solo advisors would still have ample profit margins to absorb the impact, and top solo advisors could still be taking home nearly half a million dollars a year in take-home pay. Even an advisor generating "just" $250,0000 in gross revenue and running a 60% profit margin would still be taking home $150,000, which is still almost 3 times the median household income in the U.S. Simply put, there’s a lot of room to succeed as a solo advisor, even if costs rise.

Furthermore, it's really not even clear if we should expect costs to rise for solo advisors in the future, as the reality is that the cost of what it takes to operate an advisory firm today compared to 20 years ago has been reduced tremendously, due to technology. Tools that make it more efficient to be a solo financial advisor – scheduling software, rebalancing software, tax updates built into powerful planning software rather than proprietary spreadsheets, account aggregation tools that automatically update financial plans, etc. – have all reduced the costs of being a solo financial advisor, in terms of both time and money. And while 20 to 30 years ago the "best" technology was at the wirehouse firms that had the resources to develop them, today almost all of the best solutions are provided by independent technology firms, and accessible for the average solo financial advisor (because the independent technology provider can achieve economies of scale, which transfers down to the individual advisor using the software!).

With all this being said, I don’t want to be insensitive to the plight of many of today’s solo financial advisors today who are not running 60% (or 80%-plus) profit margins, and are not taking home half a million dollars or more in compensation from their firms. For many solo advisory firms, there is often a complaint with growth that “the business isn’t scaling”, which is typically code for "this isn’t getting any easier as my firm gets bigger, so when are all of these efficiencies coming along?" But the real struggles for solo advisory firms, particularly once they cross about 50 clients, aren't actually the result of being too small to survive, but instead are a result of not having enough focus. Because the reality is that it is time intensive and hard to scale if each client you serve is different and you don't have a clear target market where you can create a consistent solution. But that means the key to success isn't more size and staff and growth... it's finding better focus. Otherwise, growing bigger just makes the problem worse, because you add even more inefficient clients and then throw staff and money at the problem, which doesn’t actually make it more efficient, and just makes you miserable because now you have to manage more and more staff on top of your inefficient business!

However, it's important to recognize that there is one real challenge that solo advisory firms do face in the future: the marketing challenge of getting new clients, and differentiating yourself, given the coming (and even current) landscape of advisory firms. Because while there was a time where just being a comprehensive financial planner was a sufficient differentiator, but that is no longer the case. Solo advisors have to compete with over 80,000 other CFP certificants now, and every major broker-dealer has been making a big push into financial planning for years. And while it is true that solo financial advisors can often still go deeper than those firms, and have more relevant expertise, and be more specialized.... unfortunately, few solo advisors are. Many are still just generalist financial planners. And there is a problem with trying to outmarket a firm that’s 100 or a 1,000 times your size, or even larger, when all you do is the same generalist financial planning advice that they do. Which means focusing and specializing into a niche helps both your client service efficiency and your marketing!

The bottom line, though, is just to recognize that not only is the solo financial advisor not dying… and I’d argue that there’s never been a better time to become a solo advisor, thanks to the rise of the internet and all this amazing technology that allows us to be solo advisors and leverage that technology at a fraction of the cost of traditional staff members. However, the fact that you can be more efficient than ever as a solo won’t help in the future if you can’t differentiate yourself. But when you get all that right, as the benchmarking studies have shown already, solo financial advisors can make an incredible income (sometimes not even working full time!)! Which means being a solo financial advisor can still be amazing... at least, once you have focus!

Acquisition And Home Equity Mortgage Interest Tax Deductibility After TCJA

January 17, 2018 07:01 am 12 Comments CATEGORY: Taxes

The “American Dream” has long included the opportunity to own your own home, which the Federal government incentivizes and partially subsidizes by offering a tax deduction for mortgage interest. To the extent that the taxpayer itemizes their deductions – for which the mortgage interest deduction itself often pushes them over the line to itemize – the mortgage interest is deductible as well.

Since the Tax Reform Act of 1986, the mortgage deduction had a limit of only deducting the interest on the first $1,000,000 of debt principal that was used to acquire, build, or substantially improve the primary residence (and was secured by that residence). Interest on any additional mortgage debt, or debt proceeds that were used for any other purpose, was only deductible for the next $100,000 of debt principal (and not deductible at all for AMT purposes).

Under the Tax Cuts and Jobs Act of 2017, though, the debt limit on deductibility for acquisition indebtedness is reduced to just $750,000 (albeit grandfathered for existing mortgages under the old higher $1M limit), and interest on home equity indebtedness is no longer deductible at all starting in 2018.

Notably, though, the determination of what is “acquisition indebtedness” – which remains deductible in 2018 and beyond – is based not on how the loan is structured or what the bank (or mortgage servicer) calls it, but how the mortgage proceeds were actually used. To the extent they were used to acquire, build, or substantially improve the primary residence that secures the loan, it is acquisition indebtedness – even in the form of a HELOC or home equity loan. On the other hand, even a “traditional” 30-year mortgage may not be fully deductible interest if it is a cash-out refinance and the cashed out portion was used for other purposes.

Unfortunately, the existing Form 1098 reporting does not even track how much is acquisition indebtedness versus not – despite the fact that only acquisition mortgage debt is now deductible. Nonetheless, taxpayers are still responsible for determining how much is (and isn’t) deductible for tax purposes. Which means actually tracking (and keeping records of) how mortgage proceeds are/were used when the borrowisecong occurred, and how the remaining principal has been amortized with principal payments over time!