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Kitces & Carl Ep 06: Building Resiliency For The Stress Of Being A Financial Advisor

April 25, 2019 10:41 am 7 Comments CATEGORY: Kitces & Carl Podcast Personal/Career Development

A big part of a financial advisor’s job is to be a release valve for their clients’ financial anxieties… it’s an essential aspect of how we add value in helping them manage their “behavior gap” and avoid making poor financial decisions for themselves. Because unfortunately, no matter how well we prepare our clients conceptually about the importance of keeping an even keel during the inevitable bouts of market volatility (or worse), the concept of “market risk” (and how clients will react to it) often feels purely theoretical until it actually happens… or as Mike Tyson so eloquently put it, “Everyone has a plan until they get punched in the mouth.”

And when market turmoil happens, it creates a huge amount of stress for clients, who oftentimes will then turn towards their advisors as they look for someone to blame. But while that can serve as the foundation for memorable “war stories” that advisors can bond over at industry events, the dynamic that isn’t discussed nearly as much is mental and emotional toll we as advisors face ourselves in serving our clients during severe market corrections or even deep bear markets. In fact, in the aftermath of the financial crisis, one study found that advisors ended out experiencing symptoms also associated with post-traumatic stress disorder! Which, in turn, raises the question: How can advisors prepare themselves mentally and emotionally to help not only their clients, but also themselves, cope with the stresses inherent in serving clients through their own times of stress?

In our sixth episode of “Kitces & Carl”, Michael Kitces and financial advisor communication guru Carl Richards sit down to discuss proactive steps advisors can take to prepare themselves to deal with and manage the stresses inherent in being a financial planning professional, some common but less-well-known sources of advisor stress, and how a subtle shift in mindset can help advisors make self-care a priority.

As a starting point, the best way to put yourself in a place where you’re able to deal effectively with the inevitability of stress is self-care, which only gets more important as we age and includes (among other things) diet, exercise, and rest (both physical and mental). Meanwhile, as an “accountability partner” who’s there to support and guide clients towards reaching their goals, you also need to have a support system that you can reach out to when things get tough, including family, colleagues, a mentor, and other industry peers. Because, just as your clients need someone they can vent to when it seems like everything is falling apart around them, you also need to have a group of folks you can turn to when you need to express your frustrations and anxiety. It also may mean allocating a part of your personal budget towards hiring your own “accountability partners” to help you stay (get?) fit, eat right, and establish a healthy work-life balance… which will almost certainly end out providing a positive ROI for you both personally and professionally.

Ultimately, the key point is simply to realize that as a skilled financial advisor, you are still no good to your family, friends, and colleagues if you’re stressed and unhealthy yourself, and you certainly won’t be able to provide the level of service that your clients expect… and deserve. And in order to do that, perhaps a smart approach might be to stop treating things like rest and recreation as a “reward” for working hard, and instead start thinking about those things as a prerequisite (that needs to be actively scheduled for on your calendar) for doing good work in the first place!

Key Tax Considerations When Advising Non-US Citizen Clients

April 24, 2019 07:02 am 1 Comment CATEGORY: Taxes

Benjamin Franklin famously quipped, “In this world, nothing can be said to be certain, except death and taxes.” For as long as anyone claims the rights and privileges of their sovereign nation in which they are citizens, the governments of those countries reserve the right to tax their citizens in order to provide the government’s services and infrastructure. Except, sometimes, in the case of people who are citizens of one country, but live – temporarily or permanently – in another… taxation is suddenly not so certain after all.

Because the reality is that countries generally only have a right to those people who reside within their borders, and/or who generate income within their borders. While, by limitations of jurisdiction, or coordination of treaties, those who are neither citizens nor residents, generally don’t have to pay taxes on any income not earned within the country’s borders.

In this guest post, Sahil Vakil, founder of Myra Wealth, which specializes in working with immigrants to the US (who may or may not be US citizens or residents), provides guidance on what advisors need to know about navigating the rules of non-US citizens, who may or may not be residents of the US, and who may have income both within and outside the US.

When it comes to non-US citizens living in the US – known as “aliens” by virtue of being non-US citizens – the key question is whether that person at least qualifies as a “resident” of the US, either by meeting the Green Card Test or the Substantial Presence Test. Those who do are resident aliens, and must declare and pay taxes on all their income worldwide (similar to US citizens), and are also subject to special Foreign Bank Account Report (FBAR) and must follow the Foreign Account Tax Compliance Act (FATCA), which can introduce substantial additional tax reporting burdens.

By contrast, nonresident aliens are generally not subject to FBAR and FATCA, and only must report and pay taxes on their income earned in the US (either by being Effectively Connected Income to the US, or be Fixed or Determinable, Annual, or Periodic (FDAP) income (e.g., passive portfolio income). Which in turn may be eligible for special tax rates (at least on FDAP), but also special tax withholding rules.

And ultimately, these rules are important not only for the taxation of resident and nonresident aliens themselves but also the tax strategies that emerge (e.g., resident aliens contributing to US retirement accounts to receive the deduction at current US tax rates on worldwide income, but liquidating them after returning to the home country when they will only be taxed on US income as nonresident aliens). On the other hand, the limitations on tax rules for resident and especially nonresident aliens can also complicate traditional tax planning strategies (e.g., the unlimited marital deduction is not available for nonresident alien spouses, forcing the use of a Qualified Domestic Trust [QDOT] instead).

The bottom line, though, is simply to understand that, while for US citizens, there may be nothing more inescapable than death and taxes, when it comes to non-citizen “aliens,” the rules in fact are far more nuanced and the situation is less clear… presenting both opportunities, and traps, to be aware of!

#FASuccess Ep 121: Crafting A Differentiated Investment Process By Engaging Clients And Community, with Rachel Robasciotti

April 23, 2019 07:04 am 1 Comment CATEGORY: Financial Advisor Success Podcast

Welcome back to the 121st episode of Financial Advisor Success Podcast!

My guest on today's podcast is Rachel Robasciotti. Rachel is the founder of Robasciotti & Philipson, an independent RIA in the San Francisco area that oversees $140 million of assets for more than 100 individual clients.

What's unique about Rachel, though, is the way that her firm built its own unique proprietary investment process, dubbed RISE for Return on Investment and Social Equity, by going beyond just doing socially responsible investing and actually engaging her local community to develop the screens that they would use to decide what companies would or wouldn't be in their client portfolios.

In this episode, we talk in depth about Rachel's journey through the socially responsible investing and ESG evolution over the past 15 years, why she ultimately moved away from traditional SRI mutual funds and ESG screens, how she developed her local RISE Community to ongoing quarterly feedback on her investment process, the tool she uses to take the feedback from her community and implement it into a portfolio of individually screened stocks, and the way that her engagement with the RISE Community she's created has also become her biggest driver of marketing and business development anyways.

We also talk about Rachel's own path through the financial services industry. How she was incredibly successful starting in a major insurance firm at a young age but ultimately decided to go out on her own as an independent at the age of 25, how the driver of her shift was not the financial opportunity of the independent channel but simply the ability to create the particular vision that she had about how to serve the clients that she wanted, the way that she wanted, while hiring the team and creating the culture she wanted, the way she survived in her early years of relative isolation and found community as a solo advisor until her firm grew, and how her approach to marketing and the way that she communicates with clients has changed over the years as she's gained experience and professional credibility.

And be certain to listen to the end, where Rachel shares some of the unique challenges that she faced starting her firm not only as a young advisor, but as a young black female who came from a poor upbringing, who had no safety net or family to fall back on as she launched her firm from scratch, the sometimes stifling pressure on people from different cultures to act and talk certain ways to conform to the industry standard expectations of financial advisors, and how the reality is that everyone needs help from time to time, and often the biggest differentiator of success is not whether you need the help or not but how helpable you make yourself to receive that assistance and how easy you make it to be helped or not in the first place.

The Economics Of Growth: Why The Second 100 Clients Are Far Less Profitable Than The First

April 22, 2019 07:03 am 5 Comments CATEGORY: Practice Management

The traditional path to growing an advisory firm – or any business – is fairly straightforward: craft a product or service that you can deliver profitably, and then deliver it profitably to more and more people. The greater the number of clients or customers who are paying for the solution, the more total revenue the business generates, and the more in profits that accrue to the owners (assuming a reasonable profit margin in the first place). In the early years in particular, when a financial advisor still has a lot of capacity (i.e., time) and not a lot of clients, adding more clients and the revenue they bring can quickly ramp up the income of the financial advisor themselves.

But only up to a point: the individual capacity of a financial advisor is typically no more than 100 clients in an ongoing advisory relationship. As once the advisor’s individual capacity is reached, the only way to continue to add more clients is to add more staff to service them, including another advisor to work with them. Which suddenly makes the next 100 clients not nearly as profitable to the advisor as the first 100 might have been.

Because the reality is that for a financial advisor’s first 100 clients, the advisor is actually paid in two ways: part of the revenue compensates the advisor for the work he/she does in the business, while the (smaller) remainder is compensation as profits for being the owner of a successful advisory business. While for the next 100 clients, the next advisor is paid for doing the advisory work in the business, while the advisory firm owner is “only” compensated with the profits of growing the business larger. Which means in practice that an advisory firm owner might take home 70% to 80% of the revenue from the first 100 clients in combined profits… but only 20% to 30% of the revenue for the next 100!

Of course, continuing to grow an advisory firm, and participate in the profits, is still a goal of the business (and the income of the owner), for those who have a goal to grow further. But it also means that for many advisors, it may actually be far easier and more efficient to grow not by adding another 100 clients, but trying to replace the existing 100 clients with others who are more affluent and can pay higher fees. Effectively generating more revenue for the firm not from more clients in total, but revenue per client instead. All of which drops to the bottom line take-home pay of an advisor-owner with fixed overhead costs.

At a minimum, though, the key point is simply to recognize that what it takes to generate more income, once an advisor reaches capacity, is very different depending on whether the advisor tries to grow a larger business with more clients, or simply via more revenue from each client. Not that there is necessarily a “right” or “wrong” path, but growing the firm with more clients does mean added staff, overhead, and risk, in an effort to grow a larger business with less incremental profit that comes with it. Which means if advisors are going to go the path of growth through more clients, it should at least be done with eyes wide open… and an awareness that there are (potentially more efficient) alternatives to growth instead!

Weekend Reading for Financial Planners (Apr 20-21)

April 19, 2019 02:54 pm 1 Comment CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the big news that the FPA has released the second iteration of its OneFPA Network initiative, which backs off the key controversial requirement for chapters to be dissolved and "nationalized"... but still doesn't seem to effectively answer the question of why such a big organization-changing initiative is so necessary, instead of simply focusing on the key items from a better membership database to more engaging strategic committees that FPA members and chapter leaders have been asking for in the first place. Also in the news this week was the announcement that New Jersey is now the latest to put forth a state-level fiduciary requirement out of concern that the SEC's Regulation Best Interest isn't stringent enough... and the proposed state fiduciary rule is being driven directly by the state's regulators (not their legislators), which suggests a much greater likelihood that the rule will actually come to pass.

From there, we have a number of practice management articles, including a major new white paper from the CFP Board's Center for Financial Planning to articulate a standardized career path that advisory firms can use for their next-generation advisors, why managing "human capital" is becoming so much more important in the age of fee-based firms (with the recurring revenue that both supports and then necessitates a growing staff infrastructure), and a look at whether financial planning programs today are doing enough to prepare students for the realities of what it takes to be a successful financial planner (and how far they've already come in just a few short decades).

We also have several articles on retirement planning, from a fascinating research study on how retirees tend to be happiest when they spend their time on "active" activities rather than "passive" ones (but how as we age, reduced mobility tends to shift our time from the happiness-inducing active activities to the less-happy passive ones), tips to better maintaining friends and social relationships as clients get older in retirement, and tips to consider as retirees face four major transitions when they age (health care, financial decision-making ability, living/lifestyle, and transportation).

We wrap up with three interesting articles, all around being more "unplugged" and engaging in more "digital minimalism": the first is a look at one financial advisor who went to Australia for an extended work trip, found internet access was more limited, and ended out positively reshaping his digital habits in the process; the second looks at one company that pays its employees an extra bonus of up to $750 on their vacations for not checking email or Slack while they're gone (both to encourage them to really unplug and recharge, and also because it better forces teams to learn how to delegate to and reinforce each other when someone is out); and the last is a look at how to more actively engage in "digital minimalism" itself, which isn't just about unplugging and eliminating the smartphone and internet from your life, but instead just being more deliberate about which parts of your digital life you do want to remain engaged in (and then consciously eliminating the rest that doesn't really matter after all).

Enjoy the "light" reading!

When Is The “Right” Time To Launch Yourself As A(n Independent) Financial Advisor?

April 18, 2019 02:33 pm 1 Comment CATEGORY: Personal/Career Development

From the financial advisor’s perspective, the virtue of emerging advisor technology (i.e., “FinTech”) solutions is the opportunity to operate the firm more efficiently and reduce overhead costs by automating various back- and middle-office functions of the firm. Which means the most likely outcome of FinTech “disruption” is not to eliminate financial advisor jobs… but to reduce the needs for and opportunities of other non-advisor roles in advisory firms (that are more repetitive and more conducive to being automated away).

But from the perspective of those back- and middle-office employees, the emerging risk now is whether or how secure their jobs may be in a more FinTech-driven future. Which in turn raises the question: would it be better to shift into a more “front-office” client-facing role as an individual advisor. And if so, the next question is: When is it the best time to make the switch, and launch your own practice as an independent financial advisor?

In this episode of #OfficeHours with Michael Kitces, we discuss the three key skillsets would-be advisors need to gain experience and ultimately expertise in before even considering launching on their own as an independent advisor, ways to gain the competency and confidence needed to be able to serve clients (and get them) in the first place, and why it’s so important to have the financial stability – or even a pile of cash socked away – to be able to pay your own living expenses in the first few years while you build your advisory business.

The first step in preparing to launch as an independent advisor is gaining the expertise and experience to ensure that you’re able to operate and grow your new business to begin with. Initially, that means having the operations know-how to (to name just a few examples) open accounts, transfer assets, and place trades… because someone is going to have to do it, and that someone is almost certainly going to be you when you start your firm on your own! It also means learning to actually manage client relationships, which encompasses communicating effectively the nature of the advisory relationship, letting clients know what to expect, and setting boundaries. Finally (and perhaps most importantly), you also need to have experience in developing business in the first place, because no matter how great your advice may be, you won’t be in business for very long if you can’t convince anyone to hire you to begin with!

The next essential piece of the puzzle is competency. Offering financial advice is a sacred duty, and no matter how good your intentions may be, you have the potential to do severe, life-altering damage to your clients if you don’t make sure you really have the knowledge and know what you’re doing. For many, this means getting your CFP certification (and possibly additional post-CFP designations as well), because simply passing the minimum Series 7 or Series 65 regulatory exams isn’t enough, and earning the right to put those three letters after your name will not only give you credibility in the eyes of prospects, but will help you have the confidence you need to convince people you know what you’re talking about in the first place!

Lastly, you absolutely must have your own financial house in order, and the financial stability to be able to handle the foregone income when you go out on your own. Which usually means either having enough cash saved up to cover your living expenses for at least three years (because that’s often how long it takes for even experienced and competent advisors to earn enough to live on), or a dual-income spouse or other additional income source. As even though a career as an advisor can be potentially quite lucrative, it still takes time to get to that level, and it’s simply not feasible if you don’t have a cushion to make it through the first few lean years to survive long enough to get to the higher income levels of the future.

Ultimately, the key point is that finding success to launch as an advisor isn’t something that happens overnight. It requires years of preparation to gain the knowledge and experience, to not only provide advice to clients but to make sure all the day-to-day operational tasks happen in the firm as well. At the minimum, an advisor starting from scratch will need their CFP certification, an average of seven years of experience in operations, sales, and relationship management, and the financial stability to cover three years (give or take) of living expenses. Because that’s the sort of foundation that will offer the best odds of succeeding in a career that holds tremendous potential rewards in the long run… both from a financial and psychological perspective!