Kitces.com - Advancing Knowledge in Financial Planning

Last Chance To Share Your Best Practices With Your Fellow Advicers At The 2025 Kitces Marketing Summit!

We’re seeking advisors with proven marketing practices to inspire their peers. Share your expertise, give back to the community, and collaborate with Michael Kitces and Taylor Schulte. Plus, you’ll earn $2,000 and a box of Kitces goodies!

The submission deadline is Monday, January 13th, 11:59 PM EST so if you’re interested, submit via the link below.

APPLY TODAY

When CFP® Professionals Have To Actually ‘Do’ Financial Planning

June 3, 2020 07:08 am 0 Comments CATEGORY: Ethics

One of the hallmarks of recognized professions is that they have established Practice Standards that define the process that professionals of that discipline are expected to engage in to ensure that their clients/patients/etc. are well-served. The end result is not only a more consistent quality of service from that professional discipline – when everyone engages in a vetted process that has been refined by recognized best practices – but also an important means of protection for professionals themselves, who can point to the fact that the process was diligently followed, even and especially in scenarios where the outcome isn’t favorable (e.g., the doctor who can point to the fact that the processes were conducted appropriately, even if the patient themselves unfortunately didn’t survive).

Accordingly, CFP® professionals have long had a version of “Financial Planning Practice Standards” that apply to the delivery of Financial Planning itself, known by the EGADIM acronym (short for Establish relationship, Gather data, Analyze the client situation, Develop and present planning recommendations, Implement the recommendations, and Monitor). But effective on October 1^st of 2019 (which were first enforced starting on June 30^th of 2020), CFP Board updated the Financial Planning Practice Standards to a new 7-step process of CGADPIM (understand Circumstances, Gather data, Analyze, Develop recommendations, Present recommendations, Implement, and Monitor).

CFP® professionals providing Financial Planning are expected to engage in the full 7-step Financial Planning process with clients, unless the Scope of Engagement specifically excludes the Implement and Monitor phases (e.g., for an hourly or project-planning-only engagement). In addition, the full Financial Planning Practice Standards will apply if the Client engages the CFP® professional for Financial Advice that broadly integrates a wide range of advice areas or otherwise requires Financial Planning based upon a weighing of factors that CFP Board specifically identified in the Code and Standards (i.e., “Financial Advice that Requires Financial Planning”), or in situations where the Client has a reasonable basis to believe the CFP® professional will provide or has provided Financial Planning (i.e., if the CFP® professional suggests the Client is going to receive Financial Planning based on how they market and hold out, they have to actually do so!).

Notably, though, CFP® professionals do not have to engage in comprehensive (7-step) Financial Planning with every client. In situations where clients do not engage for Financial Planning, or seek out only narrow-scope (i.e., non-integrated) Financial Advice – or where the Client outright refuses to engage in the comprehensive Financial Planning process after being warned of the consequences – CFP® professionals may still proceed in providing non-Financial-Planning (i.e., not comprehensive and following the full 7-step process) Financial Advice. However, in all cases, CFP® professionals will still be held to CFP Board’s new ‘fiduciary-at-all-times’ standard with respect to the advice itself (even if not delivered pursuant to the full 7-step process).

The key point, though, is simply to understand that whenever CFP® professionals are engaged in Financial Planning itself – or provide advice that is so comprehensive and integrated it necessitates the full scope of Financial Planning – they are expected to follow the full 7-step Financial Planning process. Which isn’t intended to be unduly burdensome, but simply to help ensure that when financial planning advice is given, the CFP® professional has fully considered all the relevant facts and circumstances, as well as Client goals and objectives, before coming to a fiduciary recommendation in the Client’s best interests!

#FASuccess Ep 179: Investment Banking For Wealth Management And The Evolution Of Advisor Enterprise Value, with Elizabeth Nesvold

June 2, 2020 07:06 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 179th episode of Financial Advisor Success Podcast!

My guest on today's podcast Elizabeth Nesvold. Elizabeth is the managing director and head of asset and wealth management investment banking for Raymond James, which provides investment banking services for some of the largest independent advisory firms engaging in capital transactions. What's unique about Liz though, is that she has covered wealth management as an investment banker for more than 25 years now, and has seen firsthand how the valuation of wealth management firms has evolved over the decades to become what it is today.

In this episode, we talk in-depth about how an investment banker looks at the valuation of an advisory firm. The way that, early on, RIAs were valued primarily by their assets under management and how evolving advisory fee models, away from the traditional 1% AUM fee, caused a shift for RIAs to be valued by their gross revenues instead. The way further shifts in what advisory firms do (and don't do) to provide value for their fees, and the associated cost for those services, have caused advisory firm valuations to shift again to focus on multiples of free cash flow instead, and how obtaining a valuation of an advisory firm can be a powerful tool for the firm owner to understand whether the business is really getting a good business ROI on the resources it expends to service its clients.

We also talk in-depth about what investment bankers actually do for wealth management firms, the dynamics of raising capital when starting an advisory firm and who actually can raise capital to start a firm, how it works when an investment banker is engaged to help an advisory firm recapitalize and buy out an existing partner or founder, why advisory firms engage investment bankers to facilitate mergers and acquisitions when buying or selling a firm, and the typical success fee that investment bankers receive to help make sure a deal actually goes through.

And be certain to listen to the end where Liz shares her own journey as someone who sat down at her kitchen table and started her own firm, Silver Lane, that grew into a practice, and then into a business, and then ultimately was sold to Raymond James. How she navigated the challenges in crossing the deserts of profitability that emerged as the business reinvested for growth, and what she learned as a founder that sold her own firm that she now brings to the table in counseling other advisory firm founders that are getting ready to sell their businesses as well.

The Latest In Financial Advisor #FinTech (June 2020)

June 1, 2020 07:08 am 2 Comments CATEGORY: Technology & Advisor FinTech

Welcome to the June 2020 issue of the Latest News in Financial Advisor #FinTech – where we look at the big news, announcements, and underlying trends and developments that are emerging in the world of technology solutions for financial advisors and wealth management!

This month's edition kicks off with the news that Goldman Sachs has acquired Folio Institutional and its $11B RIA custody platform for 450 (mostly small) RIAs… and raising the question of whether Goldman is making a play to compete for small RIA custody opportunities as Morgan Stanley acquires E*Trade Advisor Services and Schwab acquires TD Ameritrade, or if Goldman will repurpose Folio to capture large wirehouse breakaway teams, or simply use it as a custodial platform for their own RIAs (Ayco and United Capital), or turn it into a robo-advisor solution paired with Marcus, or use Folio’s fractional share trading capabilities to build a direct indexing solution. Or perhaps all of the above!?

From there, the latest highlights also include a number of other interesting advisor technology announcements, including:

Franklin Templeton acquires the robo-advisor-for-advisors AdvisorEngine, but the real play may be to reinvigorate Junxure CRM?
AdvicePay rolls out Offices for Enterprises as LPL signs on to the trend of fee-for-service financial planning
Smarsh acquires Entreda as device management cybersecurity becomes a more pressing issue in a future with more remote workers
Plaid launches an integration with Microsoft that will offer consumers (or advisors and their clients) a spreadsheet-based budgeting tool with automated account aggregation
PlanTechHub launches a new financial planning software competitor built around actually showing the value of a financial advisor’s recommendations to clients

Read the analysis about these announcements in this month's column, and a discussion of more trends in advisor technology, with special AdvisorTech consulting guests Craig Iskowitz and Kyle Van Pelt, covering news including Aurora Capital acquiring FMG Suite to build ‘Hubspot for financial advisors’ as interest grows in advisor digital marketing, Vise.ai launches a new robo-tech-turned-TAMP solution for advisors, Envestnet launches a next-generation client portal that includes not just performance reporting and news but also client To-Dos, Fidelity rolls out a new Virtual AI assistant not for clients but to support advisor back-office servicing, and Morningstar doubles down on its bet of a more ESG-centric future by fully acquiring Sustainalytics (after buying an initial 40% stake back in 2017).

And be certain to read to the end, where we have provided an update to our popular new “Financial Advisor FinTech Solutions Map” as well!

I hope you're continuing to find this column on financial advisor technology to be helpful! Please share your comments at the end and let me know what you think!

*And for #AdvisorTech companies who want to submit their tech announcements for consideration in future issues, please submit to [email protected]!

Weekend Reading for Financial Planners (May 30-31)

May 29, 2020 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 the big industry news that FPA Executive Director Lauren Schadle has resigned in the face of 8 years of stagnant membership and a recent accelerating decline, a new interim CEO is stepping in, and the FPA is beginning a national search for new leadership to try to get its growth engine firing again (giving the ongoing growth of the financial planning profession itself).

Also in the news this week is an announcement that the CFP Board is updating its own Disciplinary Rules and Procedures in advance of the June 30th enforcement date for its updated Code of Ethics and fiduciary-at-all-times Standards of Conduct, and a recent study by Hearsay Social shows the dramatic improvement in results that financial advisors get by sharing more personal and authentic information on social media channels beyond just canned investment content.

From there, we have several articles on cash flow and spending decisions, including a look at how credit card companies are beginning to shift their rewards benefits in the face of a major pullback in travel and dining, a look at the ongoing rise of subscription services for 'everything' and tips on how to keep track of them all, and an interesting discussion of the benefits of 'taking a sabbatical' to work remotely as a renter instead of buying a house (with all the costs and reduced flexibility that entails).

We also have a few retirement-related articles this week, from a look at how the coronavirus pandemic may shave one or several years off the survivability of the Social Security trust fund (accelerating either a prospective cut in Social Security benefits, or action in Congress to shore up the system), a look at the use of hybrid annuity/LTC policies in low-interest-rate environments, and why it's perhaps time to eliminate the assumption of 'retirement' altogether and instead think about phased glidepaths of retirement itself (where hours worked and duties gradually shift over time, rather than a hard-stop retirement plan).

We wrap up with three interesting articles, all around the theme of client communication and engagement: the first delves into recent research on exactly what communication strategies support client trust, satisfaction, and referrals; the importance of evolving client communication beyond 'just' regular check-ins (including and especially in the coronavirus pandemic environment); and the last provides a powerful reminder of the emotional benefits of working with a financial planner, in terms of not just walking clients off the proverbial investment ledge but also simply helping them to focus on what they can financially control (from investments to spending and more)!

Enjoy the 'light' reading!

Why Discretionary See-Through Trusts May Require Reform After The SECURE Act’s 10-Year Rule

May 27, 2020 07:06 am 2 Comments CATEGORY: Retirement Planning

The passage of the SECURE Act in December of 2019 introduced several notable changes to the rules governing retirement accounts. One of the most significant was the elimination of the ‘stretch’ provision applicable to most non-spouse Designated Beneficiaries of inherited retirement accounts. Instead of allowing such beneficiaries to continue ‘stretching’ their distributions over the span of their own lifetimes, the SECURE Act now requires that certain beneficiaries deplete their inherited retirement accounts by the end of the 10th year after the year of the account owner’s death. And while that poses challenges when planning for individuals who are retirement account beneficiaries… the planning challenges increase exponentially for “See-Through” Trusts, which can also be designated retirement account beneficiaries.

See-Through Trusts are treated as a Designated Beneficiary (by “seeing through” to the underlying beneficiaries) of an inherited retirement account and come in two basic forms – a “Conduit Trust” and a “Discretionary Trust”. Whereas conduit trusts require all distributions from an inherited retirement account received by the trust to be passed out (i.e., “conduited”) to the trust beneficiaries each year, discretionary trusts allow for the build-up of distributed dollars within the trust. Under certain circumstances, each type of trust can still take advantage of the stretch provision if the underlying beneficiaries can be considered Eligible Designated Beneficiaries, but See-Through Trusts will generally be subject to the 10-Year Rule if the underlying beneficiaries are Non-Eligible Designated Beneficiaries.

Applicable Multi-Beneficiary Trusts, meanwhile, can be used for trusts that have multiple beneficiaries (all of whom are people), when one or more of the beneficiaries is a disabled or chronically ill person. These trusts were established by the SECURE Act to help beneficiaries maintain their eligibility in certain means-tested programs such as Supplemental Security Income and Medicare. If Non-Eligible Designated Beneficiaries are named as beneficiaries to an Applicable Multi-Beneficiary Trust, the stretch provision can still apply to the disabled/chronically ill beneficiary (and would be based on the oldest beneficiary if all are disabled/chronically ill), provided the trust splits into a separate sub-trust for the disabled/chronically ill person immediately upon the account owner’s death.

The primary challenge that the SECURE Act imposes on discretionary trusts stems from the high trust tax rate – the income threshold for the maximum trust tax rate (37%) is only $12,950, versus the income threshold of $622,050 for the 37% personal income tax bracket for joint filers! And because any funds distributed from a retirement account to the trust will be taxed at the trust’s income tax rate if they are not subsequently distributed to the trust beneficiary in the same tax year, the tax liability that can result from distributions left in the trust can be substantial.

Some strategies that financial advisors can use to help clients maximize the post-tax value of inherited retirement account funds left to a Discretionary Trust include immediate Roth conversions of any distributions from the inherited retirement account, which especially makes sense when the account owner is in a lower tax bracket. If Roth conversions are not possible (e.g., if income is too high to permit them), using distributions to fund a life insurance policy can be a potential alternative strategy, but only if there is relative certainty that the funds won’t be needed during the account owner’s lifetime. Other strategies that permit distributions to be taxed at potentially lower individual income tax rates instead of the higher trust rates include providing the trustee with the freedom to time inherited retirement account distributions and creating a Discretionary Trust that allows a beneficiary to exercise a power of withdrawal over annual distributions made from the IRA to the trust.

Ultimately, the key point is that Discretionary Trusts, like Conduit Trusts, have been significantly impacted under the SECURE Act. Accordingly, it is crucial for advisors to know which clients have named a discretionary trust as part of their planning, and for those clients with special needs trusts, to ensure that they conform to applicable MBT guidelines. The low-income threshold for the highest trust tax rate bracket is a particular challenge for trust distributions and can be avoided by using Roth conversions immediately after distributions are made to the trust; timing distributions between inherited retirement accounts, the trust, and the beneficiaries; and providing the beneficiary with the power of withdrawal over annual distributions (when it makes sense to do so).

#FASuccess Ep 178: Blogging Your Way Into A Successful Niche By Simply Pursuing Your Own Curiosity, with Daniel Zajac

May 26, 2020 07:05 am 1 Comment CATEGORY: Financial Advisor Success Podcast

Welcome back to the 178th episode of Financial Advisor Success Podcast!

My guest on today's podcast is Daniel Zajac. Daniel is a financial advisor and partner with Simone Zajac, a hybrid advisory firm on the Lincoln Investment platform that oversees nearly $250 million of assets under management for nearly 300 clients. What's unique about Daniel, though, is the way he's driven an evolution of how the advisory firm markets itself, from the traditional approach of networking with local centers of influence and relying on existing client referrals, to developing a blog for those earning significant equity compensation from their employers that has turned into one to three new digital prospects for the firm every week, many of whom are bringing seven-figure accounts to the firm, even in the midst of the coronavirus pandemic.

In this episode, we talk in-depth about how Daniel built and developed a niche in working with those who receive significant equity compensation, including the years it took early on for Daniel to gain any traction with his blogging efforts, how pivoting to focus more narrowly on equity compensation accelerated his positive results, how Daniel selected equity compensation as his emerging niche in the first place, what Daniel focused on in the early years to figure out if he was on track when there were not a lot of new clients coming through yet, and how even today, Daniel has found that when blogging and marketing is focused on a niche, website traffic of just a few hundred visitors a day or a few thousand per month is sufficient to drive material new business results.

We also talk about how Daniel's advisory firm prices and delivers its planning services to clients, the digital meet-and-greet session they start with every prospect to determine if they're the right fit, the way the firm uses Dropbox in the data-gathering process to make it easy for prospective clients to share information, why the firm also offers tax preparation to clients as a part of its services, and how forming a niche has opened up new opportunities for lucrative hourly planning in addition to their traditional AUM business.

And be certain to listen to the end, where Daniel shares his perspective on why it's so important to focus sooner rather than later, having struggled himself to find his own traction after his first five years as an advisor, how the path to specialization is really more about iterating incrementally deeper and deeper and not just trying to pick the perfect future niche, and the importance of recognizing that even if you commit to an initial direction, you can always pivot to another niche focus if you're not happy with the results.