Nerd's Eye View blog

Switching From Wirehouse To RIA – AUM And Revenue Requirements To Break Away

July 20, 2017 12:39 pm 1 Comment CATEGORY: Practice Management

The breakaway broker trend, which gained momentum in the aftermath of the financial crisis, has been underway for several years now. And in an environment where many 7- to 9-year post-crisis retention deals are expiring at the same time that wirehouses are reigning in their signing bonuses, there is a fresh wave of interest in potentially breaking away from wirehouses and transitioning to the independent RIA channel for the potential of greater income. However, there are many motivations which may lead to a desire to break away, and pursuing a greater "payout" alone is actually not the best reason to break away.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss different motivations for breaking away from a wirehouse to become an independent RIA, as well as the team characteristics – including revenue, AUM, and desire for independence – that tend to lead to better break away outcomes for advisors!

First and foremost, it is important to recognize the different ways that "take-home pay" are calculated in a wirehouse versus an independent RIA. In the wirehouse environment, brokers at the low end might take home 35% of GDC, while the biggest producers and teams may get to 50% to 55% in some circumstances. By contrast, independent advisory firms typically follow a "40, 35, 25 rule", that 40% of gross revenue goes towards paying advisors and the investment team, 35% goes towards overhead and administrative staff, and 25% is the profit margin left over. For a solo advisor, this may effectively equate to a 65% payout, by paying themselves both the "employee advisor" compensation and the profit margin. For a larger team, the calculation is messier, but in the end advisors are often able to keep 10% to 20% more of their gross revenue after making the switch.

That being said, there's a really important caveat to the comparison between wirehouses and an independent RIA. When you’re at a wirehouse, a lot of those cost decisions – about staffing, overhead, compliance, office leases, technology, etc. – are made for you. At an independent RIA, though, the responsibility is on you, as the owner-advisor. The flexibility of being able to make those decisions is what gives advisors some more operational leverage as an independent RIA, but it is also a lot of additional work - or at least responsibility - for you as the advisor. That’s the double-edged sword of going independent, and it's the reason why most advisors who break away don't do it for the money.

However, if they are independently minded, want to control their own destiny, want to be the owner of their business, and want to make all the decisions that go along with that... then breaking away may just be a small sacrifice to make for the long run. But if you're happy to have a firm make those decisions for you, then you're not going to be happier getting a few more points of take-home on your GDC but being required to shoulder the burden of all the responsibilities and decisions.

It's also worth noting that there are more and more options today for brokers who are breaking away and want assistance with the transition, to reduce the burden of responsibility. From platforms like HighTower Advisors and Dynasty Financial - who can recreate a lot of the infrastructure advisors are used to from their wirehouse - to consulting firms like Matt Sonnen at PFI Advisors that help with the transition, to technology benchmarking studies and compliance firms to help guide advisors, there are a lot of resources available. And the truth is that larger firms with higher levels of revenue (e.g., $5 million) can afford to hire staff to handle much of the responsibility, while solo brokers can also be successful in the transition, particularly those around the $50M to $100M of AUM level where brokers may be getting a 40% payout whereas successful solo RIAs are taking home 65% to 85% of their revenue (providing ample revenue to cover some additional expenses as an independent).

The key point in all of this, though, is simply to recognize that if you're considering whether to break away from a wirehouse to an independent RIA, have a clear picture in your head of why you’re breaking away before you do so. And just trying to make a few more points on your revenue is not the best reason. It may work out okay, but the biggest success stories amongst brokers who go to the independent RIA channel are the ones who want to be independent. In other words, ultimately it's not really a revenue or a size consideration that drives success during a breakaway - as it's viable at almost any AUM or revenue level - but rather, an advisor's desire for independence, with the burdens of responsibility and upside opportunity that comes with it!

Choosing An Appropriate Discount Rate For Retirement Planning Strategies

July 19, 2017 07:00 am 16 Comments CATEGORY: Retirement Planning

For most people, making financial planning decisions involves an evaluation of financial trade-offs. In fact, any decision about whether to save (or not) effectively boils down to a trade-off about whether to consume now, or later.

Of course, all else being equal, we virtually always choose to consume now, if we can. Delaying gratification requires at least some kind of incentive, to make it worth delaying. Or viewed another way, we “discount” the value of something in the future – because we have to wait for it – which means waiting must make something more valuable to ever be worth the wait.

Mathematically, we can quantify this “time value of money” as a discount rate, which represents the rate of growth that would have to be earned to make the waiting worthwhile. And the use of a discount rate is especially helpful when trying to compare strategies or choices that are dispersed or occur over time, where it’s not always intuitively obvious which is the better deal in the long run.

For instance, discount rates are used to evaluate whether it’s better to take a lump sum rather than ongoing pension payments, and to determine when it’s preferable to wait for (higher) Social Security payments, rather than starting early… both of which are trade-offs that entail payments over a span of years or even decades, and can be difficult to compare without a common framework. By calculating the "net present value" of the various alternatives, adjusted by an appropriate discount rate of interest, it's feasible to make better apples-to-apples comparisons.

The caveat, however, is that conducting such analyses still requires an appropriate choice for a discount rate of interest in the first place. In the context of financial planning strategies, the proper discount rate to use is literally the “time value of the money” for that individual – in other words, what return could be generated over time by the money, if it were in fact available today to be invested. Or stated more simply: the discount rate for financial planning strategies should be the long-term rate of return being assumed in the financial plan itself. Because it’s the portfolio to which the money could be added if taken earlier, and/or it’s the portfolio that will have to be liquidated to provide for spending needs if the payments are delayed until later.

Notably, the fact that the proper discount rate is the investor’s expected rate of return, means that the “right” discount rate will vary from one person to the next, based on their investment approach and risk tolerance. For those who are more inclined towards aggressive investments, a higher discount rate may be used, while those who are conservative will use a lower discount rate of interest (and those who hold all assets in cash might well use a discount rate near 0%!). Of course, the caveat is that investors must still be cautious to pick a discount rate that is actually realistic to the portfolio in the first place – otherwise, an unrealistically high discount rate will lead to decisions that turn out to be less-than-optimal after the fact, when the money-in-hand doesn’t actually produce the expected results!

#FASuccess Ep 029: Attracting Baby Boomers Digitally To A True Retirement Decumulation Specialty with Dana Anspach

July 18, 2017 07:01 am 14 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the twenty-ninth episode of the Financial Advisor Success podcast!

My guest on today's podcast is Dana Anspach. Dana is a financial advisor and the founder of Sensible Money, an advisory firm based in Scottsdale, Arizona, that oversees more than $130 million of investment assets for retired - or nearly-retired - Baby Boomer clients.

What's unique about Dana's advisory business, though, is that while the industry has been focused on the idea that younger Gen X and Gen Y clients will want to work with financial advisors virtually, Dana has built a firm where all of her 110 virtual clients – from as far away as Hawaii and Alaska – are Baby Boomers, not Millennials. And Dana attracts those virtual Baby Boomer clients to her specialized retirement planning solutions through her online writing on platforms like About.com's Money Over 55 section, Marketwatch's RetireMentors, and her own book "Control Your Retirement Destiny", which collectively are generating over 100 online prospects every year. And those virtual Baby Boomer prospects start by filling out a 40-question pre-meeting data gathering form, just to have the opportunity to talk to someone on Dana’s team about potentially working with the firm!

In this episode, Dana talks in depth about how she attracts prospects, screens them, presents her services to them, and onboards them, all without ever meeting them in person. She also shares the exact 3-meeting financial planning process she uses to generate a nearly-$7,000 average financial planning fee (without needing a separate data-gathering meeting), and why she chose to use a TAMP – a third-party asset management platform – to implement her client portfolios, while charging an overall 1.25% AUM fee for ongoing investment and retirement planning services.

We also talk about what technology tools Dana uses to deliver her services to her fully virtual clients, how she has systematized large portions of her practice – to the point that she's been able to hand off most her prospects and clients to employee advisors she's hired into the firm – and why she compensates the advisors in her firm with a base salary plus bonuses instead of the more "traditional" payment of a percentage of client revenue.

And be certain to listen to the end, where Dana talks about how she's leveraged the value of outside coaches to work through the inevitable challenges that have arisen in her practice, and how she structures her week to allow for the time she needs for client meetings, staff management, and still being able to do all the writing that continues to bring in new virtual Baby Boomer clients to the firm.

So whether you’re trying to have more success getting new clients through online and digital marketing, or simply want some perspective on how a retirement planning niche advisor has built her business, I hope you enjoy this latest episode of the Financial Advisor Success podcast!

Finology And Finding The Higher Purpose Of The Financial Planning Profession

July 17, 2017 07:01 am 7 Comments CATEGORY: Planning Profession

In the modern era, “money” is essential for survival, a means of converting our productive labor into a common unit of exchange that can be used to buy whatever we need. Yet at the same time, money is complex, and the incentives and motivations it stirs exerts powerful forces on us… such that, even though money is necessary for survival, many lack the basic “money competency” skills necessary to harness its power effectively.

Yet despite the essential nature of money, there is remarkably little research and understanding in how we relate to it. While economics studies how humans allocate scarce resources, and psychology studies the human mind and behavior, there is a gap at the intersection between the two – an emerging new body of knowledge, that financial planning pioneer Dick Wagner dubbed “Finology”.

The key to understanding Finology is to recognize that there are both interior and exterior aspects to our relationship with money. On the one hand, we can’t make financial recommendations without understanding what someone owns and owes, and how that fits within the current economic environment and existing tax laws. Yet that information alone isn’t enough, without also understanding someone’s personal goals and desires, their relationships with family and cultural beliefs, and their vision of what it takes to live “the good life”.

Unfortunately, though, the history of financial planning and its existing body of knowledge have focused almost entirely on the “exterior” factors of money and how it works, and relatively little regarding the individual and their relationship with money itself. Yet in a world where our ability to have a healthy relationship with money is increasingly essential to survive and thrive – or else, we succumb to a never-ending series of self-destructive money behaviors – Wagner suggests that financial planning itself is likely to emerge as a bona fide profession in the 21^st century… as financial planners themselves become Finologists in the future!

Weekend Reading for Financial Planners (July 15-16)

July 14, 2017 02:50 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with a new Schwab RIA Benchmarking study, that finds despite the hubbub of robo- and other competitive threats, the independent RIA community has continued to grow assets at 10%/year over the past 5 years, although the fastest-growing firms are increasingly combining referral-based marketing with other forms of marketing and business development beyond referrals alone. Also in the news this week is a Boston Consulting Group study finding that in the aggregate, gross revenues of the asset management industry declined in 2016 (for the first time since 2008), even though total industry assets were up by 7% to $69 trillion, as the shift to low-cost products continues to take its toll. And the SEC has approved the FINRA proposal to revamp its traditional "Series" licensing exams, and roll out a new Securities Industry Essentials (SIA) exam that prospective new brokers can take, even if they're not yet sponsored with a broker-dealer.

From there, we have several articles on the theme of health insurance and Medicare, including a look at how uncertainty over health care policy in Washington is making it harder for advisors to craft effective recommendations for clients considering early retirement (who are uncertain whether they will still be able to access cost-effective health insurance without being limited for pre-existing conditions in the future), how the Social Security COLA is likely to be 2% this year but will be mostly consumed by the unwind of 2015's "Hold Harmless" provisions on Medicare Part B premiums, and proactive planning strategies and talking points for (prospective or current) retirees who are approaching age 65 and need to make decisions about Medicare.

We also feature several articles specifically focused on financial advisor marketing, from advice on how to sharpen up your core marketing messages to prospective clients (without needing to spend money on a marketing expert), to a series of marketing tips from a wide-ranging interview of advisor marketing experts, and a look at the concept of a "marketing nest" and how it differs from a "marketing niche" as a way to accelerate near-term growth for the firm (though while the nest may be best in the short term, the niche is still best strategically in the long run).

We wrap up with three interesting articles, all looking at the ongoing evolution of the "soft skills" of financial planners, and what it takes to be successful: the first is a Journal of Financial Planning study, looking at how "behavioral finance" and financial therapy techniques can be incorporated into the 6-step financial planning process; the second is a discussion of "active listening" and how developing the skill (yes, it is a skill) can improve your communication (with clients, and even with your spouse!); and the last is a look at what it takes to gain more confidence as a financial advisor, recognizing that if you don't truly believe in what you do and that you can help your clients, that lack of confidence means your clients probably won't believe in your value, either, so building personal confidence is crucial for business success (whether that means finding support at home, joining a study group, gaining education or experience, or whatever else it takes!)!

Enjoy the "light" reading!

How Should You Split Equity And Compensation When Multiple Advisors Partner Together?

July 13, 2017 01:06 pm 2 Comments CATEGORY: Practice Management

One of the "luxuries" of operating as a solo financial advisor is the simplicity of dealing with advisor compensation: the gross revenue of the business, minus your costs, is your net income as the advisor/owner. However, at some point in time, many advisors will consider launching a multi-advisor partnership – either as a means to share (and split) growing overhead costs, or perhaps to try to build a multi-advisor "ensemble" firm that is bigger than what any one advisor can create on his/her own. Yet in the process of shifting to a multi-advisor firm, especially when merging together multiple existing firms with varying numbers of existing clients and revenue, it's necessary to navigate the messy process of determining how to split equity and partner compensation in the new business entity!

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss ways in which financial advisors choose to split equity and partner compensation when forming a multi-advisor business, and why the structure of the arrangement depends on heavily what type of firm you're ultimately trying to grow in the first place!

Historically, the most common reason to form a multi-advisor firm – whether as an RIA, or more often on an independent broker-dealer platform – was to share and split overhead costs (e.g., office rent, administrative staff, and perhaps gain some bargaining power to get a better payout rate as a group of advisors). In this context, all of the advisors still took their "own" revenue from their own clients, and the primary or sole purpose of the business was really just to split the costs. As a result, the "equity" split was really just a reflection of how to split the costs themselves, and all partners were compensated based on their own individual client revenue (reduced by those shared costs).

On the other hand, with some multi-advisor firms, the goal is actually to build a true standalone business, in which all the advisors contribute to the growth and success of the business (i.e., an "ensemble" firm) that is larger than any one of them alone. With this type of partnership, equity and compensation dynamics are different: the primary driver of value and wealth creation is not client revenue (less expenses), but net business profits and the (slice of) equity value of the aggregate business. Which means taking uniform salaries based on job descriptions (not revenue-based compensation from clients), plus perhaps a bonus for business development, and deriving most long-term value directly from the equity itself.

If the ensemble firm is being created from scratch, this typically results in an even equity split amongst all the partners. However, in most cases, at least some of the advisors already have existing clients and revenue, which may be uneven when they come to the table. Which means it's necessary to either set the ownership percentages based on the relative amount of revenue that’s being brought to the table in the first place (e.g., if a partner brings 70% of the revenue they receive 70% of the equity), or to equalize ownership at the start through a buy-out (e.g., if one partner brings 70% of the revenue the other partner buys them out of 20% and each gets 50% equity). The advantage to the latter strategy is that if growth between partners is relatively equal going forward, then each partner has an equal incentive to grow the firm, and receives an equal benefit for doing so.

The key point in all of this, though, is simply to recognize that there’s a big difference between forming a “let’s share the overhead costs” multi-advisor partnership, where each advisor keeps their own client revenue and their goal and upside is to build their own client base, versus a true “ensemble practice” where you’re trying to build the shared equity value and the upside isn’t your client revenue but your participation in the bottom line profits of a growing business entity. Because if you want to build an ensemble business, and the other partners just thought of this as a cost-sharing partnership… the visions are so different that, regardless of how equity and compensation are split, this partnership isn’t likely to go well!

Why The Net Unrealized Appreciation (NUA) Rules Aren’t Always A Great Deal

July 12, 2017 07:02 am 69 Comments CATEGORY: Taxes

In many large (publicly traded) businesses, it’s common to reward employees with employer stock, often granted directly in/through a profit-sharing or ESOP plan, or at least by allowing employees to purchase shares themselves inside of their 401(k) plan. The advantage of this strategy is that it helps to encourage an “ownership mentality” of the employees – who literally become (small) shareholders of the business. The disadvantage, however, is that when employer stock is purchased/owned inside of a retirement account, it is ultimately taxed as ordinary income when withdrawn (as is the case for any distribution from a retirement account), and loses the opportunity to take advantage of favorable long-term capital gains rates.

To help resolve the situation, though, the Internal Revenue Code allows employees a special election to distribute appreciated employer stock out of an employer retirement plan, and have the “Net Unrealized Appreciation” (i.e., the embedded capital gain) taxed at favorable capital gains rates outside of the account. However, to take advantage of these special NUA rules, there are specific requirements – that the stock must be distributed in-kind, as part of a lump sum distribution, after a specific triggering event.

The good news of the NUA strategy is that it creates an opportunity to convert unrealized gains from ordinary income rates into lower tax rates on long-term capital gains instead. However, the caveat is that in order to use the NUA rules, the account owner must report the cost basis of the stock immediately in income for tax purposes, and pay taxes at ordinary income rates. In addition, if the NUA stock is quickly sold, that long-term capital gains bill immediately comes due, too.

Which means in reality, the NUA rules don’t merely allow for the gains to be taxed at lower rates. They cause the gains to be taxed at lower rates immediately (at least if the stock is sold immediately), in addition to triggering ordinary income taxation of the cost basis immediately, when all of those tax liabilities might otherwise have been deferred for years or even decades. Which means deciding whether to take advantage of the NUA strategy or not is really more of a trade-off, than a guaranteed tax savings success.

As a result, the best practice for NUA distributions is to really scrutinize the cost basis of the employer stock inside the qualified plan, and if necessary cherry pick only the lowest-basis shares for the NUA distribution to ensure the most favorable tax consequences. Fortunately, the NUA rules do allow such flexibility – to take some shares in-kind, and roll over the rest – but that still means it’s necessary to actually do the analysis to determine whether or how many of the NUA-eligible shares should actually be distributed to take advantage of the strategy (or not)!

#FASuccess Ep 028: Scaling Up A $6B Independent RIA Using A Full-Time CEO As Chief Inspiration Officer with Michael Nathanson

July 11, 2017 07:01 am 4 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the twenty-eighth episode of the Financial Advisor Success podcast!

My guest on today's podcast is Michael Nathanson. Michael is the CEO of The Colony Group, a private wealth management firm based in the Boston area that has nearly $6 billion of assets under management. The Colony Group has managed to systematize its wealth management and investment solutions to the point of driving a whopping 39% profit margin, and nearly quadruple the size of the firm in just the past 5 years alone, through a combination of both a series of major acquisitions, and organic growth across multiple niches - including corporate executives, athletes and entertainers, and an ultra-high-net-worth family office division.

What's unique about Michael, though, is how he functions as a true CEO of the Colony Group - where as he puts it, his primary job is to be the "Chief Inspiration Officer" that sets the vision for the firm, and tries to get their more-than-100 employees excited about achieving it, with a focused strategy to attract, develop, engage, and retain the top talent in the industry.

In this episode, Michael gives a behind-the-scenes look at how a large independent RIA thinks and operates, where the investment management duties are entirely separated from the wealth managers (who help clients select strategies, formalized in an Investment Policy Statement, but let the investment management team actually run and manage the portfolio), the firm has formalized its career track into a progression from associate to senior associate to financial counselor to senior financial counselor, and partners have formalized criteria to buy units of their LLC entity (with financing arranged by the firm).

We also talk about how Colony Group built its core technology stack with a combination of Tamarac, Junxure, and eMoney Advisor, its compensation policy for all the advisors in the firm, and how the Colony Group differentiates itself with prospective clients its four Es - Expertise, the Entirety of its comprehensive services, its Enhanced open architecture, and its ability to execute as an Enterprise.

And be certain to listen to the end, where Michael talks about what he sees as the true threat for advisory firms in the future - where it's not about fee-compression, robo-advisors, DoL fiduciary compliance, or the generational shift to Millennials... but instead is all about the ability of the firm to keep its people inspired to achieve the vision of the firm. Because if the team doesn't believe, then the firm won't be able to execute.

So whether you’re trying to grow your own advisory firm to become a mega-RIA, or simply want some perspective on what it’s like inside a large independent advisory firm, and the role of a true CEO, I hope you enjoy this latest episode of the Financial Advisor Success podcast!

Optimal Design Of A Financial Advisor’s Office: Insights from the Financial Planning Performance Lab

July 10, 2017 07:01 am 16 Comments CATEGORY: Practice Management

The traditional financial advisor's office is setup with a desk that the advisor sits behind, and chairs for clients to sit across. Alternatively, many financial advisors use an office conference room to meet with clients, but the arrangement is similar: a large conference room table, with the financial advisor sitting on one side, and clients sitting on the other. To the extent that any further thought goes into the office design, it's mostly focused on which type of furniture to buy, what paintings should go on the wall, and other classic elements of office interior design.

Except as it turns out, the look of a financial advisor's office goes far beyond just setting the interior design decor, and establishing a sense of perceived professionalism for clients. In this guest post, Dr. John Grable of the University of Georgia shares some thoughts, ideas, and research on how to best design a financial advisory office... all the way down to some specifics on the use of light, sound, smell, texture, and temperature to create a more comfortable atmosphere for clients that is conducive to helping them make good financial decisions!

Because it turns out the reality is that how an advisor's office is arranged really does impact their ability and comfort level to make decisions. In fact, everything from the color of the walls, to the kinds of artwork that hang on the walls, and even the type and configuration of office furniture, has been found to have an impact on client stress levels, which in turn can adversely affect their willingness to make a decision!

So whether you've given a lot of thought to your office environment as a tool in the planning process, or none at all (but now realize that perhaps you should have!), I hope Dr. Grable's exploration of some of the scientific evidence can help guide you to design (or update) your advisory office environment… and that, in turn, can help you make your office more comfortable to clients, allowing them to make better financial decisions, and increase client satisfaction!

Weekend Reading for Financial Planners (July 8-9)

July 7, 2017 02:55 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the latest of DoL fiduciary news, including the revelation that the Justice Department does not intend to defend the "class action lawsuit" provision of the fiduciary rule in the current Appeals lawsuit that fiduciary opponents have filed, a memo from LPL that indicates it expects the DoL fiduciary rule to stick and will be limiting the ability of its brokers (but not those on its RIA platform) to solicit 401(k) rollovers (suggesting that LPL may be pivoting its entire business to be more RIA-centric), and an announcement from Raymond James that it will be converting the payout grid for its independent channel to be entirely "product-neutral" with just a straight revenue-based payout (starting at 81% and rising as high as 90% for top producers).

From there, we have a few practice management articles this week, including a look at when to think about using debt proactively as a business management tool in advisory firms (especially since private equity investors often demand more in dividend payments than lenders demand in interest payments!), when you consider soliciting input from clients when making a potentially significant business decision, and how to create a "Client Retreat" event to deepen the relationship (and the breadth of solutions) for your clients.

We also feature several articles specifically focused on finding work-life balance, whether as an advisory firm owner or an advisor employee, including how to approach the work-life balance question as an employer (it's all about setting clear expectations of what it takes to succeed in the firm), how to change your situation if you're an employee unhappy with your balance (it's all about starting the conversation with your firm/supervisor about what you want to change, and discussing ways to make it work for both parties), and how financially successful "lifestyle practices" can actually be (the idea that a lifestyle practice with good work/life balance can't also be profitable is a myth... at least when done right!).

We wrap up with three interesting articles, all from people who have experienced early retirement or extended sabbaticals, talking about what they learned that surprised them about retirement (or a "faux retirement" sabbatical) in their first year. Key points included that more time at home makes it far easier to eat healthy and exercise more, but that the "best" days are still the ones where there's something to "do" when you wake up, that you may find even more opportunities coming to you once you're retired (which means you need to be careful to figure out what filters you will use to decide whether to say "yes" or "no" when they come along!), and that while you'll have more time to deepen spousal and other family relationships, don't underestimate how much you may miss the social environment and camaraderie of your "work family" as well!

Enjoy the "light" reading!