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#FASuccess Ep 205: Differentiating From The Crowd By Pursuing A Specialized Clientele Of Cross-Border (Swiss) Expatriates, With Marina Hernandez

December 1, 2020 07:09 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 205th episode of Financial Advisor Success Podcast!

My guest for today's podcast is Marina Hernandez. Marina is an Investment Advisor Representative with Dynamic Wealth Advisors dba Swiss American Wealth Advisors with offices in Philadelphia and Switzerland that specializes in working with cross-border Swiss-American expatriates.

What's unique about Marina, though, is the way her specialized niche allows her to command sizable financial planning fees, working primarily with otherwise hard-to-work-with next-generation clients, while facing remarkably little competition at all, but focusing on not just cross-border expatriate clients, but specifically, those expatriates going just between the U.S. and Switzerland.

In this episode, we talk in-depth about what makes the niche of cross-border planning for expatriates so unique and so complex, the challenges from potential double-taxation of foreign country retirement accounts that the U.S. doesn't recognize for favorable tax treatment, how the rising focus on preventing money laundering and foreign tax cheats has created new layers of specialized tax reporting that expatriates must handle or face $10,000 fines from the U.S. government, and why even seemingly simple publicly traded investments that hold a diversified portfolio in a foreign country can create significant additional U.S. tax challenges.

We also talk about how Marina is structuring her advisory business, why she chose to break away from the existing advisory firm to start her own practice, the reason she affiliated with a larger firm, Dynamic Wealth Advisors, to provide her own back-office RIA support and get her access to multiple RIA custodial platforms, the software tool she uses to do financial planning with her expatriate clients, and why despite the fact that her value hinges on solving the especially complex problems her clients face, Marina's financial planning process is actually very efficient, because her specialization has allowed her to develop repeatable expertise.

Be certain to listen to the end, where Marina shares her journey in finding her cross-border expatriate niche, how her need to handle her own family's taxes as an expatriate living in London made her aware of the unique complexities for Americans living overseas, how the combination of CFP marks and Enrolled Agent license and her experience on international tax issues meant that she had three job offers out to her within just a few months of joining the Financial Planning Association and network for career opportunities, and why Marina is taking the barbell approach to serving the marketplace with a premium financial planning fee for her most complex clients, but then also offering free financial education classes for cross-border citizens who may also need help and may not be able to afford her premium services.

So whether you’re interested in learning about how Marina became an international tax expert, how she found a career that supported her need for mobility, or why she ultimately decided to partner with another firm, then we hope you enjoy this episode of the Financial Advisor Success podcast.

Employee Benefits And Perks That Actually Help To Retain Advisory Firm Employees

November 30, 2020 07:03 am 2 Comments CATEGORY: Practice Management

The financial advice business is a service business, and a service business is a people business. Which means the ability to attract and retain people to work in the business, and keep them happy and engaged with that work becomes increasingly essential as an advisory business grows and scales. And keeping employees happy is a function of not only having meaningful work to do, but also compensating them appropriately for that work. In recent years, this has led to an ever-growing number of “perks” that firms offer employees to keep them happy, from retirement benefits to health insurance, to education reimbursement to student loan support, and gym memberships, and employer-provided meals. But in the end, employers can’t just pile on a never-ending stream of employee benefits and perks in the hopes that it will help employees to retain; at some point, the question becomes: what are the best “perks” and employee benefits that really, actually help to retain employees?

In this guest post, Angie Herbers – Chief Executive and Senior Consultant at Herbers & Company, an independent management and growth consultancy for financial advisory firms – discusses her four principles that she has determined are most effective at supporting employee happiness. Known as the “P4 Principles”, they include a combination of Preparation (helping all team members achieve success), Pay (designing satisfying compensation and incentive packages for employees), Perks (offering lifestyle benefits that motivate employees and help them balance their work and personal life), and Productivity (providing the tech tools that allow employees to do their work in the first place). Importantly, though, “P4 Firms” that implement all four P4 principles successfully have shown that offering the right Perks to employees is the most impactful of the four P4 Principles in achieving lower turnover, higher growth, and more successful employees.

Research conducted by Herbers & Co revealed several perks offered by companies that were most effective in increasing employee happiness. Two perks, above all others, that are important for all financial advisory firms to offer to their employees are health insurance and retirement plans (even if the company is unable to contribute on behalf of their employees). Not only are these two perks necessary for financial advisory firms to attract (and retain) top talent, but they are also important to offer employees access to these benefits simply for company morale, especially when the firm teaches its clients that purchasing health insurance and saving for retirement are essential practices for a healthy financial future (which can quickly make employees wonder why they’re not receiving those benefits, too!).

In addition to the essential employee perks of health insurance and access to an employer retirement plan, financial advisory firms can offer a menu of additional optional perks to motivate their employees and help them better manage (and enjoy) their professional and personal lives. In fact, Herbers' research indicates that while there is a wide range of potential perks and benefits that firms might consider offering, including flex time, unrestricted vacation, bereavement time off, family leave, time off for volunteer work, paying for continuing education, time off for continuing or further non-work-related education, group discounts, and sabbatical time off, companies need not offer all (eleven) types of perks; instead, offering at least six of these options (chosen from any of the top eleven) was sufficient to maximize employee happiness (by allowing enough options that all employees could appreciate and benefit from at least some of the available perks).

Furthermore, employees who are given a range of these perks (and the autonomy to choose amongst them) tend to feel that their employer trusts them to balance their lives with doing a good job which further motivates them to manage themselves (and each other). In fact, despite fears from many employers that too many – or too flexible – perks may lead to abuse, in practice, firms with strong positive work cultures typically find that employees still feel accountable to each other… and consequently generally do not abuse the privileges the perks afford (e.g., if offered unlimited vacation time, P4 Firm employees still end out taking only what they really need). In fact, P4 Firm employees were found to take less vacation (14.5 days per year) when compared to non-P4 Firm employees (who took an average of 19 days per year), despite having more flexibility and often “unlimited” vacation access!

Ultimately, the key point is that financial advisory firms that focus on a P4 culture by implementing good Preparation, Pay, Perks, and Productivity practices, with an emphasis on providing the right Perks for their employees to support their happiness, will generally have great employees with high morale and the motivation to manage the company responsibly and effectively, which can help the company grow into a truly great business!

Weekend Reading for Financial Planners (Nov 28-29)

November 27, 2020 03:00 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "Weekend Reading For Financial Planners" – this week's edition kicks off with the industry news that mega asset manager Blackrock is making a "billion dollar bet" on the future of direct indexing by acquiring SMA provider Aperio (the #2 provider of direct indexing solutions, behind #1 provider, Parametric, that itself was acquired last month as part of the Morgan Stanley acquisition of Eaton Vance), as interest grows in both the tax-optimization benefits of direct indexing and also the ability to "customize" index allocations to clients' ESG or other individual preferences (e.g., the S&P 500, but excluding tobacco stocks and with an overweight to renewable energy?).

Also in the news this week is an interesting J.D. Power survey that finds consumers during the pandemic are perhaps, not surprisingly, more likely to use mobile apps on their smartphone to manage their wealth but, surprisingly, are even more satisfied when they can use the app as a means to contact and communicate with their advisor (not in lieu of their advisor!), and the announcement that the Department of Labor is sending its controversial new fiduciary rule (that would begin to allow ERISA fiduciaries to receive commissions in certain circumstances) to the Office of Management and Budget to finalize... but it may already be too late to finalize the rule before the Biden administration takes office (and is expected to pause the rule for further review in what may ultimately send it back to the drawing table for a more fiduciary revision).

From there, we have several articles on marketing and client communication, including tips on how to make emails more engaging with colleagues, clients, and prospects, using a simple two-sentence directive approach, some thoughts on how to revise our approach and use of virtual meetings as it becomes clear they're likely not temporary but here to stay permanently (at least in some form as part of the annual advisor-client relationship), and a look at whether compliance rules actually require video meetings with clients to be recorded and archived for compliance purposes (hint: probably not, as they're treated like telephone conversations, but any written communication delivered as part of the video meeting does have to be captured and archived!).

We've also included some articles on cash flow and spending strategies, including a look at the immense opportunity of mortgage refinancing in the current environment (as mortgage rates continue to hover below 3%), some suggestions for cash flow/budgeting apps that clients can use to track and manage their own finances, and some ideas on how to engage children with (stock) investing from an early age to get them to begin appreciating the value of compounding (and the benefits of investing in long-term companies for long-term growth!).

We wrap up with three interesting articles, all around the theme of holiday gift-giving as we enter the December holiday season: the first two both explore some year-end gift-giving ideas that are "classy" but not budget-busting (important both for the economic cost to the business, and to avoid running afoul of the FINRA [and often RIA] $100 gift-giving limit!); and the last looks at how, in the end, we're happier when we spend money on experiences and others rather than "things", which can hold, not only for how we spend our own money, but also in how we use it to help others (which means giving services like TisBest or DonorsChoose) or spend on experiences that remain memorable long after the event has passed (available through services like Excitations and Xperience Days)!

Enjoy the 'light' reading!

Year-End Tax Planning Under The Forthcoming Biden Presidency

November 25, 2020 07:04 am 2 Comments CATEGORY: Taxes

The November 3, 2020 elections produced a wholly unsatisfying result for financial advisors and their clients from a financial planning perspective, regardless of their political affiliation. The political clarity – leading to planning clarity – that many had hoped for, did not emerge. Instead, control of the US Senate, which will determine whether Democrats can drive their legislative agenda or if Republicans will have a ‘check’ over a Democratic-controlled White House and House of Representatives that could lead to gridlock instead, continues to hang in the balance.

The problem? The control-determining Senate races won’t be decided until a Georgia run-off on January 5^th of 2021… which is too late to take most actions that influence a client’s 2020 tax bill! Thus, planners are left with a substantial dilemma: act now and make potential changes that could be costly and/or unwanted if substantial changes to the tax code are not implemented for 2021, or wait and risk the chance that such changes may be implemented, potentially dramatically increasing costs.

Given President-elect Biden’s proposal to increase the ordinary income tax rate for those making more than $400,000 per year, and to make the long-term capital gains rate equal to the ordinary income tax rate for income in excess of $1 million, many taxpayers and planners have considered the possibility of accelerating income for high earners into 2020. Problematically, clients who are just slightly above the threshold may actually have the most to lose with potential tax bracket changes, but also the most adverse impact if they accelerate significant amounts of income but no changes occur… while those significantly above the threshold have less potential benefit for accelerating income, but if they’re already in the top tax bracket, there’s limited downside to accelerating income even if tax brackets aren’t changed (and still some benefit if the Biden tax plan is implemented).

With respect to a change in the top long-term capital gains rate, if one is to believe that the Biden-platform income figure of $1 million is ‘real’, the decision of whether to sell or hold positions with existing gains is more nuanced. On one hand, the cost of selling such investments in 2020 (i.e., harvesting capital gains in the current tax year before the increase) would trigger a 20% long-term capital gains tax that might be a tough pill to swallow. But should the Biden proposal become law, it would nearly double the current top long-term capital gains rate from 20% to 39.6%! Which means those with very high income or especially sizable capital gains may still want to take some chips off the table with year-end capital gains harvesting, if only as a form of “tax insurance” to hedge against the risk of potentially dramatic increases in long-term capital gains rates next year.

But, as if that decision wasn’t complicated enough on its own, further complexity is added to the mix when considering the additional Biden tax proposal calling for the elimination of the step-up in basis of capital assets upon death. Ironically, holding appreciated assets until death would rapidly switch from a very desirable tax strategy to an especially undesirable one (because taxing all appreciated investments at death, all at once, would be even more likely to push capital gains into the new higher capital gains rate!).

As the end of the year approaches, clients must also make decisions with respect to expenses that may qualify for itemized deductions. As while in general, a potential tax increase next year means there is a benefit to accelerate income (into 2020’s lower tax rates) and defer deductions (when they’d be more valuable at 2021’s higher tax rates), in practice most high-income taxpayers who already itemize deductions will benefit more by claiming their deductions in 2020 at current rates, due to the potential of the Biden-proposed cap of 28% on the value of itemized deductions! Meanwhile, clients of all income levels should still defer any expenses that won’t be counted as an itemized deduction in 2020 (such as SALT expenses in excess of $10,000, or any potential itemized deductions if the taxpayer’s standard deduction will still exceed their itemized deductions), but at least have the chance of helping boost deductions in 2021 if the rules are changed.

Finally, while the overwhelming majority of taxpayers won’t have to worry about estate and gift taxes whether the exemption remains at its current level, or is dropped back down to its pre-TCJA level as called for by the Biden proposal, advisors must address the ‘lucky’ few clients who do still face Federal estate tax exposure. Though obstacles loom large, for clients who have a net worth that will almost certainly subject their estate to an estate tax liability upon their passing (or may grow to that point in the future), there is a strong impetus to act now and engage in potentially substantial year-end gifting – up to their entire $11.58 million Federal estate tax exemption amount, to ensure they do not lose out on maximizing the current exemption while it lasts.

Ultimately, the key point is that now that the election has passed, clients are looking for guidance as to what they should be doing – or not doing – before the end of 2020 and beyond. And while in many cases, the ‘right’ answer may not be able to be definitively known today, not having a conversation about it at all is decidedly the wrong ‘move’ for proactive advisors seeking to reassure and inform clients.

#FASuccess Ep 204: Being Able To Just Focus On Clients By Choosing To Be An Employee Advisor At A Growing Firm, With Blair duQuesnay

November 24, 2020 07:03 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 204th episode of Financial Advisor Success Podcast!

My guest on today's podcast is Blair duQuesnay. Blair is a financial advisor with Ritholtz Wealth Management, an independent RIA based in the New York City area that oversees nearly 1.3 billion of assets under management for more than 1000 affluent clients.

What's unique about Blair though, is the way that she's been able to build her client base of the firm up to $90 million of client assets in barely two-and-a-half years in a role that, by design and her choice, doesn't require her to actively prospect for business and instead lets her focus on the client relationships and the investment committee work she enjoys most, and why she gave up being a partner at her prior firm for this current employee role.

In this episode, we talk in-depth about the journey that Blair has taken through different types of firms in the industry, from starting out at a major wirehouse in various operational and investment support roles to the transition she first made to the independent channel not as a proactive decision to break away from the wirehouse world, but simply out of a need for a job after the financial crisis. Why her decision to launch her own independent RIA was driven more by a family change and limited alternatives than a desire to hang her own shingle. The opportunity that led her to merge her firm into a larger local one. And why finding an advisory firm that had a strong organic growth rate of its own was ultimately such a driving factor in her decision to join Ritholtz Wealth Management.

We also talk about the steps that Blair took to reinvest in herself to advance her career. The reason she decided to pursue the CFA Charterholder as her first professional designation, the path she took to obtain her CFP marks thereafter, why Blair has no regrets for having spent several years working as a sales assistant before becoming a financial advisor, and the moment when Blair was attending a financial advisor conference that she realized she was going to have to make a change.

And be certain to listen to the end where Blair shares the real-world challenges and frustrations that came with starting her career in financial services as a young person straight out of college and as a female in a male-dominated industry. The steps she took to make sure she stayed in the industry, whatever it took until she found the right role. And why, in retrospect, she believes it's so important to be patient and taking early entry-level roles that form the foundation of a long-term career as a financial advisor.

So whether you’re interested in learning about how Blair's career path changed from aspiring professional ballet dancer to financial advisor, how she discovered real financial planning, or how making a mindset shift to optimism changed everything for her, then we hope you enjoy this episode of the Financial Advisor Success podcast.

Why Broker-Dealer Forgivable Notes Aren’t (Really) Forgiven And Are Instead Ultimately Paid Back By Clients

November 23, 2020 07:02 am 0 Comments CATEGORY: Practice Management

In the early days of insurance broker-dealer recruiting efforts, it was so lucrative to attract new brokers who could sell the broker-dealer’s proprietary products to their clients, that insurance broker-dealers began to outright pay for new brokers to join the firm… in the form of a loan that would be forgiven as long as certain proprietary product sales requirements were met. Over time, these “forgivable notes” have morphed from being contingent on the sale of proprietary products, to overall maintenance (or growth) of the broker’s production, to (as regulators began to crack down on the conflicted incentives) simpler time-based contingencies. Yet even as the requirements have changed, the underlying structure remains – where many broker-dealers today try to attract advisors to switch firms by offering potentially substantial upfront recruiting “bonuses” in the form of forgivable notes… in the hopes of making back that recruiting cost (and then some) from the advisor’s clients.

In this guest post, Jonathan Henschen – president of Henschen & Associates, a recruiting firm that specializes in helping advisors find and match themselves to the right independent broker-dealer when making a switch to a new platform – discusses the history and mechanics of forgivable notes, some of the ethical concerns they raise for brokers and their clients, and how the evolving landscape of the industry is encouraging broker-dealers to reconsider their incentive structures (and advisors to reconsider whether forgivable note recruiting bonuses are worth their long-term consequences to clients).

Typically, forgivable notes are structured as a percentage of the broker’s trailing 12-month Gross Dealer Concession (GDC), and have evolved from notes (issued prior to 2000) that ranged from 5 – 20% of trailing-12-month GDC and were forgiven over five years, to notes as high as 40% of trailing-12-month GDC that are forgiven over seven years. Throughout, though, the core principle has remained the same – the advisor receives an upfront “bonus” to join the new broker-dealer, but it is actually in the form of a loan, that the advisor will have to repay (i.e., the unpaid balance of the loan) if certain requirements are not met over time.

Today, forgivable notes have become so ubiquitous that many advisors who switch broker-dealer firms consider forgivable notes as a required component to their job offer. Yet the reality is that broker-dealers only offer such “bonuses” because it is profitable to do so in the long run… which means advisors and their clients must bear higher costs in order for the broker-dealer to recover its own costs!

Specifically, the particular revenue sources driven by broker production that help to recover the cost of forgivable notes include brokerage account transaction charges (often substantially marked up over the raw costs to increase the profit margin of the broker-dealer), revenue sharing with product vendors (e.g., mutual funds, variable annuities, REITs, alternative investments, and to some extent ETFs), markups on No Transaction Fee (NTF) mutual fund expense ratios, markups on third-party money managers, proprietary advisory platforms, advisory administrative fees for advisory accounts managed by the brokers themselves, platform fees for holding TAMP assets directly at the TAMP (which, without this extra fee, would otherwise avoid the broker dealer markup for being held within the TAMP provider), and platform fees for holding advisory assets at third-party RIA custodians (e.g., Schwab, Fidelity, TD Ameritrade). Some or all of which are additional layers of expenses that the advisor and their clients may not have had to pay if not pursuing a broker-dealer’s forgivable note recruiting bonus.

In fact, when determining how much to pay into forgivable notes in today’s marketplace, broker-dealers consider the advisor’s product mix and asset levels, to determine a forgivable note amount based on a profitability matrix that each broker-dealer establishes based on its various profit centers imposed and the actual revenue generated from various asset classes (influenced more by assets held in brokerage accounts or managed by the broker dealer, and less in assets held away).

Notably, though, a new crop of some fiduciary-friendly brokers are beginning to emerge, that aim to compete specifically by limiting the markups and fees (which aren’t necessary if substantial forgivable notes aren’t being paid in the first place).Instead of forgivable note bonuses, these firms often recruit brokers with more limited incentives, that may still include some transition expenses (e.g., ACAT transfer expenses to move assets over to the new broker dealer, registration costs, and broker transition/startup costs), payback loans to cover larger set-up expenses incurred by the new broker (e.g., new office space), and providing 100% of GDC for a short period (e.g., 3-6 months) to accommodate initial cash flow for the new broker… but without the need to place as much burden on the advisor’s costs to their clients.

Ultimately, while forgivable notes can be attractively alluring to brokers seeking new broker-dealer firms, the cost of recovery for broker dealer firms to offer these notes, in the end, is passed onto the client who (often unknowingly) may pay heavily in a wide array of fees and expenses related to proprietary advisory platforms. And while broker-dealers, like any other business, are entitled to generate revenue for the services they provide, the rising attention on fiduciary practices and the recent transition by many large custodians to ‘zero-commission’ trades on stocks and ETFs are pressuring many to rethink how they structure their incentive programs and profit centers, lest their advisors lose clients as the layers of additional cost risk rendering them uncompetitive in the current marketplace. The bottom line, though, is simply to understand the bottom line – that there’s no such thing as a “free lunch”, and that broker-dealer recruiting bonuses come with real costs that must be carefully considered.