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Kitces & Carl Ep 26: Talking Clients Out Of The Bunker Portfolio

January 30, 2020 07:27 am 4 Comments CATEGORY: Kitces & Carl Podcast

Kitces & Carl Episode 26 - Talking Clients Out Of The Bunker Portfolio

Clients often worry about how “the market” may be doing at any given time, which is understandable given the assets they may have invested there. However, there are times when some clients (particularly those who experienced the worst of the financial crisis a little over a decade ago) completely lose faith in the entire economic system altogether and want to abandon their financial plan to go all-in with a ‘bunker portfolio’, investing solely and entirely into select assets (like gold) that they feel will ‘save them’ from the risk of an overall failure of the entire economic system.

The fear that stokes the bunker portfolio goes beyond the typical concern over bear markets or periodic market volatility – it is based on a deeper fear and doubt about the entire foundation of the economic system. And for financial advisors working with such clients, the challenge is in helping them understand that, despite inevitable economic cycles, shifting their portfolio to ‘bet’ on a complete collapse of the entire economic structure is itself a low-odds, high-risk bet, such that even with the potential risk, the best course of action is generally still to stick to their financial plan and stay the course instead.

In our 26th episode of Kitces & Carl, Michael Kitces and financial advisor communication expert Carl Richards discuss how to communicate with clients with extreme distrust of the economic system as a whole, as contrasted with temporary concerns over market volatility (in which case a different conversation around market timing needs to be considered), and present strategies to help those clients from making fear-based decisions.

The first step in talking clients out of the bunker portfolio is for advisors to confirm that clients appreciate the fundamental principles around risk and return and that for more than a century, equities have fared better than fixed income, and fixed income has outperformed cash.

Even so, clients may still feel beholden to escape-hatch strategies to avoid market catastrophe. In these situations, advisors can help them understand the value of diversification by framing hypothetical out-of-market portfolios as risk-based ‘bets’ themselves, considering whether the portfolio the client is proposing would stand the test of time. And by examining the data, the advisor can simply ask (and assess) how often (if at all) the proposed portfolio would have made sense and actually been an appropriate choice. Often, this is enough to convince the client of the merits of their original plan and to stay the course.

For some clients, however, no amount of reason will persuade them that the economic system is not actually about to fail. And while an advisor’s primary role is to help clients meet their goals and to clearly understand the impact of their decisions, the advisor must also consider the overall happiness or dissatisfaction the client may experience as they follow their recommended plan in achieving their goals. Because if the client doesn’t fully agree with their advisor’s recommendation, and becomes so stressed about going along with the plan anyway, the advisor’s plan becomes exactly that – the advisor’s plan, and not the client’s plan. On the other hand, the strategy that the client does want to pursue, in opposition to their advisor’s recommendations, may not be one that the advisor, in good faith as a fiduciary of the client, can stand behind. Accordingly, in such circumstances, the advisor may simply need to acknowledge that the best course of action would be to terminate the relationship.

Ultimately, though, the key point is simply that clients who have completely lost faith in the economy need to be on the same page with their advisor around assumptions and principles of the market for the client-advisor relationship to continue on a healthy path. Because, unless the client is in agreement with the basic assumptions on which their financial plan has been built, it may not be possible to talk them through their fear-based decisions at all.

Distinguishing Financial Stress From Anxiety And Client Communication Strategies To Help

January 29, 2020 07:04 am 0 Comments CATEGORY: Client Trust & Communication

In today’s digital-age culture where nearly all sources of news and media are instantly accessible and information overload is a normal state of being, it is not surprising that stress and anxiety are very commonly experienced in our fast-paced society. And in fact, stress and anxiety about specific financial problems are what most often drive people to seek the help of an advisor in the first place! Which, in turn, means that advisors should have some strategies in their toolbelts to effectively help clients (prospective or otherwise) who might be stressed and anxious. Accordingly, the first step is understanding that, while the terms “stress” and “anxiety” are often used interchangeably, the reality is that they are two very different things, indeed, and require different approaches.

While stress is the result of external stimuli perceived to pose some level of threat (with a corresponding response to the threat that may involve uncertainty about one’s own ability to deal with the issue at hand), anxiety results from internal forces arising from unhealthy attitudes towards a particular idea or concept. Thus, while stress can be eliminated when the external stimuli are removed, the same is not necessarily true for anxiety. While an external stimulus might serve to trigger anxiety, removing it may have no effect on the anxiety since it is the internalized idea that causes the anxiety (versus the actual external trigger).

A recent study released by the FINRA Foundation examined specific differences between individuals reporting financial stress and financial anxiety and found that 44% of all respondents reported experiencing financial stress. Other results provided by the study showed stress levels varied by sex, income level, age group, healthcare concerns, presence of dependents, and retirement status. More detail on these differences can be found in the following figures.

Interestingly, financial anxiety is consistently higher than financial stress across a variety of demographic groups, roughly 10 percent higher. This might be justified by the very definitions of stress and anxiety, whereas stress can be addressed by removing the stimuli acting as the stressor, anxiety will linger as psychological damage even in the absence of whatever stressor might be the initial root of the anxiety.

And while stress and anxiety may appear very similar, the underlying causes are distinct and communication styles to deal with each condition should be adjusted accordingly. For instance, advisors who have clients experiencing stress can most effectively help them by reframing the stressful issue positively (such as by reminding how they’ve successfully overcome similar challenges in the past), focusing on the problem (discussing the specific problem and plan of attack), and making to-do lists for the client. On the other hand, clients with anxiety may be overwhelmed by these strategies. Accordingly, advisors can use a different set of techniques, such as providing a safe place to have conversations about money issues, offering guidance as a teacher and supporter, and recognizing and acknowledging growth and progress. And while stress and anxiety may appear to have similar symptoms on the surface, simple assessment tools can help the advisor assess whether their clients are experiencing stress or anxiety so that communication strategies can be adapted accordingly.

Ultimately, the key point is that while stress and anxiety affect many individuals, financial advisors can best help their clients by having mechanisms in place to help them identify any stress and anxiety they may be experiencing. Additionally, taking care of themselves and managing their own stress and anxiety issues is something else advisors must do; otherwise they run the risk of unintentionally transferring their own emotions onto the client.

#FASuccess Ep 161: Cultivating The Right Firm Culture With A Reality-Based Leadership Approach, with Tessa Felix

January 28, 2020 07:03 am 1 Comment CATEGORY: Financial Advisor Success Podcast

Welcome back to the 161st episode of Financial Advisor Success Podcast!

My guest on today's podcast is Tessa Felix. Tessa is the HR and operations lead for PWL Capital, an advisory firm based in Montreal and Ottawa that oversees nearly $3.6 billion in assets under management.

What's unique about Tessa, though, is her particular focus on developing the culture of her advisory firm, and the systems and structure that she's put in place to help hold everyone on the team accountable for their work, in addition to making the firm an enjoyable environment to work in.

In this episode, we talk in-depth about the Reality-Based Leadership system that Tessa has incorporated into her management approach in the firm. Why the emotional expense of employee drama is such an important cost to manage and save for the firm; Tessa's routine of weekly team meetings, internal team podcasts, and monthly one-on-ones that she uses to maintain the culture of the firm; and why in the end, culture is not just about creating a fun workplace, but about the actions and behaviors that are expressed in the workplace.

We also talk about Tessa's own career journey. From joining her advisory firm in an operations role, earning her advisor licenses to shift into a client-facing advisory role, deciding that she actually enjoys the work of managing people and building culture more than working directly with clients and shifting back into an internal operations role, the way she navigated the challenging transition from being a peer of her co-workers to their manager instead, and how she ultimately became not just the HR and operations lead, but the culture lead for her advisory firm as well.

And be certain to listen to the end, where Tessa shares some of the key books that have influenced her journey of learning how to develop and manage people and culture, the software tool she uses to help manage internal team meetings and employee engagement, and the importance of both cultivating a growth mindset in employees and having a growth mindset as a firm where culture itself will always be fluid and evolving.

And so with that introduction, I hope you enjoy this episode of the "Financial Advisor Success" podcast with Tessa Felix.

Practical Cybersecurity Steps For (Independent) Financial Advisors To Better Protect Client Data

January 27, 2020 07:07 am 16 Comments CATEGORY: Technology & Advisor FinTech

In most financial planning firms today, nearly all business operations depend on some form of cloud-based technology or other data storage system. And given the sensitive and personal nature of client information that financial advisors are entrusted with and work with on a daily basis, reliable security measures need to be implemented to protect that client data, wherever it is stored. In fact, both the SEC and FINRA have increasingly recognized the significance of cybersecurity measures for financial planning firms in recent years, and offer extensive regulations, rules, and guidelines to ensure advisors effectively protect client and firm data against the vast expanse of malicious cyber-threats that attempt to steal valuable Personally Identifiable Information (PII) across the globe on a daily basis.

However, the rules and regulations around cybersecurity and identity theft can seem overwhelmingly complex to deal with, especially for financial planners who are sole proprietors or who work in smaller firms. As while larger firms have the staff infrastructure of dedicated IT and compliance teams, smaller practices don’t have this option and are often left to their own devices (or seek out consultants at additional compliance cost) to develop cybersecurity plans for their practices.

Even more problematic, though, is simply the fact that most financial planners became financial planners to be financial planners… not cybersecurity experts. And while most financial planners may know enough about computer systems and basic internet processes to manage their firms, few have an extensive background in IT sufficient to fully develop their own sound, yet manageable, cybersecurity plan.

In this guest post, Preeti Shah – herself the founder and sole proprietor of Enlight Financial, an RIA located in Matawan, New Jersey that works with physicians and business owners – shares her own 16-point cybersecurity plan that she personally developed, and how she boiled down the complex regulatory requirements of cybersecurity into practical categories of tools and systems to manage and implement on her own.

In practice, Preeti converted her cybersecurity requirements into a comprehensive checklist that includes measures to protect her email systems, ensure safe mobile technology practices, provide secure document storage and software solutions for use with her clients, maintain a secure physical working environment, and provide for an emergency plan in case disaster strikes.

Ultimately, the reality is that no cybersecurity plan will be perfect as cyberthreats continually evolve. Still, though, a work-in-progress framework that continues to evolve as each point is revisited and improved upon over time can help protect key data and demonstrate to regulators a good-faith effort to do so. And the reality is that financial advisors don’t need to be cybersecurity experts to implement a reasonably sound plan to better protect their clients' and their firm’s confidential data… at least once their cybersecurity requirements are boiled down to more practical steps that can be implemented!

Weekend Reading for Financial Planners (Jan 25-26)

January 24, 2020 03:01 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 lawmakers are recommending the Federal Trade Commission investigate Envestnet's Yodlee over its data-sharing practices, raising concerns that the anonymized data they sell might still potentially be pieced back together by data buyers and that Yodlee is not sufficiently disclosing the way it sells data and the risks involved... though notably, Yodlee maintains that it does sufficiently scrub its data before sharing, and the practice is common across more providers than just Yodlee anyway.

Also in the news this week is a profile in Financial Planning magazine of Schwab, and specifically how it pursues advisors in its retail division that want to switch over to form an RIA or join an existing one... raising concerns about whether Schwab is impeding the ability of Schwab's retail advisors to work in the industry if they leave Schwab, or whether independent RIAs are being inappropriately aggressive in pursuing Schwab retail advisors to join their firms and bring their existing Schwab retail clients along (even though RIAs would lambast Schwab if its retail team ever tried to poach RIA clients and assets?).

From there, we have several articles on industry trends, including one analysis that suggests, despite robo-advisor competition, the market for financial planning advice is actually poised to explode to the upside in the 2020s (in large part because the rise of technology is making it so much more efficient to deliver financial advice that it will reduce the cost and expand the market of who advisors can serve), a look at the ongoing slow but steady decline of wirehouse advisor headcount (even as wirehouse advisor productivity hits record highs), and the continued rise of mergers and acquisitions of advisory firms (which hit a new record in 2019, up a whopping 31% from the prior year).

We also have several practice management articles, from a discussion of when it's time to revisit your own fee structure with clients (or not), a discussion of the rising popularity of the subscription-fee model for financial advice and when it works best (or doesn't), the appeal of offering tax-planning services to grow your advisory firm, and the rise of "cash-management" solutions where advisors can offer clients high-yield bank savings accounts to complement their investment/brokerage services.

We wrap up with three interesting articles, all around the theme of personal productivity: the first explores how effectively achieving your goals requires not just setting goals, but prioritizing them to be able to focus and avoid being overwhelmed; the second examines how the real key to productivity is to focus on the 'fundamentals' first (from sleep to nutrition to workspace environment) and your own psychology, rather than fretting about self-control or self-motivation; and the last looks at how the real key to being more productive is not about what else you can manage to do, but what you can stop doing (and especially identifying the things you can stop doing that relieve you of even more otherwise-unnecessary decisions down the road)!

Enjoy the 'light' reading!

Coordinating QCDs With Post 70 1/2 IRA Contributions Under The SECURE Act

January 22, 2020 07:16 am 8 Comments CATEGORY: Retirement Planning

In December 2019, the Setting Every Community Up For Retirement Enhancement (SECURE) Act was passed into law, making many substantial updates to long-standing retirement account rules. While one rule repealed the maximum age for making Traditional IRA contributions (as now IRA owners beyond age 70 1/2, and in fact of any age, are allowed to contribute to their accounts, as long as they have compensation [generally earned income] to contribute), another such rule was created that, in essence, limits the amount of Qualified Charitable Distributions (QCDs) a Traditional IRA account holder can make, depending on the cumulative amount of those post 70 1/2 deductible contributions claimed.

Qualified Charitable Distributions (QCDs) are tax-efficient methods of making charitable donations with funds from a Traditional IRA (or inherited Traditional IRA). Essentially, an account holder (or beneficiary) age 70 1/2 or older can transfer up to $100,000 each year directly to charity. While the distribution from the account can count toward the account holder’s annual RMD, it is not included as Adjusted Gross Income (AGI), and thus does not need to (and cannot) be included as a charitable gift itemized deduction, making it a ‘perfect’ pre-tax donation.

With the passage of the SECURE Act, however, IRA account owners must now reduce their intended QCDs by any contribution amounts made into their IRAs after age 70 1/2 (the age cap in place to make IRA contributions before passage of the SECURE Act), to the extent they have not already been used to reduce their QCD. In other words, IRA contributions made after age 70 1/2 cannot be turned around to be used as QCDs… and the rules effectively require a “LIFO” treatment that ensures post-age-70 1/2 contributions will first and foremost be used to reduce future QCDs.

Going forward, there are four steps used to calculate allowable QCDs (to account for the potential impact of post-age-70 1/2 contributions):

Determine current-year distributions made and intended to be counted as QCDs;
Calculate total remaining distributions to be denied QCD status (this includes any deductible Traditional IRA contributions made by the account owner after reaching age 70 1/2 minus any QCD amounts disallowed in prior years);
Determine current-year distributions that will be denied QCD status (by identifying the lesser of the amount determined in steps 1 and 2); and
Determine current-year distributions which will be treated as a QCD (by taking the amount from step 1 and subtracting the amount from step 3).

Presumably, this QCD ‘anti-abuse’ provision is meant to prevent individuals from deducting Traditional IRA contributions (above-the-line deductions that reduce a taxpayer’s AGI) and then donating those contributions on a pre-tax basis (as a QCD), particularly in scenarios where they otherwise were not itemizing deductions and could not have otherwise made a pre-tax charitable contribution.

Despite this new provision, though, financial advisors can use numerous strategies to help clients benefit from QCDs. For example, Traditional IRA contributions can be voluntarily removed if done by October 15^th of the year following the year in which the contribution was made. Thus, an account holder who makes a contribution, who then decides they would instead prefer to make a QCD, can withdraw the contribution within the allowable timeframe, preventing any reduction to their QCD. Alternatively, married spouses who each have their own IRA account can choose to use one account to receive post-70 1/2 deductible contributions and the other to make QCDs. A third option would be for account holders to simply ‘burn’ through their post-70 1/2 contributions by making charitable donations from their IRAs that ‘use up’ QCD-disqualifying contributions as quickly as possible. While this means that taxable income will be reported for those account distributions, charitable gifts may be reported as itemized deductions, with future QCDs to be unaffected by these contribution amounts.

Some additional strategies available to advisors and their clients work to avoid the anti-abuse rule altogether. These include using other tax-efficient means to make charitable contributions (such as donating highly appreciated stock in a taxable account, which avoids potential capital gains taxes from selling the stock outright and, for those who itemize, allowing the contribution to be itemized as a charitable donation), contributing to employer-sponsored retirement plans (e.g., 401(k)s, and even SEP IRAs and SIMPLE IRAs) or Roth IRAs instead of Traditional IRAs (since contributions to Traditional IRAs only result in QCDs being denied), and choosing not to claim the deduction on Traditional IRA contributions (even if otherwise available) and deliberately making non-deductible contributions instead (to at least preserve the non-taxable treatment of those contributions for the future).

Ultimately, the key point is that the SECURE Act’s repeal of the age limit cap on Traditional IRA contributions has complicated the coordination of post-70 ½ contributions and QCDs with its introduction of the anti-abuse provision, which reduces allowable future QCDs by the amount of post-70 ½ IRA contributions. However, financial advisors can help their clients continue to make QCDs successfully with a range of planning strategies, some of which work with the anti-abuse provision, and some that avoid it altogether.