Nerd's Eye View blog

Navigating Compliance Oversight When Blogging As A Financial Advisor

June 22, 2017 08:07 am 7 Comments CATEGORY: Practice Management

As digital marketing for financial advisors slowly gains momentum, there is growing interest amongst financial advisors to launch their own blog as a means to showcase their expertise. Yet the challenge, for advisors at both broker-dealers and RIAs, is that any prospective advertising content to the public must first be reviewed by compliance, and the compliance oversight process can make financial advisor blogging difficult - especially for those in a large broker-dealer environment.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss blogging as a financial advisor, the compliance rules that apply to financial advisor blogging, and the issues to consider when navigating compliance oversight, both for RIAs and those operating in the broker-dealer channel!

Because in practice blogging is more popular at this point amongst RIAs than broker-dealers, a common question is whether the compliance requirements are different between the two channels. However, the reality is that whether you’re an RIA or a broker-dealer, anything you do that advertises to prospective clients or solicits prospective clients for your business is deemed “advertising”, and is subject to compliance (pre-)review. Technically broker-dealers are covered by FINRA Rule 2210, and RIAs are covered by Rule 206(4)-1, but in the end, both have requirements that compliance should review blog content before it goes out to the public, ensure blog content isn't misleading, and record and archive blog content for later review. Which means, the key difference between channels is not really the regulatory compliance requirements.

Instead, the key difference is actually firm size. Most RIAs are small (at least by broker-dealer standards), and operate as either solo advisors, or with just a dozen or few advisors as a large RIA. By contrast, mid-to-large-sized broker-dealers may have hundreds or even thousands or brokers. And it's this size difference that drives major compliance differences for financial advisor blogging between channels. Because in a small (or even "large") RIA, an advisor is either themselves the chief compliance officer, or likely knows the compliance officer very well. Which means it is easy to get buy-in from the compliance officer to take the time to review the content of a blog. By contrast, a compliance officer in a broker-dealer rarely knows the brokers who many want to blog, and the sheer magnitude of trying to oversee advertising for such a large number of brokers leads to compliance officers to adopt very strict and very limited rules that force brokers to stay inside a small box of activities!

Fortunately, there are some more progressive broker-dealers that have begun to find solutions to allow advisors to blog. But unfortunately, many of those programs have been slow to roll out. For advisors who do want to start a blog, regardless of what channel you are in, there are some things you can do to increase your odds of solving the compliance issues. First, try to work proactively with your compliance department. Explain to them what you want to write about, and, if it's not related to products, investments, or performance, tell them, because that will make their job easier. Second, write some content well in advance, and send it to them for review. After they've seen your content for a while and realize it is not a compliance risk, you may find they ease up a bit.

In the end, the challenges of overseeing such a large number of advisors in the broker-dealer environment have unfortunately squelched the ability of a lot of brokers to engage in blogging, but it's not because they can't, or that FINRA won't allow it. Rather, it's because broker-dealer compliance departments are struggling to oversee a huge number of brokers that they don’t necessarily know, while the more limited span of oversight at RIAs makes it easier to expedite the process!

How Financial Counseling Laboratories Will Change Financial Planning

June 21, 2017 07:01 am 2 Comments CATEGORY: Planning Profession

It is widely acknowledged that there is both an ‘art’ and a ‘science’ to financial planning. Technical knowledge – the “science” – is crucial to delivering the technically accurate advice to clients. But the best advice in the world is meaningless if the financial advisor can’t master the “art” of delivering it in a skillful manner – leading a client to actually take action and improve their financial well-being. Yet despite its label as "art", the reality is that how best to deliver financial advice advice can itself be subjected to scientific scrutiny. Which is beginning to happen, with the emergence of several "financial counseling laboratories" in educational institutions across the country.

In this guest post, Derek Tharp – our new Research Associate at Kitces.com, and a Ph.D. candidate in the financial planning program at Kansas State University – examines what a financial counseling laboratory is, and how researchers are using financial counseling laboratories to subject the 'art' of financial planning to scientific investigation.

A financial counseling laboratory is an environment in which financial planning, counseling, or therapy research can be conducted. The space itself is akin to the kind of office with tables and chairs that financial advisors might use to meet with their clients. However, the key feature of a financial counseling lab is that it contains some unobtrusive means of observation, such as one-way mirrors or cameras, allowing the interactions between a financial advisor and their client to be scientifically measured and tested (and sometimes also monitored by students who may be gaining practical observational training, or even engage in the supervised practice of their financial planning skills).

The existence of financial counseling laboratories is important given how conducive they are to conducting highly relevant research for practitioners about how to actually be better financial planners, and get clients to engage their financial advice. In fact, some of this research is already beginning to emerge, delving into topics such as how the physical office environment influences client stress, how coaching techniques can help clients save more, and how measurements of brain activity suggest receiving counseling from an advisor with a CFP designation (relative to a non-credentialed advisor) may actually reduce stress during market declines! In essence, laboratory research – in a financial setting, examining questions relevant to advisors – may soon begin to shape the future of how financial planners interact with their clients!

Advisors who are interested in supporting or assistance with the research process have several options, from getting involved with organizations like the Financial Therapy Association (where many of the Financial Counseling laboratory researchers are engaged), collaborating with researchers themselves on future projects, contributing financially to organizations such as the CFP Board's Center for Financial Planning, or contributing directly to the handful of universities which already have permanent on-campus financial counseling laboratories.

But the bottom line is that, for the first time ever, the "art" of financial planning itself is beginning to be subjected to scientific scrutiny, with the potential to yield important insights into the practice of financial planning, and how advisors can better get clients to actually adopt their advice!

#FASuccess Ep 025: Leveraging A TAMP To Roll Out Wealth Management Services In A CPA Firm with Tim Delaney

June 20, 2017 07:01 am 6 Comments CATEGORY: Financial Advisor Success Podcast

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

My guest for this week’s podcast is Tim Delaney. Tim is the co-founder of JDH Wealth Management, an independent RIA in northern California that oversees nearly $200 million of assets for 120 affluent clients.

What’s unique about Tim is that, unlike most financial advisors who started out selling life insurance or mutual funds, Tim began his career as a CPA, and it wasn't until after 20 years of experience doing accounting and tax preparation that he decided for the first time to launch a wealth management firm, from within the existing accounting business, with a goal of leveraging the firm's existing relationships with its tax clients to expand into wealth management.

In this episode, Tim talks about the transition from tax preparation into wealth management, why he decided from day 1 to build his wealth management business on a TAMP platform - despite the fact that it would take a material chunk of his long-term revenue - how he structured the wealth management firm as a separate entity from the tax practice, and why he ultimately decided to buy out the wealth management division and part ways from the accounting firm after more than a decade... which, as it turned out, just accelerated the growth of his wealth management firm even further!

We also talk at length about the opportunity that CPAs have in offering wealth management services to clients, how the typical accounting firm can likely generate an additional 25% of gross revenue by offering investment management services to existing clients, and why most accounting firms still fail to capitalize on the business opportunity. Which provides some interesting insights into the opportunity – and challenges – for financial advisors seeking to generate wealth management referrals from CPAs, too.

And be certain to listen to the end, where Tim talks about how he's executing an internal succession plan, with his son who has now taken over as the managing partner, and how he structured the arrangement not to gift shares but to have his son buy into the practice over time... in large part because that's what was necessary to balance the value of the business against what his other two children, who aren't involved in the business, will also someday inherit.

So whether you’re a CPA considering whether to go into wealth management, an advisor trying to better understand the mindset of CPAs who offer (or may be considering) wealth management services, or are looking for perspective on why a TAMP can make a lot of sense when launching a planning-centric advisory firm, I hope you enjoy this latest episode of the Financial Advisor Success podcast!

The Passive Investing Mirage And The Disintermediation Of Active Mutual Fund Managers

June 19, 2017 07:01 am 13 Comments CATEGORY: Investments

As financial advisors increasingly adopt ETFs, the wholesale shift from actively managed mutual funds to passive investment vehicles is driving more inflows to ETF providers like Vanguard and Blackrock and State Street and than all other mutual fund families combined… and leading mutual fund companies into a mad scramble to figure out what they have to do to once again appeal to financial advisors.

Yet the reality is that, with the rise of the internet, the fundamental role of the financial advisor themselves is changing. In a world where consumers can purchase virtually any publicly traded investment online themselves, financial advisors are compelled to add value above and beyond “just” bringing third-party mutual fund managers to the table. In fact, an increasing number of financial advisors appear to be “coping” by eliminating third-party managers, and instead becoming the investment portfolio managers themselves.

In this context, the rise of ETFs is not so much about a shift from active to passive, but simply a recognition that when financial advisors build investment portfolios, we prefer to do it using ETFs as our “building blocks”, rather than individual stocks and bonds. Although in point of fact, a recent FPA Trends in Investing Survey revealed that advisors are increasingly building portfolios with ETFs, and stocks, and bonds, and even private equity funds – anything except third-party mutual funds. Which just helps to show how the shift from active to passive is really just a mirage; what’s really occurring is a process where financial advisors are remaining active, but disintermediating mutual fund managers and going hands-on to actively build the portfolio themselves, whether as an independent RIA, or under a Rep-As-PM arrangement in a broker-dealer.

Of course, the caveat is that just as many mutual fund managers have struggled in an increasingly competitive market for alpha to outperform their benchmarks, there’s no indication that individual financial advisors are any better at the process. Which means ultimately, the financial-advisor-as-investment-manager shift itself may be short-lived, as advisors further shift to providing financial planning value outside of the portfolio altogether. But until financial advisors get to the point that the majority of us truly view our value-add as going beyond the investment portfolio – where a bona fide shift to passive investing may gain further traction – the ongoing rise of ETFs will remain less about a shift to passive itself, and more about how financial advisors are defending their own fees by squeezing out the costs of the investment products they use for client portfolios!

Weekend Reading for Financial Planners (Jun 17-18)

June 16, 2017 02:57 pm 4 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with several stories on the initial aftermath of the DoL fiduciary rule becoming applicable on June 9th, including the growing number of annuity agents who are opting in to using the Best Interests Contract Exemption (instead of PTE 84-24), state insurance regulators considering whether to change the annuity suitability rules to a more fiduciary-like standard, and a look at the latest Schwab Independent Advisor survey that finds as DoL fiduciary shifts more advisors towards the AUM model and increases competition, that more advisors are feeling compelled to offer more services and spend more time with clients to justify their advisory fees (but without being able to charge more for the extra effort and offerings).

From there, we have a few technical articles this week, from Ed Slott discussing how HSAs can be used not just for ongoing health costs but as a supplemental tax-preferenced savings account for future retiree health care costs, the rise of 81-100 group trusts as a lower cost alternative for small business employer retirement plans (in a world where it's still difficult to offer a Multiple Employer Plan [MEP]), and a discussion of what Private Placement Life Insurance (PPLI) is and where it fits for certain ultra-high-net-worth clientele.

We also have several practice management articles, focusing on hiring and building our your advisory team, including: a roadmap on how to hire top talent (by first determining core values and core competencies, and using those to screen out candidates first); why it's better to look for "cultural add" than just "cultural fit" to improve diversity (and how hard that really is, given our tendencies to hire people like ourselves); and guidance from Julie Littlechild on how to establish a mentoring program to aid in the personal development of your team.

We wrap up with three interesting articles, all focused around homeownership, housing policy, and the country's growing challenges with affordable housing: the first looks at how the trend of Millennials to live in the urban core of cities (instead of the suburbs) is exacerbating the housing crisis, as there simply isn't as much room to build housing in already-densely-populated urban areas (and the high cost of land in urban centers tends to lead developers to build more expensive housing to generate a return on their own real estate investment, which just makes the problem worse); the second explores how the shift of the economy from manufacturing to knowledge workers is leading to a growing concentration of workers in urban areas (where "smart people" can meet and gather and form businesses together), which suggests the housing challenges created by urban concentration will just get worse (even as it provides an unexpected windfall for existing homeowners in major cities); and the last explores how the emerging affordable housing crisis is bringing newfound scrutiny on the popular mortgage interest deduction, which over the years has shifted to disproportionately become a tax subsidy for upper-income individuals (who can actually afford houses, and have mortgages that charge enough interest to exceed the standard deduction, and benefit the most from the deduction at their higher tax rates), and whether it's time to reform the program into at least an alternative 15% mortgage interest credit (which would reduce the benefit for upper-income individuals, and make it more accessible for lower-income individuals, even and including those who don't itemize their deductions at all).

Enjoy the "light" reading!

Why Actively Managed Mutual Fund Performance Is About To Improve

June 15, 2017 01:24 pm 1 Comment CATEGORY: Investments

This week is the first that financial advisors must operate under the Department of Labor's fiduciary rule, subject to Impartial Conduct Standards which require that they must give best interests advice, for reasonable compensation, and make no misleading statements. While much has been said about the impact this will have for advisors and their clients, there's also a not-well-discussed secondary shift that will be triggered by the DoL fiduciary rule, which will impact actively managed mutual funds and their performance in the coming years - in a "surprisingly" positive way.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss how the DoL fiduciary rule will likely end out causing an improvement in the return performance of actively managed mutual funds, thanks to the rise of clean shares and a shift in how brokers are compensated for recommending such funds!

Most predictions about the likely impact of the Department of Labor’s fiduciary rule is that it will lead to a (continued) decline in the use of actively managed mutual funds, and support the ongoing rise of passive ETFs, thanks to the fiduciary rule’s focus on low cost. But the truth is, that there actually is no requirement in the DoL fiduciary rule that financial advisors eschew actively managed funds and switch to lower cost passive funds. The only real requirement is that if an advisor is going to use an actively managed fund, that there needs to be a clear reason and justification for paying that active manager’s fee. And if you can make the case for the active manager, there’s nothing wrong with using the actively managed fund.

There is, however, a requirement to use the lowest cost share class if multiple share classes of the same fund are available. This is why we've seen the launch of T shares and clean shares – which either pay a uniform 2.5% upfront commission and 0.25% trails, or eliminate commissions entirely with the broker-dealer then wrapping a levelized commission around the whole fund or account. And this matters, because mutual funds currently have to report their performance net of commissions and broker compensation. But as broker-dealers shift to being compensated by levelized commissions outside of the funds (even if the consumer still pays a 1% fee via the broker-dealer equivalent to the 1% trail in a C share), the mutual fund itself will no longer have to count the broker's compensation against their own performance!

And this is important because a lot of mutual fund managers have not been underperforming by the amount of the manager's fee, but instead, they've been underperforming because of the drag of the broker's commission compensation. Which means, "suddenly", we're going to start seeing the average actively managed mutual fund begin to improve on its performance... starting this week, with the rollout of the DoL fiduciary rule (and the rapidly rising adoption of clean shares in particular). Not because mutual fund managers are necessarily managing any differently or better, but simply because they’re no longer paying broker compensation out of their own performance track records! Ironically, this may even handicap RIA performance reporting relative to brokers, given that brokers typically point to mutual fund performance (which will not include the broker-dealer's level commission payout) instead of account performance, whereas advisors in an RIA that want to market GIPS-compliant performance track records will still have to follow specific rules requiring a full accounting for fees.

In the end, this shift may still result in a roughly-similar total cost to consumers - whether it's a 1% AUM fee, a 1% commission, or a 1% broker-dealer payout wrapped around clean shares - but the net result nonetheless is that with a shift to clean shares, reported performance for actively managed mutual funds is going to start looking better. Which means in a few years, we may suddenly be talking about how much better actively managed mutual funds are doing again. But it won't be because "the pendulum swinging from passive to active"... or because that's when the Fed started accelerating their rate increases... or whatever else happens economically from here. It will be because DoL fiduciary reconfigured how brokers get paid, reducing the need for 12b-1 fees, reducing the expense ratio of actively managed mutual funds, and improving the reported performance of the mutual fund itself!

Maximizing Tax Deductions For Long-Term Care (LTC) Insurance

June 14, 2017 07:00 am 25 Comments CATEGORY: Taxes

With the 1996 introduction of “tax-qualified” long-term care insurance under the Health Insurance Portability and Accountability Act and IRC Section 7702B, Congress affirmed that long-term care insurance benefits are tax-free, and began to offer tax benefits for purchased LTC insurance coverage.

However, over the years the evolving landscape of both individual tax deductions in general, and long-term care insurance tax preferences in particular, have created a confusing myriad of options to purchase LTCI and receive favorable tax treatment.

In this article, we explore the full range of options, from the most favorable (purchasing on behalf of employees, or for employee-owners of a C corporation or who are less-than-2% shareholders of an S corporation), to the slightly less favorable (purchasing for owner-employees of partnerships and LLCs, more-than-2% owners of S corporations, and sole proprietors), to the least favorable (paying for LTC insurance premiums directly, subject to age-based limitations, medical expense AGI thresholds, and itemized deduction limitations). And there are also the less-common-but-also-sometimes-appealing alternatives, like using the money in a Health Savings Account (HSA) to purchase LTC insurance, or funding it via a partial 1035 exchange into a standalone LTC insurance or hybrid LTC policy.

Ultimately, the reality is that some people won’t actually have many choices about how to pay for coverage – the choice will simply be whether to purchase or not, and write a check for the premiums as the only means eligible. Nonetheless, it’s important to understand the full breadth of options for how to pay premiums on LTC insurance, especially given the nuanced but substantial difference in tax treatment across the different choices!

#FASuccess Ep 024: How Mindset Drives Success And The 7 Freedoms Of Limitless Advisers with Stephanie Bogan

June 13, 2017 07:01 am 15 Comments CATEGORY: Financial Advisor Success Podcast

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

This week’s guest is Stephanie Bogan. Stephanie is a practice management consultant for financial advisors, who founded her own very successful consulting firm, Quantivus, at the age of just 24, and ultimately sold it a decade later for 7 figures to Genworth Financial, back in 2008.

What's fascinating about Stephanie, though, is the consulting work she's been doing since then. Because - as with many entrepreneurs who have successfully built and sold a business, Stephanie soon realized that what she'd built and sold hadn't really brought her the life satisfaction that she had hoped. And that in turn led her into a journey into the neuroscience of success, life satisfaction, and what helps us find purpose and meaning in our own businesses.

In this episode, Stephanie talks about the journey she went through in building her consulting practice - as a young 24-year-old woman trying to give practice management advice to advisors with multi-million-dollar firms that were more than twice her age, the mindset she had to create for herself to stay optimistic through the challenges, and key practice management areas that she consulting on with advisors, including Business Strategy and Planning, Human Capital, Operations, and Marketing & Growth.

We also talk at length about how our mindset as a financial advisor and business owner can both drive our success, and often limit it without even realizing there's a problem, leading to problems like the "Stress of Success", why most time management problems are really an "inability to say 'no'" problem, and what Stephanie calls the "7 freedoms of being a limitless adviser", to free yourself from a mindset of limiting beliefs that may be holding you back.

And be certain to listen to the end, where Stephanie talks about how she helped one advisory firm overcome the all-too-common problem of saying "yes" to too many accommodation clients, and not being able to draw the line between "investment-only" clients and full financial planning clients, but creating a simple one-page visual that broke the firm's services into 3 categories, set prices for each, and let the CLIENTS choose which tier they wanted.

So whether you’re simply looking for practice management advice and ideas from one of the industry’s leading experts, or perhaps need some help getting over a mental mindset of limiting beliefs that may be limiting your own success (without even realizing it, until now!?), I hope you enjoy this latest episode of the Financial Advisor Success podcast!

Nerd’s Eye View 2017 Reader Survey – Your Input Is Requested!

June 12, 2017 07:01 am 15 Comments CATEGORY: Nerd's Eye View

Here at Kitces.com, the goal is always to make the Nerd's Eye View blog and the Members Section an ever-more-valuable resource for all of you, the readers. Which means we want to hear from you about what we can do to make this website even better for you.

Over the years, reader feedback has shaped everything from the visual design of the blog (from its original dense small font!) and the Disqus comment system we use, to the expansion of our Members section to offer CFP and then IMCA CE credit (and soon, CPE for accountants as well!) for Nerd's Eye View blog posts, the launch of the Financial Advisor Success podcast, and more.

And while I'm happy with the progress we've been making, I'm sure there's still more than we could do differently to serve you better. Accordingly, every year we conduct a feedback survey to all of you who read this blog, to get your thoughts and feedback about the features we're offering, some new ideas we're considering, and whatever other input you're willing to share about what we could do to make this a more valuable site (and a better user experience) for you.

So regardless of what kind of reader you are: an advisor, an individual consumer who reads this blog for your own benefit, a related professional that works with financial advisors, or you're associated with a vendor who serves advisors... I hope you'll participate in this year's survey. It's only 10 questions, should take no more than a few minutes, and will remain open until the end of next week (June 24th).

Thanks in advance for taking a few minutes to click through on the "Read More" link below to access our reader survey, and share your feedback! 🙂

Weekend Reading for Financial Planners (Jun 10-11)

June 9, 2017 02:56 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the implementation of the Department of Labor's fiduciary rule, with the previously-delayed Impartial Conduct Standards taking effect today, June 9th... even as the DoL begins the public comment process of modifying the rule, and Congress proposes further legislation to potentially kill it, suggesting that the fiduciary battle is far from over, especially given that full enforcement is still not scheduled to take effect until 2018 (allowing room for further debate and at least modifications to the rule and its requirements).

From there, we have several articles around marketing and business development, including some very practical ideas on how to improve your client onboarding process to improve trust (and generate referrals), marketing ideas on how financial advisors can build the business (hint: it's more about persistency of the marketing strategy than a super-creative idea to do something completely new!), and a look at the latest research on how we determine who to trust in the first place (in the context of both employees trusting company leadership, and prospective clients trusting a new advisor).

We also have a few technology-related articles this week, from suggestions on what financial advisor websites need to do to actually generate real prospects, to the new technology solutions coming forth (from financial planning software enhances to online risk tolerance assessment tools) to help aid in advisor digital marketing, a new kind of risk tolerance solution that uses facial recognition to detect when clients become financially stressed, a new digital 401(k) solution for financial advisors, and a look at the proliferating number of "client portals" that financial advisors can offer (none of which really do everything that a financial advisor actually needs!).

We wrap up with three interesting articles, all focused around crafting and improving the financial advisor value proposition: the first is a fascinating look at "The Elements Of Value" from a recent study published in the Harvard Business Review, finding that the key components of value break down into a series of 30 categories, organized around four categories of Functional, Emotional, Life-Changing, and Social Impact (where businesses don't need to offer all 30, but can excel but thinking about how to be especially good at 5-10 of them); the second looks at the way one financial advisor describes his value proposition to clients, emphasizing that while most people can do it themselves with available technology tools today, few have the time, knowledge, inclination, and behavioral focus to do it well (whereas the value of the financial advisor is knowing and ensuring that it will be done right!); and the last is a look at how the rise of a fiduciary duty, coupled with the rise of technology, is leading financial advisors around the world to struggle in articulating their value proposition going forward, and suggesting that ultimately the way forward will be a shift from helping clients with the "hows" (which they can just look up online), and instead work with them on their financial "whys" instead.

Enjoy the "light" reading!