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#FASuccess Ep 144: The Past, Present, And Future Evolution Of The RIA Custody Model, with Tom Bradley Jr.

October 1, 2019 07:05 am 3 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 144th episode of Financial Advisor Success Podcast!

My guest on today's podcast is Tom Bradley. Tom is the former president of TD Ameritrade Institutional, one of the leading RIA custodial platforms serving nearly 7,000 independent RIAs with almost $600 billion of assets held in custody.

What's unique about Tom, though, is that he led the original Waterhouse Advisor Services platform when it was first started back in 1992, and has been a part of the growth and evolution of financial advisors operating as independent RIAs on the custodial platform for more than 25 years.

In this episode, we talk in depth about the evolution of the RIA custody model itself. From the early days when advisors had no direct means to actually trade across multiple client accounts and had to manually enter transactions off paper trade confirmations into their portfolio performance reporting systems, to the development of the first wave of RIA custodial tech integrations when few advisors had more than $20 million of AUM and couldn't demand much of their providers, to TD Ameritrade's unique pivot into an open architecture system with its Veo Open Access platform, because their acquisition by Ameritrade in 2006 gave them a unique opportunity to leverage the first wave of APIs that other RIA custodians hadn't fully developed yet.

We also talk about the nature of the RIA custodial business itself. The not always apparent ways that RIA custodians generate their revenue from advisors and their clients, why the RIA custodial options for how cash is invested has become such a hot-button issue, what it really costs an RIA custodian to service an advisor on average and what clients actually pay as a percentage of their assets, and what it would take to develop an RIA custodial platform that itself operated on a truly fee-only basis.

And be certain to listen to the end, where Tom shares his perspective on the future of the RIA custodial business. The gaps he still sees in how advisory firms manage succession plans and the transition of clients after a founder passes away, and why in the end, the fact that RIA custodians may also compete with their RIAs for end investors in their retail brokerage businesses can still be a net benefit to most advisors because it brings down the cost of the custodial platform in the first place.

Protecting And Guiding Clients With Diminishing Mental Capacity

September 30, 2019 07:33 am 2 Comments CATEGORY: General Planning

With an ever-increasing number of seniors afflicted with dementia, most financial advisors should expect to have to deal with (if they don’t already) clients experiencing diminishing mental capacity. Which are often challenging situations to deal with, not only for the complexities of the clients themselves, but also because client privacy rules can limit an advisor’s ability to involve other family members or to intervene if outright elder financial abuse of the diminished-capacity client is discovered. And while there has been regulatory progress towards protecting seniors from abuse (and allowing advisors more ways to involve family members and outside providers), it can still be very challenging for advisors to figure out how best to handle these relationships.

Importantly, though, financial advisors are in the unique situation of potentially being among the first to recognize that symptoms of diminishing capacity ailments are beginning to develop in the client, as indications of impaired financial capacity may be noticeable long before a formal diagnosis of dementia is made. Furthermore, given that seniors with diminishing mental capacity are potentially the most vulnerable to financial exploitation, it’s especially important for financial advisors to be aware of these risks, and to know what to do if they suspect (or know) that their client is being victimized.

In this guest post, Steve Starnes, a Principal with Grand Wealth Management in Grand Rapids, Michigan, discusses what client diminished capacity actually entails, how regulations protecting seniors (as well as guidance for advisors who serve them) have progressed, the importance of documenting goals, key relationships, and investment plans, and how advisors can help clients manage through the various stages of cognitive decline.

As a starting point, the most basic challenge is simply understanding the relatively vague nature of what ‘diminished financial capacity’ actually means… both for clients (and their loved ones) as well as the advisors who serve them. As while it’s easy enough to peg a definition on the term, the real challenge is in recognizing when the client has actually crossed the threshold of their financial capacity diminishing to the point that it actually becomes a real ‘problem’ where action must be taken.

The regulatory landscape paved by Federal legislation, FINRA regulations, and the North American Securities Administrators Association (NASAA) offers another challenge to advisors, who, in the past, were often restricted in involving authorities, but now in some cases may instead be required to report suspicions of financial exploitation. Fortunately, at the Federal level, the Senior Safe Act provides some level of immunity to advisors who report incidents of potential financial exploitation against seniors. NASAA is on the same track at the state level, encouraging states to adopt its Model Act which also grants advisors immunity for reporting suspected financial exploitation. Further, NASAA’s Model Act also allows for advisors and broker-dealers to delay disbursements from a client’s account if they suspect their client is a victim of financial exploitation. And when it comes to brokerage firms themselves, FINRA has established two rules intended to help broker-dealers protect customers from financial exploitation: Rule 4512 requires brokerage firms to request Trusted Contact Person information for customer accounts, and Rule 2165 allows brokerage firms themselves to put a hold on disbursements if financial exploitation is suspected.

Working with clients with diminished mental capacity creates additional concerns over the business risks faced by advisors and their practices. For example, if a client makes an uncharacteristic request, it’s often hard to distinguish whether the request is the result of a temporary external situation, or if it’s a warning sign of diminishing mental capacity… raising questions of how the advisor should respond and handle the client’s request (or not). The risks inherent in such situations, however, can be mitigated by implementing and following structured processes and procedures that a firm establishes in advance specifically for situations of potential diminishing capacity of clients. Among the most important are documenting (and regularly updating) client goals, values, and investment plans, as well as maintaining a list of their important personal relationships (including the client’s financial power of attorney, the advisor’s trusted points of contact, and custodial trusted contact persons) and getting signed permission in advance for the firm to be able to reach out to the client’s trusted points of contact if a concern of diminishing capacity arises.

Often the biggest advisor challenge, though, is simply the dynamic of trying to communicate with clients who can’t remember basic, yet important, details about their own lives and financial situations. By keeping conversations straightforward and clear, and maintaining patience and compassion during these conversations, client interactions can often remain productive and helpful. If the client’s financial POA is included in the discussion as well, they can help the client understand any confusing points of the discussion, and they may be better positioned to understand the issues around the client’s financial priorities.

Ultimately, the key point is that while there are many unique challenges in working with clients suffering from dementia, advisors have an abundance of resources available to help them navigate through these challenges. And arguably, advisors have an even greater responsibility and duty to clients who may be especially vulnerable to financial exploitation to help protect them to the fullest extent possible. The starting point, though, is to recognize that while financial advisors are typically well-equipped to help clients plan for their retirement, investments, and tax strategies, it’s equally important to create the necessary processes and procedures to plan for what unfortunately is a virtually inevitable reality of at least some clients who will eventually face the onset of diminishing mental capacity and who will need to rely on their financial advisor more than ever.

Weekend Reading for Financial Planners (Sep 28-29)

September 27, 2019 02:57 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the news that the SEC has adopted a new ETF Rule 6c-11, adding new formal disclosure requirements about daily holdings, bid/ask spreads, and trading premiums or discounts... but also eliminating the requirement for all new ETFs to obtain costly and time-consuming exemptive relief to be launched, which is anticipated to even further accelerate the pace of new ETF launches in the coming years (though inverse and leveraged ETFs, and non-transparent 'active' ETFs, will still remain with the slower high-scrutiny exemptive relief process).

Also in the news this week is a new joint initiative from the Foundation for Financial Planning along with the CFP Board, FPA, and NAPFA, to promote pro bono financial planning services, and notable internal compliance review underway at Merrill Lynch on advisors who are using Merrill's home-office-created model portfolios, which happen to be the same as the portfolios offered directly to consumers in their Guided Investing and broker-facilitated Merrill Edge programs, and create an interesting microcosm of the challenge for advisors to justify exactly what value they're providing over and above what a direct-to-consumer offering provides (especially when it's your firm providing the side-by-side offering).

From there, we have a few more investment-related articles, including a look at the recent turmoil in interbank lending and the overnight repo market that may be signaling the end of banking excess reserves fueling economic growth, a discussion of the new "FedNow" system being developed to facilitate truly "instant" bank-to-bank payments (which may entirely eliminate overdraft fees, payday lending, and check-cashing services in the coming decade), and an early warning for mutual fund holders that a 10-year bull market coupled with rising outflows from mutual funds (as investors increasingly shift towards ETFs) could trigger very sizable mutual fund capital gains distributions in 2019 (far beyond what the funds themselves have appreciated this year).

We also have a number of articles on health insurance, including one that finds Affordable Care Act (ACA) marketplace plans may finally be "stabilizing" with premium increases slowing and some insurers increasing their options and competing in more state markets, a study that finds overall health insurance costs continue to march higher in the employer marketplace (with family coverage up 5% in 2019, leading the total cost of coverage for family plans for employers to top $20,000 in 2019), and a look at some of the behavioral finance research about why people have such difficulty choosing the right health insurance plan even when one is 'clearly' dominant (a combination of complex math, overwhelming choices, and a strong aversion to deductibles even when they may be cost effective).

We wrap up with three interesting articles, all around the theme of what motivates advisors themselves: the first looks at a recent Financial Planning Review study finding that women who have entered the profession find more career satisfaction going independent than working in large corporate environments; the second explores a new Morningstar study around practice management and the conflict between advisors who started firms because they want to serve their clients but have trouble finding and attracting them; and the last exploring the importance of avoiding peer pressure, including as a financial advisor, and creating the firm that is most fulfilling to you personally (and not just what the "industry says" you should be building towards).

Enjoy the 'light' reading!

Kitces & Carl Ep 17: Responding With Empathy When Clients Call About ‘Scary’ Markets

September 26, 2019 07:17 am 6 Comments CATEGORY: Kitces & Carl Podcast

If there’s one thing virtually every financial advisor can relate to, it’s the outreach from a panicked client who has seen or heard some sensationalized story about how the economy or market is in imminent danger of collapse and is seeking reassurance that their life savings will be okay… and may even be asking if it would be better for them to simply sell everything and put their money in cash or CDs. Or instead, it’s the angry client who calls and wants to know (immediately!) why their portfolio has declined, despite frequent (and recent) discussions the financial advisor has had with them about inevitable market fluctuations.

Yet while it’s easy for advisors to get frustrated (especially after having the exact same conversation, sometimes with the exact same client, multiple times), it’s not always as easy to remember that clients are human beings, and as such, will naturally experience fear over losing what they hold dear. And for many clients, it isn’t just about losing portfolio assets themselves that is upsetting; rather, for many clients, it’s what that accumulated wealth that they have entrusted you to manage actually represents: a lifetime of hard work, and the ultimate means to achieving their future goals and dreams, that they may fear is evaporating away right before their eyes.

In our 17th episode of Kitces & Carl, Michael Kitces and financial advisor communication expert Carl Richards talk about the importance (and challenges) of responding with empathy to clients who are upset or afraid. Because even though research in behavioral finance has helped us better understand the natural human proclivity to make irrational decisions, especially in times of stress and fear, the objectivity with which these paradigms have been created has perhaps unwittingly made it too easy for advisors to judge their clients for their impulsiveness, and subsequently become dismissive of what are normal and understandable reactions to stress. And while it is an advisor’s job to help their clients make good decisions, the real challenge is figuring out how to do so with kindness and empathy, and without behaving smugly with a sometimes-hard-to-resist “I told you so” attitude.

Instead, the insight that behavioral finance has provided to advisors can be used to offer an empathetic response to an upset client in a truly genuine manner. Because when that advisor takes a moment to tell the client, “I understand why you’re upset,” they are doing so from a place of intellectual understanding, and are in the optimal position of helping the client down from the ‘branches’ of irrational ideas and emotional obfuscation, and back to the ‘roots’ of their financial plan’s basic objectives… which are based on the client’s core values and long-term goals. And by deliberately pausing for a moment after offering an initial empathetic response, an advisor can give the client a chance to shift gears and, if necessary, to calm down, which helps set the stage for the ensuing conversation.

Ultimately, the key point is that, when a financial advisor responds with empathy to a panicked or angry client, they are strengthening that relationship, building trust, and becoming more effective at their jobs. Because, at the end of the day, empathetic communication is simply an effective tool to connect people to each other’s humanity, facilitating conversations around highly personal values, points of view, and priorities, all of which make it easier to understand the ‘why’ behind a client’s goals and objectives, and how to stay on track to achieve them through the vicissitudes of market volatility.

Ambiguous Loss: Helping Clients To Grieve Even Before A Loved One Passes Away

September 25, 2019 07:03 am 1 Comment CATEGORY: Client Trust & Communication

Loss is an experience that all humans share at one point or another, and when a loved one dies, the grief is undeniably and devastatingly certain. But what about the grief that we might feel for a loved one who is still alive, only physically separated from us? Or for one who is mentally incapacitated, but who no longer has the capacity to recognize us? These feelings of grief for someone who is still alive, but no longer present (either physically or psychologically), are referred to as ‘ambiguous loss’. For example, some clients might have relatives who are no longer mentally lucid (psychological ambiguous loss), and some may have loved ones who need full-time care provided by an assisted living facility (physical ambiguous loss). And as would be expected with extended human lifespans and increasing cases of mental incapacity that comes with a growing, older population, feelings of ambiguous loss are on the rise.

Because the average human lifespan has increased over the last several decades, we are now at a point where family members are commonly expected to take on the responsibility of caring for elderly parents or spouses, many of whom are afflicted with neurodegenerative diseases such as Alzheimer’s and dementia. Accordingly, advisors may find themselves dealing with clients suffering from ambiguous loss, especially when conversations are raised around incapacity planning and estate planning.

While most financial advisors don’t have formal training in grief management, there are some basic guidelines that can be effective in working with clients suffering from ambiguous loss. As a starting point, mentally preparing for client conversations, for example, can include a series of questions that advisors ask themselves about their own personal attitudes around grief and loss in general, and also around understanding the situational causes of their clients’ ambiguous loss. Understanding the daily routines and relationships that the client may be struggling with can also help the advisor relate more empathetically with the client. And starting any incapacity discussion as early as possible to give clients ample time to process their feelings of ambiguous loss while adjusting to their new responsibilities can prove helpful for the client to transition through change.

Additionally, the advisor can support clients by acknowledging their feelings of ambiguous loss, and helping them adjust to the ambiguity they face by planning for a broad range of financial scenarios. This can help clients attain a level of certainty over what they have control over versus what variables in their situation will inevitably remain unknown, and that may eventually need to be addressed. And last, the advisor can play an important role in their client’s life by helping them through the difficult process of understanding and accepting what is happening to them, by simply giving them time and space to share their stories when they are ready to do so.

Ultimately, the key point is that ambiguous loss is commonly experienced by many people, and advisors should be prepared to work with clients and their issues in a sensitive yet productive manner. The conversations will be difficult and may be highly charged with emotion, but offering compassion and providing support can have a huge impact on the client’s ability to make sound financial decisions, as well as establish trusting relationships not only between the advisor and the client, but with the client’s support system as well.

#FASuccess Ep 143: Getting Local Clients Via Google Search With A Niche Of Serving Independent Women, with Cathy Curtis

September 24, 2019 07:01 am 9 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 143rd episode of Financial Advisor Success Podcast!

My guest on today's podcast is Cathy Curtis. Cathy is the founder of Curtis Financial Planning, a solo independent RIA in Oakland, California that oversees nearly $60 million of assets under management for 52 client households.

What's unique about Cathy, though, is the way she's positioned her business into a niche of serving women, and in particular, single, independent-minded women who specifically want to work with a female financial advisor as their financial partner, to the point that the majority of Cathy's new clients find her through a Google search.

In this episode, we talk in-depth about why Cathy chose to build into a niche of serving women as a way to better stand out and attract clients in the crowded San Francisco advisor marketplace, how she refined her website to the point that even new prospects compliment her on how it spoke to them, the way she's been able to generate most of her new clients from organic Google search traffic, even though she focuses on working with local in-person clients, and why the business development success of focusing into her niche eventually has forced Cathy to implement a minimum fee requirement just to better determine which prospects were really qualified to do business with her or not.

We also talk about Cathy's financial planning process itself. How her targeted marketing has helped her to get clients who are willing to go through a lengthy, detailed 20-page data gathering questionnaire, why she includes a draft financial plan meeting with clients and uses eMoney Advisor's Decision Center instead of printing out any details of a financial plan, the reason she chose HiddenLevers and Kwanti to be her risk tolerance and investment research tools, and the surge meeting approach that Cathy is using to cluster all of her regular client meetings into just 3 different months throughout the year.

And be certain to listen to the end, where Cathy shares how she got over the impostor syndrome struggles she faced early on as a career changer entering financial planning. Why she thinks new entrants to the profession today should work for another advisory firm for several years before going out on their own, and how the industry pressure to consolidate led her to merge into another advisory firm, only to realize that she really did prefer being an independent entrepreneur, and now simply leverages technology and outsourcing solutions instead to make herself even more successful.