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The New Blended Retirement System For Military Servicemembers

September 11, 2019 09:09 am 5 Comments CATEGORY: General Planning

Since before World War I, the United States has maintained a retirement program in one form or another to incentivize military servicemembers to build long-term careers in the armed services. The last iteration of the military defined benefit retirement system, called the High-36 Retirement Plan (or “High-3”), was established after World War II and required servicemembers to serve at least 20 years before becoming eligible for retirement benefits. The High-3 system calculates retirement pay based on a percentage of the average salary from the highest 36 months (or 3 years, thus the name “High-3”), for those who have met the 20-year service requirement.

In this guest post, Kathleen Boyd points out that this requirement has been problematic, as according to the Department of Defense, an estimated 80 percent of military personnel exit their service before 20 years. Consequently, most servicemembers have departed the military without any retirement savings. To compensate for the all-or-nothing cliff vesting, the military began offering a Thrift Savings Plan (TSP) so that servicemembers could supplement their retirement benefits with their own tax-preferenced savings. However, the TSP under the original High-3 system offers no military contributions or matching elements on behalf of servicemembers; it’s ‘just’ a self-directed retirement savings plan. And consequently, it provided little to no incentive for a servicemember to initiate contributions if they weren’t already self-motivated to do so.

In 2016, Congress enacted substantial changes to the High-3 military retirement system for the first time since it was set up in 1981. The National Defense Authorization Act (NDAA), effective January 1, 2018, was created with the goal of cutting expenses while increasing flexibility for servicemembers to participate and get at least some retirement benefits from the government. From that legislation, the new Blended Retirement System (BRS) was born.

The BRS consists of a blend of a new High-3 system, similar to the old but updated with a decreased defined benefit amount (due to an adjustment of the years-of-service multiplier), plus new provisions for servicemember TSP contributions (to supplement the reduced High-3 defined benefit amount), including a 1% service automatic contribution (‘free money’ that does not depend on the member’s contribution level) and an employer match of up to 4%. Additional benefits of the new BRS system include substantially increased contribution limits for servicemembers working in combat zones, and a potentially significant retention bonus.

Notably, while the 20-year service requirement still remains in place to receive the High-3 pension annuity benefit under the BRS, a servicemember can take the TSP funds (including their own contributions, government contributions, and matches) upon exiting the military (assuming they meet the vesting requirements – matching contributions vest immediately, and the 1% service automatic contributions vest after two years of service).

To facilitate the transition from the old High-3 to the new Blended Retirement System, the Department of Defense established a deadline of December 31^st, 2018 for active servicemembers to make a decision on whether to opt into the new system or stay with the old. Yet even though the deadline for the choice has passed, it’s still important for advisors working with military clients to understand the benefits and risks of this irreversible decision for future planning purposes.

For example, if a servicemember opted into the new plan, they are now set to receive a lower defined benefit amount, but also have access to government contributions and a matching benefit to their TSP. Alternatively, if a servicemember chose to stick with the old High-3 plan, they stay on track to receive the higher defined benefit amount but lose out on government contributions and matches to their TSP.

The key point is simply that there are additional intricacies of the new system that advisors who serve servicemembers of the military need to understand, and that the servicemember’s join date and years of service will dictate not only which plan will apply to them, but also which benefits they will be eligible for. And while the 2018 deadline to choose retirement systems has passed, the decision must still be made by any Reserve members who are redeployed who have yet to make a choice.

#FASuccess Ep 141: Building The Differentiated Foundation For Successful Advisor Marketing, with Kristen Luke

September 10, 2019 07:05 am 2 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 141st episode of Financial Advisor Success Podcast!

My guest on today's podcast is Kristen Luke. Kristen is the founder of Kaleido Creative Studio, a marketing consulting firm that specializes in multi-advisor fee-only RIAs with $100 million to $1 billion in assets under management, doing financial planning for individual clients.

What's unique about Kristen, though, beyond her clear focus on her target ideal client, is the kaleidoscope wheel of advisor marketing activity she's created, and the steps that advisors can take in each area, from basic to intermediate to advanced, in growing their own marketing channels.

In this episode, we talk in-depth about Kristen's marketing wheel, including the six core areas of client referrals, COI referrals, online marketing, thought leadership, community awareness, and conversion, and what it takes to improve in each of those areas, from refining client profiles by first concretely defining the triggering events that bring your target ideal clients in, to the starting steps of online marketing, from various "find an advisor" websites to refining your local SEO, to the reason why you shouldn't write books or try to appear on TV until you have a blog first, and why podcasts are replacing webinars as the hot new advisor marketing channel.

We also talk about what it takes to build the right marketing foundation. Why defining an ideal client profile really is absolutely essential to differentiate and build a successful marketing funnel, how to identify the right target client for your firm if you've already got a wide range of clients and aren't sure where to go next, and the key data that you should start tracking in your advisor CRM now so that you'll be able to measure the results of your marketing efforts properly once you begin to invest into them.

And be certain to listen to the end, where Kristen talks about how she's lived the advisor marketing path in her own consulting firm to advisors, from making a decision or find the focus of her own ideal target advisory firm to work with, how she's been able to grow her own marketing reach without actually spending a lot of money on marketing, and how she followed the path of many advisors in growing her own firm to the point that she had to spend more time than she liked just managing the people, and the reason she ultimately decided to right-size her own firm to better focus on the types of clients she enjoys working with the most, and got a lot happier in the process.

The Capacity Crossroads And The Small Giant Alternative To Building A Lifestyle Or Enterprise Firm

September 9, 2019 07:09 am 11 Comments CATEGORY: Practice Management

As the financial advisory industry continues to move away from being primarily product-driven (where client ‘relationships’ were primarily transactional sales interactions, and advisors could go months or even years without interacting with some of their clients after the sale was closed) and towards a recurring-revenue ongoing relationship model (where advisors provide continuous, ongoing advisory services to their clients), the total number of clients that any one advisor can handle at any given time has decreased dramatically. Because, not only are there significant time constraints around actually doing the work necessary to serve those clients well (not to mention the time needed to actually find new clients and convince them to work with you), but there are cognitive constraints as well, given that physiologically our brains (as humans) can only keep track of a limited number of interpersonal relationships to begin with!

Traditionally, having ‘too many’ clients was rarely a problem – as advisors just focused on their best clients for repeat business opportunities – but in the modern relationship-driven model, all advisors will eventually reach a point where they simply don’t have the capacity to take on more of those ongoing relationship clients and continue to grow the firm. In other words, the advisor has reached a ‘Capacity Crossroads’, and must make a conscious decision about the path to pursue next - either stop growing, or increase the firm’s capacity by bringing on additional staff (and possibly another advisor) in order to continue growing the firm. The problem, however, is that even for those who choose the path of continued growth, once an advisor crosses that capacity threshold, not only are any additional clients less profitable (due to the higher overhead costs incurred by increasing staff), but the advisor also has to manage that growing number of team members… which is rarely a goal for advisors who decided to strike out on their own to serve clients (and not manage employees)!

For most financial advisors, the choice at the Capacity Crossroads becomes a decision about long-term income potential, where the advisor has to decide whether to become a ‘lifestyle practice’ and stop growing (flat-lining their growth and income), or to hop on the eternal hamster wheel of growth and work towards building an enterprise business to continue to grow their income. Yet the reality is that, for those who do decide to go down the enterprise path, there is little evidence to suggest that there are any economies of scale growing down the road from being a ‘small’ solo practice to a multi-billion-dollar firm. And, in fact, top-performing solo advisors often have the same take-home pay as the average partner at a $1B+ ensemble anyway!

In addition, the reality is that the choice at the Capacity Crossroads isn’t just between Lifestyle or a ‘go-big’ enterprise to maximize shareholder value in the first place; there is another choice, which is to become a “Small Giant” advisory firm, which doesn’t grow just for the sake of growing, but rather is built intentionally to be ‘great’ instead of ‘big’. In essence, Small Giants seek to be a purpose-driven business, typically one that is able to serve not only the clients/customers, but also the employees, vendors, and the community. In other words, the point isn’t to maximize just shareholder value, but rather to simply be excellent at what they do, while focusing on serving all of their stakeholders, including owners, employees, vendors, clients, and communities. Fortunately, it also turns out that small giants also happen to be steady growers, and are able to be rather profitable to boot!

Ultimately, though, the key point is simply that, if there isn’t that much difference in the long-term wealth-building potential between a lifestyle practice, small giant, or enterprise firm (especially given the time, effort, and reinvestment cost required to build a multi-billion-dollar business), then the answer to the question of the best path to take when you reach the Capacity Crossroads simply comes down to personal choice. Which is important, because in the end, the best way to build a practice that maximizes your own happiness as an advisor isn’t by allowing growth to dictate the role you fill in the business, but by intentionally setting a vision for the type of business you want to build in the first place!

Weekend Reading for Financial Planners (Sep 7-8)

September 6, 2019 02:57 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with a fascinating new consumer study finding that the titles that financial advisors use really do matter, particularly when it comes to the perceived loyalty that the individual will give to their clients, with "financial planners" and "financial advisors" gauged as significantly more trustworthy than stockbrokers and insurance agents... and raising questions of whether the SEC should have gone further in its title reform efforts under Regulation Best Interest.

Also in the news this week was an announcement by the CFP Board, in response to the recent Wall Street Journal article about its lax enforcement of standards, of the members of its new Enforcement Task Force, and that the task force will be comprised mostly of former securities regulators (suggesting that the CFP Board may indeed be preparing for a substantial step up in its enforcement efforts). In addition, the buzz is growing that the SECURE Act may finally be passed in the coming month (as an add-on to the budget legislation that Congress must pass by the end of September, and Jackson National paradoxically announced, that due to New York state's new Regulation 187 fiduciary rule for annuities, the company will bizarrely be suspending its fee-based annuities but keeping its commission-based annuities in what appears to be an attempt to not have to disclose how significant the differences in costs and benefits may be between commission- and fee-based annuity contracts.

From there, we have several practice management articles this week, including a look at the new add-on services advisory firms are beginning to offer to help justify their advisory fees (and avoid needing to cut fees), the latest advisor benchmarking study that finds advisor compensation in various key roles may be starting to flatline (but only because firms are developing more traditional career tracks with formal promotions instead), issues to consider when instituting a new advisor bonus plan for bringing in new clients, what to consider to properly define who an "A" client really is (beyond just their assets under management or revenue to the firm), and what to consider when considering whether to make a counter-offer to an employee who says they're leaving (and why it's best to try to avoid ever being in such a position in the first place).

We wrap up with three interesting articles, all around the theme of entrepreneurship: the first looks at a recent study finding that despite the popular view that more heads are better than one, startups founded by solo entrepreneurs are more likely to survive and thrive than team-based start-ups (that in practice just end out being more likely to have critical disagreements about the vision or direction of the business and break up later); the second explores another new study, finding that the vision of young-genius entrepreneurs (e.g., Bill Gates, Steve Jobs, or Mark Zuckerberg) is really the exception to the rule, and the average age of entrepreneurs is actually 42, with the fastest-growing startups have an average founder age of 45; and the last explores the journey of entrepreneurship for advisory firm founders in particular, and the ways the role of the founder and the demands of the business on that founder change and evolve as the business itself grows and develops over the years.

Enjoy the "light" reading!

How S Corporation Owner-Employees Can Adopt An Accountable Plan To Preserve The Home Office And Other Business Expense Deductions

September 4, 2019 10:34 am 10 Comments CATEGORY: Taxes

Prior to the passage of the Tax Cuts and Jobs Act in 2017, W-2 employees had the ability to deduct unreimbursed job-related expenses paid with personal funds as miscellaneous itemized deductions on their personal income tax returns. But the TCJA suspended most miscellaneous itemized deductions (including unreimbursed employee business expenses) through 2026, eliminating the opportunity for employees (including S corporation owners who also serve as employees of those companies) to deduct business expenses on their individual returns.

But the good news for S corporation owner-employees is that, by implementing an “Accountable Plan” a (a reimbursement program which meets certain IRS regulations), S Corporation owner-employees can continue to deduct business expenses that they pay for personally by “passing” them along to the business. Essentially, an Accountable Plan is an IRS-approved reimbursement program that allows a business to reimburse employees for business expenses they incur as part of their work. The business is then able to deduct those reimbursed amounts as if the business had incurred the initial expense, itself.

When using an Accountable Plan, reimbursements for business expenses are not considered compensation to employees thus, don’t increase payroll taxes due on wages or an employee’s income tax liability. However, it’s important to note that the deductibility of an expense incurred by an employee isn’t changed when submitted for reimbursement to an employer. Thus, any limitations or restrictions inherently associated with a deductible expense remain in place (e.g., the 50% deductibility of meal expenses).

There are three simple guidelines an Accountable Plan must follow to be considered valid: 1) all expenses to be reimbursed through the plan must have a business connection, 2) expenses must be “timely substantiated,” and 3) any excess advances provided to the employee must be “timely repaid.” While the actual definition of “timely” (with respect to substantiation and repayments of advances) is somewhat ambiguous, the IRS has provided several “safe harbor” options.

Since Accountable Plans are so simple to establish, and since they offer such flexible rules around to whom they can apply, and to which expenses they will cover, there is generally no reason for most S Corporations not to implement them. For example, the Accountable Plan can be designed so that only certain expenses can be reimbursed, and/or so that only specific employees can participate.

Despite their simplicity, though, business owners should understand that if the IRS does not deem their plan in compliance with the Accountable Plan rules, their plan will be treated instead as a “Non-Accountable Plan”. In such instances, any reimbursements will be added the employee’s wages. Even though employee wages reduce gross business revenue, that reduction is offset by the increase in wages. And to top it off, the impact of higher FICA taxes as a result of those wages means that the total tax liability will be higher than if the expense hadn’t been reimbursed in the first place!

Ultimately, the key point is that an Accountable Plan is a simple way for S Corporation owner/employees to shift deductibility of business expenses from the employee to the employer and offers the ability to mitigate tax liability by allowing business owners to choose which expenses are reimbursable and which employees will be eligible to submit reimbursements. Thus, in light of TCJA and the suspension of miscellaneous itemized deductions, for S Corporation owner-employees, in particular, Accountable Plans are an especially effective tax planning tool.

#FASuccess Ep 140: Transforming Your Advisory Business By Shifting Your Mindset After Hitting The (10-Year) Capacity Wall, with Adam Cmejla

September 3, 2019 07:01 am 2 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 140th episode of Financial Advisor Success Podcast!

My guest on today's podcast is Adam Cmejla. Adam is the founder of Integrated Planning & Wealth Management, an independent RIA based in Carmel, Indiana that oversees approximately $45 million in assets under advisement for nearly 100 financial planning clients.

What's unique about Adam, though, is the incredible transformation his practice has gone through over the past 2 years, as a shift in mindset has led him to grow revenue by nearly 80% over what he had built the first 10 years cumulatively by both raising his financial planning fees and going all-in on a niche of serving optometrists.

In this episode, we talk in depth about how Adam's marketing process has evolved over the years, from starting out at Waddell & Reed where he immersed himself in local networking groups like BNI and Indianapolis Rainmakers, to beginning to shift his focus towards working with VDOCs, veterinarians, doctors, optometrists, and chiropractors, by focusing his marketing on white coat professions and launching a podcast, to further narrowing down his focus to just serve optometrists after realizing it's actually easier to market it and grow his firm as the target clientele narrows, which in turn has led him from charging as little as $400 a year for financial planning for his legacy clients, to charging $595 per month plus $1,000 upfront or over $8,000 a year in planning fees for his ideal target client.

We also talk about the mindset shifts that Adam went through to reinvent his practice over the past 2 years after hitting the wall from his first 10. From moving away to setting his value in terms of the time he spends on clients and instead looking more directly to what his clients say they value the most, which wasn't the depth of his financial planning data analysis, the steps he took to raise his financial planning fees by as much as 100% to 300% over the past year to fix legacy clients that were being undercharged, and the way he balanced bringing in new ideal clients along with raising fees on existing clients as a way to overcome his own fears that clients might terminate him for the fee increases, even though in the end, virtually none of them did.

And be certain to listen to the end, where Adam shares his top advice to fellow financial planners. If you're really wondering if you should raise your fees, the answer is already yes. How the transformation of his advisory firm enabled a transformation with his wife and children by allowing the entire family to reallocate the time they spend together, and how Adam has institutionalized the processes and workflows he's developed in Redtail CRM to the point that he's now also beginning to consult other advisors on how they can adapt and implement the same efficiencies in their own advisory firms.

So whether you're interested in learning why narrowing your focus can help grow your advisory business, ways to systematize your business processes, or why the answer to the question, "Should I raise my fees?" is almost always, "yes," then we how you enjoy this episode of the Financial Advisor Success podcast.