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Weekend Reading for Financial Planners (Mar 9-10)

March 8, 2019 02:40 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with yet another round of warnings from the SEC at a recent compliance conference that they continue to scrutinize hybrid RIAs for whether they're using the appropriate (lowest-cost) share class for any mutual fund held in an advisory or wrap account for which the advisor is already receiving a separate fee (including now when it comes to 529 plans as well).

Also in the news this week were two proposed bills in Congress that would ban mandatory arbitration (not specifically targeted at financial services, but nonetheless potentially disrupting industry-standard mandatory arbitration clauses in brokerage and many advisory agreements), and a new succession planning program from Wells Fargo that could make it feasible for wirehouse brokers to get paid as much as an independent RIA does to sell their practice (but without needing to leave the wirehouse in order to do so)!

From there, we have several articles around practice management and employee development and retention, including a discussion of what it means to craft a good employee experience, how to more effectively make new employees feel included from day 1 (so they don't get disengaged as leaders/managers tend to take input more from existing employees who have existing relationships), the rise of in-house "universities" at larger advisory firms to both develop their talent and better attract next generation advisors, why even though toxic employees tend to be more productive than average their cost to the firm in the aggregate still exceeds their productivity benefits, the business impact of having stressed-out workers, and why, despite their popularity, advisory firm bonuses for business development often don't work (especially if their purpose is to get advisors not already doing much of any business development to try to start).

We wrap up with three interesting articles, all around the theme of how the industry itself is changing: the first looks at how, as the role of the financial advisor changes, so too is the requisite skill set to succeed as a financial advisor of the future; the second explores whether wirehouses can really be successful in launching their own RIA platforms to try to prevent their entrepreneurially-minded brokers from leaving to start their own independent RIAs; and the last raises the question of whether the real transformative opportunity in the industry is not to lift the fiduciary duty of loyalty (that advisors must act in their clients' best interest and mitigate conflicted compensation), but simply to lift up advisors' educational standards so it's more likely that when a consumer engaged a financial advisor, he/she really has the "substance" to deliver in-depth quality financial advice in the first place!

Enjoy the "light" reading!

Maximizing The Pre-Tax Treatment Of Investment Advisory Fees After TCJA

March 6, 2019 07:01 am 2 Comments CATEGORY: Taxes

One of the many changes made by the Tax Cuts and Jobs Act of 2017 was the repeal of miscellaneous itemized deductions through 2025… which was especially concerning to many financial advisors, as it included the elimination of the deduction for investment advisory fees! Of course, the reality is that not all taxpayers were eligible to claim a deduction for advisory fees in the first place, as not only did it require the taxpayer to itemize and exceed 2% of the taxpayer’s AGI along with other miscellaneous itemized deductions… but even then, could be lost to the alternative minimum tax (AMT). Still, though, many clients of advisors have been impacted by the loss of the deduction for advisory fees… and are now looking for any opportunity they can find to reduce the repeal’s impact and still get at least some tax benefit for advisory fees paid.

One “simple” way to help clients retain the pre-tax nature of advisory fees is to find a bona fide way to continue deducting the expenses. For instance, although advisory fees are no longer deductible as miscellaneous itemized deductions, ordinary and necessary expenses of a business continue to be deductible under IRC Section 162. Thus, for clients who are small business owners, a portion of the total advisory fee may be deductible as a business expense, at least to the extent that business-related advice (i.e., succession planning, retirement plan services, business-related tax strategies, etc.) has been provided. Though notably, only payments made from taxable accounts (i.e., not retirement accounts) could potentially qualify for this treatment, and deducting advisory fees from the business may be even more complex for those who are not sole proprietors, and must logistically manage to pay the advisory fee (or a portion thereof) from a business account and not the owner’s individual investment account.

Another way that advisors can help clients mitigate the impact of the loss of the deduction for advisory fees is to help clients pay fees from the most efficient source. As fortunately, AUM-style investment advisory fees for a client’s retirement account (i.e., a traditional IRA or a Roth IRA) can actually be “pulled” directly from the applicable retirement account, allowing the expense to continue to be paid with pre-tax dollars (at least when pulled from a pre-tax retirement account in the first place).

Hybrid advisors (i.e., those with both an RIA and broker/dealer affiliation) may also wish to reevaluate when it is in a client’s best interest to have them pay for the advisor’s services with advisory fees, as opposed to commissions. As ironically, while the financial “advice” industry has steadily been moving away from commissions and towards fees, the Tax Cuts and Jobs Act gives a distinct tax preference paying advisors via commissions over fees! Because, while commissions are not deductible, per se, they can add to the cost basis of a position (such as a commission paid for the purchase of an individual security), reduce the proceeds of a sale (such as a commission paid for the sale of an individual security), or reduce the amount of taxable income produced by an investment (such as the 12b-1 fee commission paid by mutual funds) before the income is, in turn, passed through to the investor. All of which are more tax-efficient means of compensating a financial professional than advisory fees.

And when it comes to standalone RIAs, while they cannot receive commissions for the sale of securities (to get pre-tax treatment for their clients), RIAs may still benefit from the use of mutual funds or ETFs, by turning their investment models into such funds. By doing so, RIAs can bill their advisory fees as a management fee to the fund itself, which means clients effectively pay the RIA’s fee via the mutual fund/ETF’s expense ratio on a pre-tax basis. Unfortunately, though, the creation and maintenance of a mutual fund or ETF - and potentially multiple funds for multiple advisor model portfolios – can add a significant level of operational overhead to a firm. And even for larger firms that may be able to absorb such costs, there are still other issues to contend with, including up-ending the firm’s entire business model, and the fact that packaged funds, when held in taxable accounts, are generally not as tax-efficient as separately-managed accounts holding identical positions (from a tax loss harvesting perspective).

Alternatively, some advisory firms may look to limited partnerships as another potential method of mitigating the loss of the deduction for advisory fees, by again trying to claim the RIA’s fees as a “management fee” for the business, rather than a pass-through expense of the investment partnership. Though whether or not such a partnership would qualify as a true business – as opposed to an investment – would be of the utmost importance (as absent business status, expenses of the partnership would again be deemed non-deductible personal investment expenses), and is, unfortunately, a very grey area. A clearer path would be for advisory firms to instead opt to be compensated via a “carried interest” as a general partner, which is effectively treated on a pre-tax basis for the client… except even in the best of circumstances, such partnerships would likely be operated as private securities (limiting their availability to primarily high-net-worth and other accredited investors), and by definition, a carried interest payment is a performance-based fee (that most advisory firms wouldn’t want to operate by in the first place?).

The bottom line, though, is that while the loss of the deduction for investment advisory fees may be painful for many, there are still at least some ways that financial advisors and institutions can help their clients pay investment related expenses in a tax-efficient (pre-tax) manner!

#FASuccess Ep 114: Why Creating A Great Client Experience Is About More Than Just Great Service, with Dennis Moseley-Williams

March 5, 2019 07:03 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 114th episode of Financial Advisor Success Podcast!

My guest on today's podcast is Dennis Moseley-Williams. Dennis is the founder of DMW Strategic Consulting, a boutique consulting firm that works with financial advisors in how to design and deliver a great client experience.

What's unique about Dennis, though, is that he's not simply focused on how to improve client service, but that he's trained and studied under Joseph Pine, author of the seminal book, "The Experience Economy," and has specialized in applying "The Experience Economy" concepts specifically to the domain of financial advisors.

In this episode, we talk in depth about the difference between simply giving better client service and a truly distinct client experience. How the focus of better service is to save client's time and money, but a great client experience is about ensuring that the client's time is well spent. How the delivery of a great client experience starts with viewing everything about your financial planning process as an experience to be staged for clients, and why in the end it's not just about what you do for clients but what change for the better you help to create in their lives.

We also talk about the practical steps to take to start adapting your firm towards delivering a better client experience, starting with how to more effectively target who you want to serve by taking a niche, niche, weird approach to identifying your target clientele, why it's so important to develop a theme to the experience you're trying to create for your ideal clients, why you should think of your advisory business as a stage and industry products and your financial plan itself as props in that staged experience, and how the challenge of creating a unique client experience that there's no clear instruction manual for how exactly to do it for your particular ideal clientele is part of what makes it so profoundly unique and differentiating in the marketplace.

And be certain to listen to the end, where Dennis talks about the importance of finding your own true authenticity and crafting unique client experience, and how in the end, building an advisory firm and a great experience for clients is really just about doing one great thing for one particular type of ideal client and then really going all in to own it.

So whether you're interested in learning about how you can leverage "the experience economy" for your advisory business, why discovering your "theme" as a financial advisor is so important, or actionable steps you can take to improve your clients' experience with you and your practice, then we hope you enjoy this episode of the "Financial Advisor Success" podcast.

The Latest In Financial Advisor #FinTech (March 2019)

March 4, 2019 07:07 am 0 Comments CATEGORY: Technology & Advisor FinTech

Welcome to the March 2019 issue of the Latest News in Financial Advisor #FinTech – where we look at the big news, announcements, and underlying trends and developments that are emerging in the world of technology solutions for financial advisors and wealth management!

This month's edition kicks off with the mega-news that Envestnet has acquired PortfolioCenter from Schwab, and in the process, has stirred up a feeding frenzy of what may be once-in-a-lifetime deals as all the major portfolio performance reporting solutions compete for the nearly 2,000 legacy PortfolioCenter users that are now in transition.

From there, the latest highlights also include a number of interesting advisor technology announcements, including:

Commonwealth spins off its proprietary broker-dealer operating system and advisor tools into a standalone entity, Advisor360, and then promptly licenses it out to MassMutual’s 9,000 brokers
Cetera stakes a new direction in the post-product future of the broker-dealer model with a “fee-for-service” advice initiative using AdvicePay
OnPointe Risk Analyzer launches a new Riskalyze alternative that aims to compete not just on risk tolerance assessment but marketing capabilities as well
FA Match raises a $500k seed round and builds a broker-dealer recruiting matchmaking platform for independent brokers looking to make a switch

Read the analysis about these announcements in this month's column and a discussion of more trends in advisor technology, including the latest new “Multiple Opinions” and “Timeline” features announcements from Riskalyze, Chalice Financial Network’s acquisition of SuccessionLink as a channel to recruit new advisors, PreciseFP launches a standalone “digital onboarding” solution with SSG that does not require advisors to change client portals and portfolio performance reporting solutions, and Yourefolio launches a new drag-and-drop estate plan flowcharting tool (at least for the subset of advisors still doing estate planning flowcharts!).

And be certain to read to the end, where we have provided an update to our popular new “Financial Advisor FinTech Solutions Map” as well!

I hope you're continuing to find this new column on financial advisor technology to be helpful! Please share your comments at the end and let me know what you think!

*And for #AdvisorTech companies who want to submit their tech announcements for consideration in future issues, please submit to [email protected]!

Weekend Reading for Financial Planners (Mar 2-3)

March 1, 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 study from Morningstar, which finds that, even as financial advisors increasingly frame "behavior management" as a key value proposition, consumer research ranks "helping me control my emotions" as dead last amongst the benefits of working with a financial advisor, instead showing a preference for more tangible benefits like the advisor's relevant skills and knowledge, how well the advisor communicates, performance results, and actually achieving financial goals.

Also in the news this week was a big announcement that Bank of America is dropping the Merrill Lynch name from its investment banking unit, consolidating the Merrill Lynch Private Banking and Investment Group (PBIG) into just Merrill Private Wealth (removing the "Lynch"), and retiring the 165-year-old U.S. Trust brand altogether... and raising the question of whether the days are numbered for the entire Merrill brand itself. And there's a fascinating discussion from Bob Veres about whether FPA chapters should consider "seceding" from the FPA to form a new "CFP Society" that would fulfill the original founding vision of the FPA to be the home for CFP professionals (while the FPA itself has declined from nearly 50% to barely 20% market share of CFP certificants since 2000).

From there, we have several articles on spending and cash flow decisions, from research that suggests social media (and the rise of modern media in general) may be helping to drive the ongoing decline in the National Savings Rate in recent decades, the rise of "stealth wealth" behavior for those who don't want to live ostentatiously (whether to avoid being solicited as a "wealthy" person, or simply to help find social circles that don't encourage profligate spending), research on the habits of wealth accumulators that differ from everyone else, a fascinating series of interviews with people who had "sudden wealth" events about how they really handled the money, the ways our spending does (or often doesn't) really align with our values (as an alternative way to determine whether we're "living within our means"), and why perhaps society needs to become more cognizant of - and more sympathetic towards - the fact that even households living within their means and exercising financial discipline are often still exposed to significant "financial fragility" as well.

We wrap up with three interesting articles, all around the theme of finding and building our own career path: the first explores the research of what it really means to "find your passion" or calling, and how it turns out that you're more likely to find a passion by simply engaging in something that's aligned with your values and having your passion for it build as you succeed (rather than trying to identify the passion and find the "perfect" passion job in the first place); the second provides a powerful reminder that almost by definition, you can't learn from experience until you're willing to do and experience something different than what you already do (which is why experimentation is so crucial); and the last is a fascinating reminder that while most people try to be good workers in their jobs, and find a good company to work for, that ultimately it's finding the right industry that may actually be most important to long-term career success, as even the best companies and workers may struggle in an industry that is shrinking, while a rising/growing industry tends to lift all boats (while providing an outsized reward to the top performers in particular).

Enjoy the "light" reading!

Kitces & Carl Ep 03: The Importance Of Likability As A Financial Advisor

February 28, 2019 10:51 am 0 Comments CATEGORY: Kitces & Carl Podcast Personal/Career Development

In a world where it can take as few as 50 great clients to build a successful advisory practice, many seasoned advisors have been able to build a business around a small group of clients who they like to work with (and who like them in return). Yet advisors who are at an earlier stage of their careers don’t typically have the luxury of being so selective in picking and choosing the clients who they want to work with and like, while instead there’s even more pressure on the advisor to be “likeable” in the first place; as the common aphorism goes, a client has to first “like you” before they’ll decide to trust you and hire you. Accordingly, then question then becomes, to what extent does likeability really matter in bringing on new clients and building relationships with existing clients, and conversely, how far should you go to come across as “likeable” to clients (even if it requires doing something that isn’t otherwise natural), and how common is it for clients to fire their advisors because they are “unlikable”?

In our third episode of “Kitces & Carl”, Michael Kitces and financial advisor communication guru Carl Richards sit down to discuss the question of how important it is to be “likeable” as a financial advisor, why being your “authentic self” when it comes to communicating and interacting with clients might matter more, and why it’s important for newer advisors to avoid sending mixed signals to clients when trying to differentiate themselves.

Foregoing the (remarkably intriguing) possibility of developing a practice around the “curmudgeon” niche, the reality is that those who self-select into a career of financial advice often do so out of a desire to make a difference in people’s lives, which necessitates having some level of competency in interacting with others. Though beyond just being “likeable,” being able to connect with others is also about your style, behavior, and even your appearance… all of which might be adjusted in order to be more appealing to potential clients.

Because the reality is that it is important to tailor the way you communicate with and present information to various clients, as not all clients have the same preferences in how they want to receive advice in the first place (i.e., some clients might “only” want a big-picture summary, while others love to delve into all the gritty details).

Still, though, that doesn’t necessarily mean advisors should try to be something they’re not… and in fact, the more you try to be something you’re not, the easier it is to come off as inauthentic, instead. Rather, the key to finding people who like you and want to do business with you is by being your “authentic self,” and recognizing that, while not everyone may respond well to you, some will… and those are the people who you ultimately want to work with anyway!

On the other hand, “being your true self” doesn’t mean it’s a good idea to totally throw social conventions to the wind. Be aware that, particularly when clients come in, they expect certain things of a “professional”, and if you stray too far in an effort to try to stand out from other advisors (or just be your authentic self), then you can easily create uncertainty in the client’s mind as to whether or not you have the professionalism and competency to help them solve whatever problem it is that brought them to you in the first place.

Ultimately, the key point is that likability is important, to the extent that you need to provide great service to your clients in a way that works well for them. But, especially for newer advisors, it’s equally important to not create more barriers for yourself being inauthentic, or by trying to differentiate yourself in a way that is off-putting to clients. Because the differentiator that matters the most resides not in how you present yourself (whether by manner or dress), but in the questions you ask and the experience you create for clients… effectively differentiating on the value delivered to clients themselves, and not just by the advisor’s own style and likeability!