Kitces.com - Advancing Knowledge in Financial Planning

#FASuccess Ep 165: Navigating Broker Protocol When The Firm You Start With Isn’t The One You Want To Stick With, with Steve Kampschmidt

February 25, 2020 07:03 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 165th episode of Financial Advisor Success Podcast!

My guest on today's podcast is Steve Kampschmidt. Steve is the founder of Freedom Found Financial, an independent RIA based in northern New Jersey that oversees just over $20 million in assets under management for 30 affluent clients.

What's unique about Steve, though, is that he just recently formed his advisory firm having broken away from the training program at a major wirehouse after realizing that with an entrepreneurial mindset and a goal of building a lifestyle practice with good work/life balance, it was simply far more economical for him to operate his own firm and control his own expenses than to give the majority of his income up to the grid.

In this episode, we talk in-depth about how Steve built his initial base of clients at the wirehouse through modern cold-calling techniques leveraging ZoomInfo, the salary base that the wirehouse provided while he built his initial base of clients, the type of alternative non-AUM business model he decided he wanted to create that necessitated a shift away from the wirehouse, and why he's now operating with the blend of annual retainer fees and monthly subscription fees for various client types.

We also talk about where Steve went to find the information and consulting support he needed to make the transition smoothly. What Steve actually went through to comply with the Broker Protocol when leaving his firm, the factors that led him to select Fidelity as his custodian of choice, the way he built out his advisor technology stack, and why he chose not to purchase any kind of portfolio performance reporting software and to rely solely on eMoney's financial planning portal instead.

And be certain to listen to the end, where Steve talks about realistic expectations and how many clients will stick with you if you choose to leave a large firm and its national brand, his tips for career-building in the early years especially as a career changer, and why in the end, the biggest key to success is simply having the confidence in yourself, and being willing to make whatever changes it takes to service your clients the way that you want to serve them.

The One Meeting Close: Reducing Business Development Costs By Restructuring The Advisory Firm’s Sales Process

February 24, 2020 07:05 am 4 Comments CATEGORY: Marketing

For most financial advisory firms that seek to grow, it takes a significant commitment of time to market to, attract, and ultimately close prospective new clients. But as advisory firms grow, the cost of that time it takes to attract clients through marketing efforts and close them through sales efforts becomes commensurately more expensive as the business owner’s own time becomes more valuable. Which can be problematic for firms that want to grow, and the cost to acquire new clients becomes more expensive as the business (and cost of that time) grows, becoming inherently less scalable the larger the business gets … unless the firm updates its marketing and sales methods to match the firm’s (newfound) size and resources.

In this guest post, Angie Herbers – Chief Executive and Senior Consultant at Herbers & Company, an independent management and growth consultancy for financial advisory firms – explains why advisory firms need to adapt the sales engagement methods that they use if they want to continue growing in a sustainable (and time-cost-effective) manner. As notably, while industry benchmarking statistics suggest that an average financial advisory firm will spend about 3% of revenue on marketing, these numbers only include direct marketing expenditures (e.g., online ads, consultant expenses, etc.), and don’t include the actual value of the advisor’s potentially-quite-costly time spent on acquiring clients (e.g., attending networking events, meeting with prospects, etc.). Furthermore, as a financial advisor’s firm grows and the advisor gains experience and expertise, their time generally becomes more valuable; thus, if they spend the same amount of time on client acquisition as they did when their time was worth less, the total cost actually spent on marketing can significantly increase!

In light of this growing premium on an advisor’s time as a part of the marketing and sales process, how should an advisor most efficiently spend their time on business development efforts? To address this, it’s important to consider the three primary processes in any financial advisory firm: A Marketing process to establish awareness that the firm exists, a Sales process to engage prospective clients, and a Client Service process, to cultivate lasting trust with clients and to give them a reason to stay with the firm. While many firms focus primarily on the Marketing or the Client Service process to address growth problems, the reality is that, more often than not, problems with growth (and time-cost-consuming nature) reside mainly in the Sales process – the stage in client acquisition that begins when a prospect schedules a first appointment, and ends with a signed contract.

For most advisory firms, there are generally three methods of engagement an advisor can use in the sales process. The best method for any firm to use will often depend on the approximate revenue of the firm. The “Do” Method involves actually doing something for the prospective client to show them what they might expect to receive from the firm and is most valuable for newer firms (generally those with less than $750,000 in annual revenues) who have not yet established a brand identity. Clients seeking these firms are looking for value and are most interested in what the firm has to offer them. The “Show” Method is less labor-intensive and involves showing samples of what the firm has to offer to the client (e.g., a sample financial plan or investment policy statement); in other words, these firms are typically well-established and can rely on their brand value with compelling stories, supported by “showing” what they offer. While this is more efficient than the “Do” Method, it does still require time to prepare samples to show a target clientele and is often more appropriate for firms with annual revenues between $750,000 and $3 million. The “Tell” Method is the most time-efficient and relies on an advisor’s own confidence in the firm to tell the client specifically how they will address the client’s needs. There is no “free work” done or samples offered because an advisor in a firm with more than $3M in annual revenue can generally rely on their firm’s brand value and the story behind the firm alone to establish trust with a new client. Which is important, because considering the high value of an advisor’s time at this level, (still) using the “Do” or “Tell” methods can be exponentially more expensive (than it may have been when the firm had less revenue and the advisor’s cost of time was less).

Ultimately, the key point is that the Sales process is a distinct step from the Marketing and Client Service processes and that, for many firms, growth problems can most effectively be addressed by adjusting how the Sales process is carried out. While newer firms with less revenue can benefit most using the “Do” method of offering free work to prove to clients they are worthy of their trust and engagement, firms with more revenue can benefit from the more efficient “Show” method of offering work samples and demonstrations to back up their firm’s brand identity, while firms with revenue generally over $3M are often the most well-established and generally have widespread brand recognition… that advisors can leverage to simply “Tell” a client why they should be engaged, ideally (and cost-effectively) ‘closing’ the deal after just one meeting!

Weekend Reading for Financial Planners (Feb 22-23)

February 21, 2020 03:00 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the big industry news that wirehouse Morgan Stanley is acquiring E*Trade for $13B, in a major shift for the wirehouse to move (back) towards the mass affluent with a more online digital offering via E*Trade, which opens a new pathway to E*Trade's significant business of administering employer stock plans (that can now be referred to Morgan Stanley's own advisors)... and that raises significant questions about whether E*Trade will even remain in the RIA custody business (and/or whether independent RIAs would want a custodian owned by a wirehouse competitor), and in turn, whether the potential loss of E*Trade as an RIA custody option could put even more pressure on the Department of Justice's view of the prospective Schwab-Ameritrade merger (which may have even been a factor in Morgan Stanley's timing to announce the E*Trade deal in the first place?).

Also in the news this week is a new FINRA exam sweep of how brokerage firms (including the ones serving as RIA custodians) plan to make their money in a zero-commission future and whether the prospective conflicts of interest in their alternative revenue streams are being sufficiently disclosed to clients (and their advisors), and the emerging surge in a new kind of "Registered Index-Linked Annuity" (the "RILA") that is becoming an increasingly popular risk-managed variable annuity alternative to the living benefit riders of old.

From there, we have several practice management articles, including a review of the big themes from the recent T3 advisor tech conference (from more mobile apps and integrations to an outright focus on advisor time efficiency), the ongoing rise of virtual firms (from young advisors to more senior, small firms to large), and a fresh look at other ways to measure what constitutes a "good" advisory firm (beyond just rankings of their AUM and recent growth).

We also have a few investment-related articles, from a look at the new SOFR rate that is expected to replace LIBOR in two years (and the complications that loom between now and the end of 2021 for that transition to happen), the concerns of a recent proposal from the mutual fund industry to shift more of their disclosures to be online (instead of mailed or emailed out directly), and a candid look at whether direct indexing is really a threat to the ETF industry (or "just" a kind of alternative product for certain client needs... albeit one that might still soon become a trillion-dollar AUM opportunity?).

We wrap up with three interesting articles, all around the theme of better communications with clients: the first looks at what it takes to finally see clients who are difficult to schedule for meetings (recognizing that the real problem may be that the advisor's 'check-in' meetings aren't really actually all that valuable to the client and that a better purpose is often necessary!); the ways that advisors sometimes unwittingly damage their empathy with clients in an attempt to prove or defend their own professionalism; and some tips on how to have and get through the sometimes-difficult conversations with clients that arise (and how best to introduce a difficult conversation where there's never a 'good' time to bring it up)!

Enjoy the 'light' reading!

Strategies To Mitigate The (Partial) Death Of The Stretch IRA

February 19, 2020 07:04 am 13 Comments CATEGORY: Taxes

Passed by Congress in December 2019, the “Setting Every Community Up For Retirement Enhancement (SECURE) Act” introduced substantial updates to long-standing retirement account rules. One of the most notable changes was the removal of the ‘stretch’ provision for certain non-spouse designated beneficiaries of inherited retirement accounts and the introduction of a “10-Year Rule” requiring those beneficiaries to deplete the entire balance of their inherited retirement account within ten years after the original owner’s death.

Notably, though, not all beneficiaries will be impacted by this new “10-Year Rule”. Instead, the SECURE Act identifies three distinct groups of beneficiaries: Non-Designated Beneficiaries (i.e., non-person entities such as trusts and charities), Eligible Designated Beneficiaries (i.e., individuals who are spouses of account holders, those who have a disability or chronic illness, those not more than 10 years younger than the decedent, and minor children of decedents or certain “See-Through” trusts benefiting such persons), and Non-Eligible Designated Beneficiaries (i.e., any individual or “See-Through” trust that qualifies as a Designated Beneficiary but is not an Eligible Designated Beneficiary). While Non-Designated Beneficiaries and Eligible Designated Beneficiaries are generally subject to the same rules that were in place prior to the SECURE Act (either the 5-year rule or stretching over life expectancy, respectively), Non-Eligible Designated Beneficiaries are now subject to the new 10-Year Rule, from trusts to adult children and more.

Given these substantial changes, there are many strategies that advisors can use to help their clients impacted by the new more-restrictive stretch rules, whether they be the (Non-Eligible) designated beneficiary of an inherited retirement account (trying to manage the compressed time window for distribution) or the original account owner themselves still planning for the future (to minimize the tax burden of account distributions in what is now a non-stretch world for many).

Some options available to Non-Eligible Designated Beneficiaries include spreading distributions out across a time frame for as long as possible to reduce annual income from the account, strategically timing withdrawals such that larger distributions are made in years with lower taxable income (e.g., after retirement), or simply leaving the account balance alone for as long as possible (and withdrawing everything at the end of the tenth year when required to do so).

Account owners themselves also have options to mitigate the tax impact for their heirs, including increasing the number of beneficiaries on their accounts to spread out and therefore decrease taxable income received by each beneficiary, and strategically allocating account shares based on beneficiaries’ anticipated income tax brackets to maximize the tax efficiency of those distributions. Alternatively, lifetime partial Roth conversions of tax-deferred retirement accounts can reduce (or eliminate altogether, if converting the full account) the tax burden on beneficiaries, though a careful analysis should accompany this strategy to determine how much of the original accounts should be converted to begin with (to avoid simply causing an even-higher tax burden today). Charitable Remainder Trusts can also be used to provide a potentially steady income stream for the beneficiaries (along with providing a gift to a qualified charity at the end of the trust’s term).

Ultimately, the key point is that, while Non-Eligible Designated Beneficiaries must now contend with the new SECURE Act 10-Year Rule for inherited retirement accounts, advisors can use several strategies to help clients minimize the tax impact of distributions from those accounts. Some can be implemented for the beneficiary after they inherit the account, while others can be used by the account owner themselves during their lifetime before the account transfers to the beneficiary. Although, in some cases, the best strategy may be simply to accept the 10-year rule as is, leave the account alone for as long as possible, and liquidate the inherited retirement account as required at the end of the 10-year window!

#FASuccess Ep 164: Making The Hard Transition From Financial Advisor To Business Owner Of Your Advisory Firm, With Julia Carlson

February 18, 2020 07:05 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 164th episode of Financial Advisor Success Podcast!

My guest on today's podcast is Julia Carlson. Julia is the founder and CEO of Financial Freedom Wealth Management Group, a hybrid RIA based in Newport, Oregon, that oversees nearly $300 million of assets under management for almost 1,000 client households.

What's unique about Julia, though, is the way that an unfortunate car accident that her daughter was in led Julia to transition very quickly from being the lead advisor that ran her own firm to expanding her staff and becoming the business owner of the advisory firm instead, if only out of sheer necessity of finding the time she needed to support her daughter's recovery, but in a way that allowed the firm to more than quadruple in the eight years since.

In this episode, we talk in-depth about Julia's journey through her advisory career. From her challenges early on gaining professional credibility as a young female advisor where a prospect once told her she was too pretty to be a financial advisor to the way she got her foot in the door talking to small local business owners about their retirement plans and building wealth outside of their businesses. How reading Dave Ramsey's "Total Money Makeover" launched Julia's path towards a more holistic planning-centric approach to clients and the way that she built her client base in the early years with Ramsey's Endorsed Local Provider referral program, now known as SmartVestor Pro.

We also talk about the transformation that Julia's business had to go through, almost literally overnight, when she got the call from her own client appreciation event that her daughter had been struck by a drunk driver and was being airlifted to the hospital in critical condition. How the pain of being forced to try to run her business from the ICU while being with her daughter during recovery led Julia to hire a president to take over running the firm on a day-to-day basis, the way that shift ended out allowing Julia's firm to double in size from $60 million to $120 million just 2 years later, as her time and focus were freed up for growth, and how the firm's adoption of Gino Wickman's Entrepreneurial Operating System has allowed the business to run even more efficiently as it more than doubled again over the past several years.

And be certain to listen to the end, where Julia talks about the real-world challenges of trying to let go of having so much control in your business, or as Julia puts it, how to stay in charge even if you're not in control anymore, the way that she took a hard look at everything that does and doesn't energize her, from week-to-week, to figure out her own strengths and where she should be focusing her time, and how the hardest thing to do in the end was letting go of client relationships but how, once Julia acknowledged that it was a crucial step, the firm quickly figured out how to create an internal training program to ensure that other advisors would service clients up to Julia's standards.

How Advisory Firms Can Leverage EOS To Systematically Manage And Grow Their Firms

February 17, 2020 07:03 am 2 Comments CATEGORY: Practice Management

As the RIA industry’s continued growth has catapulted more and more firms across the $100M (or even the once-unthinkable $1 billion) AUM threshold and transformed many practices into true businesses, many advisors are finding themselves as “accidental business owners” as their firms have grown beyond themselves as the original founders and into professionally managed sustainable enterprises.

The challenge, of course, laid out perfectly in Michael Gerber’s eMyth, is that as our industry has professionalized, it has required many “accidental business owners” and their firms of all shapes and sizes to elevate virtually every aspect of how their businesses are run, now that it’s no longer just the firm owner themselves and perhaps an assistant or associate. Managing even a small RIA of a half dozen individuals and beyond now requires firm owners and/or management to be able to effectively develop and communicate a compelling vision, foster a culture centered on execution of key objectives, build processes for identifying and solving key issues, and, most importantly, implement a framework for managing and leading people.

Enter Gino Wickman’s Entrepreneurial Operating System, outlined thoroughly in his seminal book, Traction. The incredibly simple, yet highly effective framework (if implemented correctly) has gained momentum over the last five years across small to mid-sized businesses, and has specifically gained popularity with RIAs across the country in recent years as a means of professionalizing their businesses as they hit that 6+ employee mark, and drawing focus to the six key aspects of managing any business: vision, people, data, issues, process, and traction.

In this guest post, Matt Cosgriff, Wealth Management Group Leader at BerganKDV Wealth Management, shares his unique insights on how to leverage EOS to professionalize an RIA, having been through the process in his own firm. In his role leading a $1 billion-plus RIA inside of BerganKDV (a regional professional services firm offering tax, audit, payroll, and technology solutions), traction has not only allowed the wealth management business to stay fully integrated with the broader organization which uses EOS, but has produced Traction—sustainable results—over the last ten years of its use.

In his firm, Matt and his team have successfully implemented all six components of EOS starting with “Vision”, by implementing the Vision/Traction Organizer (V/TO) tool to clarify and communicate the firm’s core values and focus, long- and short-term organizational goals (including “Rocks”, the important 90-day goals identified each quarter), marketing strategies, and key issues. Focusing on the “People” framework, the firm has been able to identify the right people for the right roles by finding those who “get it” (i.e., they understand the role), “want it” (i.e., they have a genuine desire to do the job successfully), and have the “capacity to do it” (i.e., have the skill and ability to do the work). The “Data” component has been used to create and customize “scorecard” systems for leadership, departmental teams, and individual employees to benchmark performance, which in turn facilitates identifying and addressing the “Issues” that may deter from achieving goals.

The development of documented and agreed-upon core “Processes” in the firm is fundamental to achieving consistent and excellent customer client experiences, which, taken together with the other EOS components, ultimately leads to creating the last EOS component, “Traction” – the continual organizational momentum that allows a firm to grow and achieve its goals – monitored continuously through weekly “Level 10” check-in meetings.

Whether you’re a CEO, Director of Operations, new advisor, or client service associate inside an RIA of any size, Matt’s breakdown of EOS outlines practical insights for how to leverage the key aspects of Traction to professionalize your organization.