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Weekend Reading for Financial Planners (August 24-25)

August 23, 2019 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 new guidance from the SEC that is taking an increasingly tough look at proxy voting and how RIAs (and the proxy advisers who give them guidance) are voting their proxies in an age of rising shareholder activism (suggesting that there may be another shoe to drop with additional proxy voting guidance in the coming year as well).

From there, we have several marketing-related articles this week, including a look at how the best approach to prospective clients is better understanding what their biggest worries are (recognizing that when clients feel truly understood after having been asked good questions, they often just presume the advisor will have the skills to solve their problems anyway), a good "probing" question to ask to better understand prospective clients' real needs, a look at the wide range of reasons that clients actually hire an advisor (hint: it's not just about solving complex problems or helping them with financial ignorance, sometimes it's just for the convenience of delegating what they could but don't want to do themselves!), and ways to field the always-challenging question of "how much do you charge?"

We also have a few investment articles this week, from a discussion of what the inverted yield curve signals (or not), to why there's actually such a thing as being too diversified in stocks (at least for active managers who are actually trying to outperform), how liquid alternatives may not actually be much of a diversifier to equities (at least compared to just buying old-fashioned intermediate-term Treasuries), and how hedge fund alpha has continued to shrink over the past decade from what appears to be "too much" interest from institutional investors that caused hedge funds themselves to shift their focus and business practice (in not-entirely-positive ways).

We wrap up with three interesting articles, all around the theme of working long hours and the importance of finding balance: the first is an interesting research study that finds it's not actually working long hours that can cause adverse health effects, but specifically having a workaholic mentality that isn't able to disconnect from work (even after the long work hours are over); the second provides a powerful reminder on the importance of delegating in order to grow; and the last points out that while being "busy" is almost worn as a badge of honor in modern culture, in practice it's often just a signal that someone is doing a poor job prioritizing their work and their focus... which means instead of just trying to be Busy, it's better to try and find Balance by truly prioritizing what really matters most, and learning to let go of the rest that doesn't really matter in the end (because, by definition, it wasn't the greatest priority!).

Enjoy the "light" reading!

How Qualified Opportunity Zone Funds Create Unique Estate Planning Challenges For Beneficiaries

August 21, 2019 07:21 am 2 Comments CATEGORY: Estate Planning

The Tax Cuts and Jobs Act of 2017 made substantive changes to the Internal Revenue Code and in the process, created several new provisions, including “Qualified Opportunity Funds” (QOFs), which were designed to encourage taxpayers to invest in certain low-income (and also newly created) “Qualified Opportunity Zones” (QOZs) by offering some particularly unique (and potentially potent) tax benefits. Specifically, by investing into a QOF, a taxpayer gains the ability to defer taxes from the sale of any asset (including intangible assets like stocks), as long as the portion of the proceeds attributable to the capital gains on the asset that’s been sold are reinvested into a QOF within 180 days. Moreover, the portions of those deferred capital gains reinvested into the QOF are eligible for potentially two partial basis increases (once after five years and again after seven years), and if the investors hold the QOF for at least ten years, then all of the tax attributable to the gains of the QOF, itself, are completely eliminated if the QOF is sold.

Of course, such tremendous tax benefits don’t come without potentially prohibitive caveats, and there are many when it comes to QOFs. Specifically, capital gains on the sale of an asset that aren’t reinvested (on a timely basis) into a QOF by December 31, 2019 (a little over 4 months from the date this article was published) won’t be eligible for all of the available basis increases. Moreover, any still-deferred gain will become taxable either when the QOF is sold, or at the end of 2026 (whichever comes sooner).

Older potential QOF investors, or those with predictably shorter life expectancies, should also be aware of the disadvantages to beneficiaries who inherit a QOF. Typically, assets originally purchased with non-retirement funds receive a “step-up” in basis upon the death of the owner, giving the beneficiary the opportunity to sell the asset with little to no tax consequence. However, the gains that were originally reinvested into a QOF do not receive a step-up in basis, but instead, become income in respect to a decedent (IRD). Which means that QOFs tend to make poor estate planning vehicles, particularly when compared to other potential options. Plus, given the forced inclusion of any still-deferred gain at the end of 2026 and the extremely illiquid nature of QOFs, a beneficiary with limited other financial resources could find themselves between the proverbial “rock” and “hard place."

Ultimately, the key point is that for many older investors (or younger investors with shorter life expectancies), there may be better alternatives than a QOF, especially when considering the potential benefits, or lack thereof, for their heirs. Some of these include, not selling the asset in the first place (and waiting instead to simply bequest an appreciated asset, which will eventually receive a step-up in basis), maintaining the eligibility for a step-up in basis by using a 1031 exchange (but only in the case of real property), or making use of a charitable trust. Although QOFs do offer several unique and useful tax benefits that can’t be found in any other vehicle, older investors, in particular, should look carefully at more mainstream gain management strategies before going down the QOF road.

#FASuccess Ep 138: Leveraging A Media PR Strategy To Attract Ultra-High-Income (Millennial) Clients, with Douglas Boneparth

August 20, 2019 07:03 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 138th episode of Financial Advisor Success Podcast!

My guest on today's podcast is Douglas Boneparth. Douglas is the founder of Bone Fide Wealth, an independent RIA based in New York City that manages nearly $80 million of assets under management for 100 client households.

What's unique about Douglas, though, is that after starting out in a fairly traditional broker-dealer business model serving affluent retirees, he decided to shift and focus on serving a niche of very high-income millennials, most of whom make half a million to $1 million per year in income.

In this episode, we talk in depth about Douglas's niche of working with ultra-high-income millennials. Why he chose to invest so heavily in a younger clientele that's investing in themselves with high student debt loads that often precede their high-income jobs, the way he structures his fee as a combination of a traditional AUM fee plus a flat annual planning fee of $2,000 and $10,000 that's waived once the client reaches half a million of assets under management, because his clients are so high income, they often reach his asset minimums quite quickly, and how he's been able to be so effective with a media- and PR-driven marketing strategy that he's used to attract such high-income millennial clients to himself in the first place.

We also talk about how Douglas structures his own advisory firm. The reason he decided to transition from being a registered rep with Commonwealth as his broker-dealer to become an independent RIA but stay with Commonwealth to provide his RIA support services, why he decided to stop implementing term insurance policies himself for his clients even though he views life insurance as a critical element of the financial plan, and how he sees the rise of millennial-oriented do-it-yourself technology platforms and financial services as the key to being able to work with and support his own millennial clients.

And be certain to listen to the end, where Douglas shares his views on why the industry still has such a difficulty attracting millennials to become financial advisors, his own advice for young advisors looking to get started in the advisory business on how to navigate the sales culture that still exists at many large firms that do the bulk of the industry's next-generation hiring, and the path he pursued from starting out in his father's advisory practice to eventually deciding to break the traditional industry mold and build the advisory business he wanted to build for himself instead.

Financial Planning Software Doesn’t Make Advisors Faster… It Makes Them Better

August 19, 2019 07:12 am 2 Comments CATEGORY: Technology & Advisor FinTech

One of the biggest challenges of planning ahead – whether with respect to our finances, or anything else in life – is that it takes time. It takes time to sit down and think about the possibilities, how they might play out, and what must be done to reach the desired goal. And for an advice-giving professional, the time to support the planning process can be even more arduous… as it both takes time to do the planning and analysis itself, plus the time to gather all the relevant information up front, and translate it into advice that can be presented and implemented.

Consequently, it is perhaps not surprising that one of the biggest hindrances to the delivery of financial planning is simply the time it takes. As according to our recent Kitces Research study on “How Financial Advisors Actually Do Financial Planning”, the typical financial plan takes 10 hours to construct, and the average financial planner spends a whopping 34.5 hours on the entire financial planning process through the first year of working with the client (from establishing the relationship and data gathering, to analysis and crafting recommendations, along with plan presentation, implementation, and monitoring). Which severely limits how many clients a typical financial planner could even handle (to generally no more than 2-3 new clients per month at the most!).

In theory, the repeatable nature of the financial planning process would be highly conducive to technology – i.e., financial planning software – simplifying the process, and making it more efficient and less time-consuming. Except as it turns out, there actually is no apparent relationship between the use of (more efficient) financial planning software and time-savings in the financial planning process.

In fact, it turns out that advisors who use account aggregation tools to better automate (and streamline, and reduce the time for) the data gathering process end out spending more time in the data-gathering phase – as faster quantitative data collection supports an even-more-in-depth qualitative discovery process with clients. And more generally, the most highly-rated financial planning software amongst advisors is the software that takes the longest to use and is the most comprehensive and customizable… because it also happens to be the most comprehensive, and therefore the most effective at helping the advisor to actually demonstrate their value.

The significance of these findings is that it suggests broker-dealers seeking to grow adoption of financial planning by purchasing “simpler, faster, and easier-to-use” financial planning software may be misguided, as planning software is not actually the time-saving tool it was once presumed. It helps advisors go deeper into planning, not faster through it… which makes it not terribly useful to brokers who aren’t interested in the planning process in the first place.

Instead, it turns out that the single greatest path and predictor of time-savings in the financial planning process is whether the advisor has their CFP certification in the first place. Or stated more simply: making financial planning more efficient (and more widely adopted in a large enterprise) is primarily an advisor training issue, not an advisor software issue.

On the other hand, there’s still substantial room for financial planning software companies to increase their own value proposition by developing what their financial advisor users actually want and need, which is not “simpler” financial planning software, but instead to become even more comprehensive and in-depth, to help financial advisors get even better in creating and demonstrating value to their own clients!

Weekend Reading for Financial Planners (August 17-18)

August 16, 2019 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 release of the latest edition of Morningstar's "Mind The Gap" study, which analyzes investor returns based on asset-weighted flows in/out of mutual funds and ETFs, and finds that while the behavior gap does persist, it is "just" about 0.45%/year over the past decade, and is actually positive (i.e., investors on average outperformed) when it comes to asset allocation funds (as the low volatility of such diversified funds appears to drastically reduce the tendency to try to market-time them in the first place).

From there, we have a number of insurance-related articles this week, including a discussion in The Wall Street Journal of Madoff-whistleblower Harry Markopolos who claims that GE and its long-term care insurance unit in particular may be "the next Enron" and that the LTC insurer has understated its future liabilities to the tune of $10s of billions, how the pricing of insurance products (or the participation rates of fixed indexed annuities) is deteriorating in the face of now-falling interest rates, and a new Private Letter Ruling from the IRS that will allow RIAs to receive their advisory fees directly from a fee-based annuity without triggering a taxable event (and in fact, will effectively be paid by the client on a pre-tax basis for any annuity with embedded gains!).

We also have several practice management articles, from the ongoing rise of non-compete agreements at RIAs to prevent employee advisors from taking clients when changing firms (notwithstanding the fact that RIAs historically have been the bastion of no-hands-tied independence), to the business management hazards of valuing an advisory firm based on a multiple of revenue alone, the "exploding" number of options for advisory firms to borrow in order to acquire other firms, the practical challenges of trying to grow by acquisition and actually close on and integrate a newly acquired advisory firm, and the practical value of benchmarking studies as a means to not just evaluate the firm's AUM and growth relative to peers but also its productivity and efficiency in allocating its resources across the firm.

We wrap up with three interesting articles, all around the theme of how to actually make a good decision: the first looks at the "anatomy" of a Great Decision, which ultimately comes down to making a principles-based decision, and using a broad multidisciplinary lens to consider the issue from all angles before making the decision; the second looks at how thinking about decisions more probabilistically as "bets" is a better approach that naturally considers the role of luck and hidden information (and recognizes that the key to a good decision is not to guarantee a good outcome, but simply to minimize the odds of a bad one); and the last discusses the so-called "37% rule", that the best amount of time to allocate to a decision is 37% of the total time designated to the project (but after 37% of the time has passed, it's time to execute the decision and do the best you can with whatever you've got at that point!).

Enjoy the "light" reading!

Kitces & Carl Ep 14: Projection-Free Financial Planning To Avoid A False Sense Of Precision

August 15, 2019 07:03 am 5 Comments CATEGORY: Kitces & Carl Podcast

Developing trust is one of the most important things financial advisors can do to establish lasting relationships with their clients. For which developing a comprehensive financial plan is often an opportunity not only to deliver value as a financial advisor but to deepen client trust by demonstrating the advisor understands them in the first place. Once clients have stepped into the proverbial Cone Of Trust, though, does a client really want (or need) to review and discuss a full-blown financial plan? Or would they rather just be told, very simply, what they specifically need to do to meet their goals and solve their problems? Alternately, is it still preferable for clients to review their plan in depth so that they might better understand where they are today and how decisions they make now will affect their plan in the long run… no matter how complex or lengthy their financial plan might be (and how much trust they’ve already imbued with from their financial advisor?)?

In our 14^th episode of Kitces & Carl, Michael Kitces and financial advisor communication expert Carl Richards explore the various functions that a physical financial plan deliverable plays in the financial planning (and client relationship trust-building) process, share their viewpoints on how written financial plans can be used effectively to help clients, and discuss what ultimately matters most for clients, regardless of whether their financial plan is one page or requires a 2” binder and color-coded tabs.

Generally speaking, there are two (if not more) camps when it comes to the usefulness and structure of financial plans. Some advisors feel that detailed financial plans give a false sense of security by predicting future outcomes with unwarranted certainty; instead, these advisors prefer to establish trust and develop empathy without using the financial plan as a central conversation tool. Once a strong connection is formed, and they understand the client’s core issues and concerns, they often find it easy to discuss “good” behaviors the clients can follow to avoid mistakes and stay on track and do so using simple terms that apply to and make sense for the client. Interestingly, the level of trust that clients have in their advisor may often influence the degree of understanding they want/need to derive from their advisor, and/or their willingness to accept the recommendations being provided, based on the financial planning discussions they have together.

Other advisors, meanwhile, prefer to develop and discuss a detailed plan with clients and feel that their clients appreciate the clarity a good plan provides for their current financial situation, and that clients value understanding how different outcomes of important decisions considered today (such as funding education, modifying spending habits, and retiring early) will affect their overall financial picture years into the future. This is especially important because clients often fail to realize the powerful impact small changes in behavior and compounding growth can have on saving goals. Not to mention that delivering the financial plan itself can often be part of the trust-building process… as clients may not be willing to take the plan recommendations unless they’re also backed up by a thorough analysis (even if the client won’t read the analysis once they see it’s there and trust that it’s been done).

In the end, the key point is simply that advisors can use financial plans as effective tools for helping clients stay on track and make smart decisions, and that different advisors have their own distinct styles of conveying this feedback. Clients, too, are unique, and they have different preferences about how much of a full plan they want to see. Regardless of how advisors create and implement financial plans, though, clients need to be confident that their advisor is competent and that their recommendations are credible… which means either in advance of developing the plan or as part of the plan delivery process itself, it’s still essential to first establish real trust in the client relationship.