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Kitces & Carl Ep 27: Handling The ‘Required Minimum’ Conversation Without Being Awkward

February 13, 2020 07:11 am 0 Comments CATEGORY: Kitces & Carl Podcast

Many financial advisors have asset minimums to ensure that they generate enough revenue from each client to be compensated appropriately for the value they provide (and the business cost to deliver it). But when it comes to having conversations about net worth with prospective clients to find out if they qualify for those minimums – especially those who are friends and family - the situation can quickly become awkward given the highly personal relationship individuals have with their money.

In our 27th episode of Kitces & Carl, Michael Kitces and financial advisor communication expert Carl Richards talk about some ways to broach the sensitive and potentially difficult conversation about assets and net worth with prospective clients, and how to gracefully defer from taking on prospective clients who don’t meet the firms’ requisite minimums. Because even while the natural inclination for many financial advisors is to help anyone who asks, regardless of net worth, doing so often becomes increasingly difficult as an advisor’s firm grows and the capacity to spend time with clients who don’t actually meet their minimum fees becomes smaller and, in many cases, non-existent.

The first issue to consider when requiring asset minimums is simply to recognize that it’s not always apparent who may qualify (or not), which means it’s crucial to meet with prospects, conduct an initial discovery meeting to learn about goals and values, and to get a rough idea of the prospect’s balance sheet to safeguard against making premature assumptions about what the client is really worth. And in the event that a client does not meet the firm’s minimums, the advisor can still conduct a brief follow-up meeting to provide a few basic recommendations and resources to the prospect without much effort, and then describe to the prospect what the firm’s typical clientele generally looks like and what the minimum fees are… a simple act of goodwill to help the client, and also an effective marketing strategy, as prospects who are grateful for the guidance they received from the advisor may still be able to refer people in their network who are appropriate clients (having been given a description of who the firm does work with, in the process of being helped themselves)!

However, while spending time with prospective clients and running through a complete discovery meeting can be a rewarding process for both the client (for the free guidance they receive) and the advisor (for the opportunity to help someone in need and the creation of a new, potential referral source), it is also a time-consuming process and an advisor’s capacity may not often permit them to meet with all prospects without some screening mechanism in place. One potential remedy is to help people better understand who the firm works with before even reaching out to the advisor… which can be achieved through the firm’s website. Details about the typical clientele or specific niche served by the firm, together with the firm’s asset minimums and fees published directly for all to see, can help deter unsuitable prospects from reaching out to the firm in the first place (effectively allowing them to self-select out themselves). And including some potential resources (e.g., books, white papers, etc.) for individuals who may not be a good fit can again leave the individual with something of value from the firm, even though they may not be a suitable client.

Ultimately, the key point is that even though the ‘required minimum’ conversation can be awkward, there are ways for financial advisors to have these discussions as a meaningful discovery process that can even serve as an effective marketing strategy… and even (briefly and time efficiently) help those who might not be ideal clients in the process. Furthermore, maintaining a website that includes a profile of the ‘ideal client’, together with a clear description of the firms’ fees, can also keep discovery meetings with prospects who are unable to meet the firm’s required minimums to a manageable minimum!

The (Partial) Death Of The Stretch IRA: How The SECURE Act Impacts Inherited Retirement Accounts

February 12, 2020 07:08 am 33 Comments CATEGORY: Taxes

Passed into law in December 2019, the “Setting Every Community Up For Retirement Enhancement (SECURE) Act”, introduced a plethora of substantial updates to longstanding retirement account rules. One of the most notable changes was the elimination (with some exceptions) of the ‘stretch’ provision for non-spouse beneficiaries of inherited retirement accounts. As prior to the SECURE Act, beneficiaries of inherited retirement accounts were able to ‘stretch’ out distributions based on their own entire life expectancy, but now most non-spouse beneficiaries will be required to deplete their accounts within ten years after the original owner’s death. (Unlike RMDs, though, the new 10-Year Rule offers flexibility around the timing of distributions, as it does not require annual withdrawals – funds can be withdrawn in any amount, at any time over the course of the 10-year term – as long as the entire amount is withdrawn by the end of the 10^th year.)

However, 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, minor children of decedents, or “See-Through” trusts), and Non-Eligible Designated Beneficiaries (i.e., any individual who qualifies as a Designated Beneficiary but is not on the list of Eligible Designated Beneficiary).

This distinction matters because Non-Designated Beneficiaries and those who are part of the newly created Eligible Designated Beneficiaries group are generally subject to the same rules prior to the SECURE Act (either the 5-year rule or stretching over life expectancy, respectively), it is the Non-Eligible Designated Beneficiaries that are now subject to the new 10-Year Rule, from trusts to adult children and more. Fortunately, the 10-year rule does still facilitate at least some flexibility – as the rule simply requires that all funds be distributed by the end of the 10^th year after death of the original account owner, but the beneficiary has discretion over when to take the dollars out over that time window – though such a mandatory distribution window may introduce new challenges for certain types of See-Through trusts (where the flexibility eliminates ‘automatic’ annual conduit distributions to beneficiaries and could trigger the sudden liquidation of both the IRA and trust at the end of the 10-year window).

Ultimately, the key point is that, while there are now three distinct groups of beneficiaries under the SECURE Act, only one of these groups (i.e., the Non-Eligible Designated Beneficiaries) must now contend with the new SECURE Act 10-Year Rule for inherited retirement accounts. For the other two groups (i.e., Eligible Designated Beneficiaries and Non-Designated Beneficiaries), very little has changed for Non-Designated Beneficiaries, and Eligible Designated Beneficiaries still follow the same rules (with few exceptions) as the pre-SECURE Act Designated Beneficiaries.

#FASuccess Ep 163: Building A Fast-Growth Practice Without Prospecting By Working Under A Credit Union, with Michael Gennawey

February 11, 2020 07:03 am 1 Comment CATEGORY: Financial Advisor Success Podcast

Welcome back to the 163rd episode of Financial Advisor Success Podcast!

My guest on today's podcast is Michael Gennawey. Michael is a financial advisor and program manager for SoCal Wealth Management, a hybrid advisory firm in Southern California that oversees $260 million of assets under management for nearly 1,800 clients.

What's unique about Michael, though, is the way he's been able to build SoCal Wealth Management under the umbrella of the Credit Union of Southern California, which itself has nearly $1.6 billion of credit union assets serving almost 120,000 members across 18 branch locations and feeds a continuous flow of prospect referrals to Michael's advisory firm, with the caveat that as part of the credit union, they have to take every client that is referred to them.

In this episode, we talk in-depth about the unique structure of credit unions as customers or, rather, member-owned financial institutions, and how the member-centric culture of credit unions can be so complementary to the client-centric culture of advisory firms. The way that Credit Union of Southern California structures its referral program and trains its Member Service Officers across branches to identify members with client needs and steer them towards SoCal Wealth Management at a pace of nearly three new clients per week, and the way SoCal Wealth structures its offering on the LPL platform to keep it efficient enough to run this kind of high-volume client business.

We also talk about the way that Michael's firm uses an internal team member supporting the financial advisors to both set initial appointments with referrals but also to help screen them to ensure they're a fit for the firm in the first place, SoCal Wealth's financial planning process and their two-meeting approach that delivers the plan interactively with MoneyGuidePro, not only to engage clients but to save significant time in the plan preparation process, and the way that Michael's firm segments clients for ongoing services, given the incredible range of who the credit union refers to them, from multimillionaires to those opening their first IRA.

And be certain to listen to the end, where Michael shares how to figure out which credit unions have the right client-centric culture and which are just offering wealth management as a product-based profit center, the typical payouts that advisors receive in a credit union environment in exchange for having to do little or no business development, and the unique structure that SoCal Wealth has built for its advisors where clients that are referred through the credit union must stay behind, but advisors can still have their own personal clients that the advisor can take with them if they leave in the future.

The Most Efficient Financial Advisor Marketing Strategies And The True Cost To Acquire A Client

February 10, 2020 07:03 am 21 Comments CATEGORY: Marketing

For more than 20 years, industry benchmarking studies have helped financial advisors understand how to manage the profitability of their businesses, and ensure that the costs to service clients are in line with the fees they’re being charged. However, remarkably little research has been done into the costs that must be incurred to actually obtain those clients in the first place and the cost-effectiveness of various client acquisition strategies that financial advisors use.

And it turns out those client acquisition costs are substantial! In our recently released Kitces Research report of more than 800 financial advisors who participated in a survey, the average total cost for a financial advisor to acquire a new client is $3,119 per client. Notably, though, a significant portion of that cost is the ‘time cost’ of the financial advisor themselves (an average of $2,600 worth of time spent, or 83% of the total cost of client acquisition), while only $519 is typically spent on hard-dollar marketing costs themselves. Which suggests that while early-on it may be cost-effective for advisory firms often to substitute advisor time for firm dollars when it comes to marketing efforts, especially for those who don’t have a lot of money to invest into growing their business in those initial years, that advisory firms may be overly reliant on an advisor’s (less-and-less-cost-effective) time to grow the business, rather than allocating marketing dollars to grow the business in a more scalable way.

The significant upfront cost to acquire a client is especially salient for financial advisors with recurring revenue models, as the cost to acquire a client may often be equal to or more than the entire revenue generated by the client in the first year – and the equivalent of several years’ worth of profits – which results in a “J-Curve” of client profitability (where aggregate profitability of a new client is negative in the early years and only turns positive over time). Which is important, as overzealous marketing efforts can cause a steep negative J-Curve dip, which in turn can cause the firm to overextend its growth capacity and ‘grow broke’ even if otherwise on a long-term path to profitability. Though on the other hand, the depth of the J-curve of advisor profitability, when coupled with firms that often have 20-30+ year-average client retention (at 95% to 97% annual retention rates), suggests that most advisory firms may be grossly underspending on marketing relative to the astonishing lifetime client value of an individual new client.

To maximize marketing spending – and minimize Client Acquisition Costs (CACs) – our Kitces Research Report identified the most cost-effective (measured by the actual CAC) and cost-efficient (measured by the revenue generated from the client relative to CAC) marketing strategies in use by the financial advisors surveyed, which included both ‘traditional’ methods (e.g., client referrals, networking, and Centers of Influence), but also underappreciated alternatives (albeit with more upfront cost) including SEO, writing a book, webinars, marketing lists, and paid third-party website listings. Interestingly, the most cost-effective strategies differed for firms with the highest marketing efficiency (books, direct mail, paid web listings, marketing lists, and SEO) versus the most efficient strategies for firms not as ‘marketing-inclined’ as others (paid advertising, paid solicitors, seminars, and general networking).

Examining marketing strategy efficiency relative to advisor adoption rate also reveals that some of the most commonly used strategies are actually among the least efficient (e.g., social media, blogging, and client appreciation events), whereas some of the lesser-used are still very efficient (e.g., marketing lists, radio, solicitors, online ads, and paid websites). This suggests an inherent inefficiency when it comes to marketing strategies chosen by financial advisors. The biggest driver behind this inefficiency appears to be the strong advisor preference for strategies that rely on the advisor’s time (versus hard dollars invested in the strategy), and an overweighting on strategies that produce a high quality of leads over those that produce a scalable quantity of leads or are actually the most cost-effective (which may help to explain why larger firms are outgrowing smaller ones, as they are able to accommodate scalable hard-dollar marketing strategies that smaller advisors might not otherwise be able to afford or be willing to invest into).

Ultimately, though, the key point is that while there is a wide range of marketing options available for advisors, effectiveness and efficiency are important criteria that need to be considered to ensure that resulting growth is sustainable, as initial costs may be recouped only after a client has generated revenue for the firm over several years. In fact, with an average CAC of $3,119, this Kitces Research Report suggests that perhaps the primary reason that advisory firms struggle to serve mass affluent clientele and the broader population is not because it is cost-ineffective to service them, but that it’s too cost-ineffective to market and gain a scalable number of them as clients in the first place! Though on the other hand, with recent reports suggesting robo-advisors have ‘just’ an average acquisition cost of $500 - $1,000, it seems clear that an opportunity exists for advisors to reduce the overall cost of their marketing efforts (and/or for third-party providers to scale their own lead generation services for advisors)… which may both improve the profitability of advisory firms, and allow them to grow more scalably and reach a wider range of clientele.

Weekend Reading for Financial Planners (Feb 8-9)

February 7, 2020 02:58 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 TD Ameritrade's RIA custody business is continuing with business as usual despite the looming Schwab merger, in what appears to be a combination of both a legal obligation to do so until the deal is finalizing... and a growing possibility (which markets are now handicapping at 30%) that the Department Of Justice may intervene and prevent at least the RIA portion of the merger from going through (e.g., by requiring the RIA business to be spun off if the TD Ameritrade retail business is acquired).

In the meantime, though, the advisor industry is also still adjusting to the potential of the merger, from firms preparing for the possibility that TD Ameritrade's VEO platform may not survive the merger if it does go through (necessitating a substantial restructuring of advisor technology for many firms), and musings about whether the loss of TD Ameritrade's open architecture platform may hinder the emergence of new advisor technology solutions (that in the past decade often built first to TD Ameritrade to go to market) or simply spawn a competing platform to become more open architecture to fill the void and take on VEO's open-architecture mantle.

From there, we have several other articles of notable industry news this week, including an SEC Investor Alert that fraudsters are engaging in pump-and-dump schemes around the coronavirus (have you warned your clients?), Vanguard is making a somewhat-surprising-but-sort-of-not push into offering a private equity fund (but potentially only for institutions using Vanguard and consumers who engage a Vanguard Personal Advisor directly), and a prediction from Cerulli that the dam of advisor retirements is about to break with outright declines in advisor headcount in the coming years that could culminate in nearly 1/3rd of all today's financial advisors retiring in the decade of the 2020s.

We also have a few articles on marketing, including a look at how firms that pay for online lead generation platforms are finding ways to make it work (based on their geography and by hiring business development associates), the challenges in finding and paying for the 'right' marketing software or service providers for financial advisors, and how Schwab is upping the ante on paying outright cash to attract new investor accounts (primarily to compete against other brokerage firms engaging in similar practices, but at the risk of catching financial advisors in the crossfire?).

We wrap up with three interesting articles, all around the theme of the (real) value of a financial advisor in the future: the first explores the ways that financial advisors can provide value beyond just highlighting their type of compensation; the second examines the lost art of being a better listener to help clients on their own journey; and the last explores the unique challenges that arise as financial advisors increasingly shift away from simply being "the experts" and instead try to become a Knowledgeable Guide to help clients feel heard, understood, and supported on their own journeys instead.

Enjoy the 'light' reading!

The Fredo Effect – Mitigating Toxic Relationships In A Family Business

February 5, 2020 07:03 am 0 Comments CATEGORY: Client Trust & Communication

In the movie The Godfather, Michael Corleone, the youngest of three sons, is chosen as successor of the New York mafia family throne, after his eldest brother is slain and over his older brother Fredo. While tradition generally designates the eldest child as successor in most family businesses, Fredo Corleone, less intelligent and weaker in character than his younger brother Michael, is superseded by Michael. The incendiary family dynamics that ensue, sparked by Fredo’s anger and resentment toward his own family, end with betrayal and in the tragic demise of Fredo himself.

In real-life family businesses, similar dynamics (though typically not as grave) can arise in which children may get overlooked for leadership positions or roles of successorship because of their lack of experience or skill. And yet, business-owner parents often feel obligated to ’take care of’ their children, and sometimes end up giving them inconsequential roles in the business because they want them to at least still be involved (which can sometimes also include a disparately high level of compensation because they want to provide what they can for their child). Alternatively, children can at other times be given roles that they are outright ill-equipped to handle (i.e., nepotism), which can result in bad decisions that cause harm to the company itself.

Thus, while these business-owner parents may only have the best intentions for their children, the behaviors and family dynamics that result can be counterproductive, arising in circumstances that can ultimately hurt the family business. This situation is called the “Fredo Effect”, and refers to the damage that results from the dysfunctional interactions between parents and children in the context of a family business.

The primary cause of the Fredo Effect often boils down to “role ambiguity”, in which parents have difficulty separating their role as business owner from that of parent. The child, too, can have role ambiguity challenges, as they often have unclear guidance about their role in the business, complicated by (often unfair) overcompensation they might receive, and may thus struggle to understand what specifically is expected of them.

Not only are parents and children affected by the Fredo Effect, but other employees and family members involved in the business are also impacted. Seeing a child-employee get compensated and otherwise rewarded for a job-not-well-done can be demoralizing to workers who are diligent and dedicated to their jobs, but who get none of the recognition or benefits that “Fredo” gets. Over time and left uncorrected, the situation can lead to severe erosion of employee morale and working conditions.

The most effective way to mitigate (and potentially prevent altogether) the Fredo Effect is to ensure that formal, well-written job descriptions are in place, which clearly define the standards and expectations for each role in the company. Establishing a “family council” can also provide a forum to facilitate open communication between family members, which can help them work through role ambiguity challenges by identifying (and delineating between) personal and business concerns, and talking them through with family members.

Financial advisors can help their clients by offering services to assist them implement these solutions. For example, an advisor can assist their family-business-owner clients in reviewing job descriptions to ensure that they clearly define the role, requirements, and expectations for each job; that a sensible reporting structure is in place; and that growth and development opportunities exist for all current employees. Advisors can also participate as an objective expert in family council meetings (and also facilitate the participation of other subject-matter experts as needed). And finally, advisors can help family-business-owner clients establish their own support system with each other, by coordinating introductions and hosting instructional events around issues relating to the Fredo Effect.

Ultimately, the key point is that many family-business owners struggle with role ambiguity issues when it comes to their children. The children, too, face role ambiguity challenges that can lead to dysfunctional behaviors, which can be potentially harmful for the business itself. Financial advisors with family-business-owner clients are in a unique position to serve as an objective third-party expert to help the family mitigate the effects of Fredo, and ideally prevent them from arising at all in the first place.