Kitces.com - Advancing Knowledge in Financial Planning

Broker-Dealers Can’t Compete Until They Treat Advice As A Value-Add Not A Liability

November 8, 2018 02:04 pm 0 Comments CATEGORY: Planning Profession

Notwithstanding their commission-based roots as a product distribution intermediary, this year's Financial Planning magazine survey of the top 50 independent broker-dealers showed that in the past year they generated more revenue from fees than from commissions. Yet even as broker-dealers transition from their commission-based roots to the fee-based model and provide more and more advice, the challenge remains that when historically broker-dealers went out of their way to not provide advice (to avoid the RIA registration requirements and advice liability that may result), too many broker-dealers still treat the growing volume of advice from their advisors as a liability to control and minimize, rather than a value-add to enhance... which will make it increasingly difficult for them to compete, even as they transition to the fee-based model.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1 PM EST broadcast via Periscope, we explore the roots of why broker-dealers historically have tried to prevent their representatives from providing advice, the ways that broker-dealers have tried to limit the scope of their representatives giving advice (from centralized planning departments to tech-delivered financial plans), and why the future of broker-dealers managing the liability exposure of providing advice is not about limiting the ability of their representatives to give advice but rather about investing in the training and education of their advisors to ensure they have the knowledge to give the right in the first place!

The trend of broker-dealers towards fee-based advice has been incredibly strong over the past decade, as the top-50 independent broker-dealers have risen from having fee-based revenue that is just 1/3rd of commissions, to surpassing it in the past year. And the trend appears to only be accelerating, due to both the simple realization that recurring AUM fees is just a much more stable and sustainable (and higher-valuation) business model, and the emerging trend of both US-based and global fiduciary regulation that threatens to curtail commission-based compensation and its conflicts of interest anyway.

The caveat, however, is that too many broker-dealers still don't treat advice itself as a valuable service to amplify, but instead manage it as a liability exposure to be minimize. In order to mitigate that risk, some broker-dealers have created centralized planning departments, which often aren't just about leveraging advisor efficiency, but instead are built to produce standardized “financial plans in a box” with formulaic advice that the “advisor” then (just like a pre-packaged product that they’d sell) “presents” to the client customer (removing the actual advisor from the advice equation!). And more are now looking to adopt technology that can further "standardize" the advice their advisors provide, eliminating the ability of the advisors to actually create more value-add with client-specific advice!

Which means broker-dealers risk unwittingly amplifying the breakaway broker trend to RIAs, even as they adopt their own fee-based models, not because their advisors want to transition to fee-based advice, but simply because their advisors want the freedom to actually give advice, customized to their individual clients. Especially as competition increasingly pressures advisors to move towards niches and specializations beyond mere "cookie-cutter" comprehensive financial plans.

Ultimately, though, the key point is simply to recognize that for firms that actually want to build value in an advice-centric future, advice should be treated as a value-add, rather than a liability. Which means the path to minimizing liability exposure is not to limit the ability of advisors to give advice, but to invest into their training and education with CFP certification and advanced post-CFP designations to ensure that they give the right advice in the first place, and form specializations (from student loan planning to retirement distribution planning) that further enhances their domain expertise and thereby reduces the risk of giving the "wrong" advice that creates liability for the firm!

Coordinating Contributions Across Multiple Defined Contribution Plans

November 7, 2018 02:30 pm 5 Comments CATEGORY: Retirement Planning

For most workers, employer retirement plan limits are what they are, with a salary deferral cap of $18,500 (in 2018), and the opportunity for employers to add even more on top in the form of matching, profit-sharing, and similar contributions (up to an aggregate limit of $55,000 in 2018). The general rule typically boils down to “save as much as you can, and be certain to capture any matching contributions at a minimum.”

However, for a subset of workers, there is a possibility of being covered by two (or more) different defined contribution plans at the same time. Either for those who have an employee job with two different businesses (each of which provides a 401(k) or similar defined contribution plan). Or because they have a “side hustle” in the gig economy that allows them to create their own “employer” retirement plan as a self-employed individual. Which raises the question of how to coordinate between the two (or more) plans.

The first limitation on employer retirement plan contributions, under IRC Section 402(g), is the salary deferral limit of $18,500/year, plus a catch-up contribution of up to $6,000. This limit applies once per taxpayer across any/all plans they’re involved with (except for 457(b) plans, which are counted separately, and IRAs, which have their own standalone contribution limits).

The second limitation is known as the 415(c) overall limit, which is the (currently $55,000, plus any catch-up contributions) cap on the aggregate total of all contributions that go into the plan (including both salary deferral contributions by the employee, after-tax employee contributions, and any/all contributions from employers, from profit-sharing to matching contributions). However, unlike the 402(g) limit which applies once across all plans, the 415(c) overall limit applies separately for each plan.

The caveat to the overall limit, though, is that if the employers are “related” to each other (either as a parent-subsidiary or brother-sister controlled group, some combination thereof, or an affiliated service group), the overall limit (along with other employer retirement plan testing rules and requirements) is applied once across all plans as well.

Which means that while individuals who work two employee jobs at independent companies can receive contributions from each, and employees who have their own side hustle can still create their own self-employed retirement plan with its own overall limit, entrepreneurs who own multiple businesses must be cautious not to run afoul of the controlled group requirements that would require them to aggregate all their businesses together and not “double-dip” by trying to reach the overall limit across multiple retirement plans from each separate-but-not-really-separate business!

#FASuccess Ep 097: Transitioning From Financial Coach to Financial Planner Serving Underserved Communities With Phuong Luong

November 6, 2018 07:05 am 1 Comment CATEGORY: Financial Advisor Success Podcast

Welcome back to the 97th episode of the Financial Advisor Success podcast!

This week's guest is Phuong Luong. Phuong is the founder of Just Wealth, an independent RIA specifically focused on working with younger clients in their 20s, 30s, and 40s who are still in the wealth building phase of their careers, and with whom Phuong meets entirely virtually using video conferencing tools, even though most of her clients are actually in the Boston area where she's located as well.

What's unique about Phuong, though, is not just her virtual practice, but that she comes from a background of doing financial coaching and counseling, and as a result, more than half her practice is working with clients who are below the median household income in Massachusetts, about $75,000 a year, for whom she charges an ongoing monthly retainer fee of 1.5% of their monthly income.

In this episode, we talk in depth about what it's like doing financial planning for lower and middle-income families. Why they really are willing to pay for financial planning advice despite being of limited means, how the focus typically is not actually on budgeting and household cash flow planning, but on building up their balance sheet instead, and why until those clients build up their personal balance sheet, it's necessary to understand the community balance sheet of local programs and resources to help.

We also talk about the progression from financial education to financial coaching to financial counseling to financial planning. The differences in each of those terms, not just in regards to the income or affluence of the clients being served, but the mindset of the educator or coach or counselor or advisor working with the client, and the appeal for someone with a financial coaching background like Phuong to come into the financial planning world in the first place.

And be certain to listen to the end, where Phuong talks about the challenging ways that stereotypes about race and low-income individuals can become blocking points to giving them effective advice. How many of the financial challenges of working with people of color in her community can be traced back to institutional and government policies from decades ago that still have lasting effects in the compounding of income and wealth inequality, which in turn may be both limiting the reach of financial planning to minority communities, and our ability as a profession to attract people of color to become financial planners in the first place.

So whether you're interested in learning about actions you can take to help improve diversity in the financial planning profession, Phuong’s unique career journey that brought her to financial planning or how she's built a successful business helping underserved communities, then we how you enjoy this episode of the Financial Advisor Success podcast.

The Latest In Financial Advisor #FinTech (November 2018)

November 5, 2018 07:03 am 0 Comments CATEGORY: Technology & Advisor FinTech

Welcome to the November 2018 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 big news that Fidelity has rolled out a new open architecture marketplace aptly called Integration XChange, in what is both a major shift for the RIA custodian towards a more open architecture, a substantial potential threat to TD Ameritrade’s marketplace differentiator, a huge new opportunity for FinTech upstarts to have a second go-to-market channel for RIAs besides Veo, and a creative way to feed Fidelity’s new Consolidated Data initiative.

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

Riskalyze rolls out a new “GPA” scoring system to evaluate how efficiently a prospect’s (or advisor’s) portfolio allocation maximizes its return potential for a given level of risk tolerance.
eMoney Advisor launches a new Foundational Planning module that takes a bizarre step into MoneyGuidePro’s past, just as FiServ launches a new Financial Advice Management module that also bears eerie similarities to the MGP interface.
Edmond Walters re-emerges after a 3-year hiatus with digital marketing platform AdvisorStream to potentially continue what he started with eMoney’s Advisor Branded Marketing.
AdvicePay announces new integrations with both TD Ameritrade’s Veo and Orion to more easily facilitate fee-for-service billing of financial planning and retainer fees alongside an advisor’s AUM fees.

Read the analysis about these announcements in this month's column and a discussion of more trends in advisor technology, including Vestmark’s acquisition of Adhesion and the rollout of Orion Enterprise, YCharts’ new Model Portfolio tracking and analysis tools, Redtail’s new AI system for advisors and what it might someday do, Hearsay’s CRM overlay system to make it easier for advisors to manage tasks and workflows directly from their smartphone, SigFig’s new CoPilot solution to replace more back- and middle-office functions for human advisors, and the rollout of CapGainValet’s 2018 estimates of end-of-year mutual fund distributions for advisors.

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 (Nov 3-4)

November 2, 2018 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 the announcement that Schwab is launching a new "Center of Excellence" that is intended to push forward internal innovation, including ways to better support "smaller" advisors with $25M to $100M of AUM that still form the bulk (70%+) of advisor assets but tend to get the least support due to their small individual size, in what may signal a broader shift of RIA custodians to put more resources to "downmarket" advisors in addition to competing for the small subset of the largest firms.

From there, we have a number of articles looking at broad industry trends, from an interesting look at the 50-year anniversary of a number of major independent broker-dealers (who all formed in 1968 as insurance company subsidiaries after a major court case and regulatory ruling required them to do so to continue offering early-stage variable annuities), to a discussion about the rising trend of private equity firms investing into broker-dealers, why perhaps it's time to shift our current industry disclosure approach to providing more standardized data that third-party sites can better package for consumers (instead of regulators trying to design the "optimal" disclosure), a discussion of how direct-to-consumer "Insurtech" providers are trying to disrupt life insurance companies the way online discount brokers disrupted the traditional stockbroker, and an interesting "call to action" to RIA custodians about what they need to improve to better support younger/newer advisory firms.

From there, we have a number of tax planning articles as well, including: pending guidance from the IRS that will affirm that meals do remain deductible even though entertainment expenses aren't deductible anymore (even if the meal itself is tied to an entertainment event); how the Tax Cuts and Jobs Act is shifting the focus of estate planning away from estate taxes and towards income tax planning and asset protection instead; and what to watch out for if clients want to do a "temporary loan" to themselves using the IRA 60-day rollover rules.

We wrap up with three interesting articles, all around the theme of connecting better with others: the first delves into the research about how we actually form close friendships, and what it takes to speed the process of finding and establishing close friends; the second offers up some useful tips on how to better write persuasive emails that connect (and are less likely to be misunderstood); and the last explores the research on what it takes to be perceived as more charming, which as it turns out, has little to do with being perceived as more competent and instead is driven almost entirely by being perceived as more "warm," which means trying to be more welcoming to the other person who may be equally nervous about being perceived as charming themselves!

Enjoy the "light" reading!

(When) Will CFP Certification Ever Become A Licensing Requirement Like The CPA?

November 1, 2018 01:26 pm 0 Comments CATEGORY: Planning Profession

Historically, the competency standards to become a “financial advisor” have been very low. After all, technically in order for someone to hold themselves out as offering “comprehensive financial advice” and get paid for it, all they really need to do is pass a 3-hour regulatory exam that takes just a week or few of preparation. In the meantime, though, salespeople who are “only” licensed to sell insurance or investment products and technically can’t be paid for their advice itself can also still publicly call themselves financial advisors as well. Which is why it’s so difficult for consumers to tell which is which, and for comprehensive financial planners themselves to differentiate their services from the army of other “advisors” out there who say they do the same thing… even though they don’t, and can’t actually be paid for it in the first place. That challenge, in turn, has led many to wonder if there’s a path for regulators to enact (and enforce) rules requiring anyone who says they provide comprehensive financial advice to actually be trained and educated to do so, and whether it might make sense to someday require a minimum standard like CFP certification as a licensing requirement to provide financial advice.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss how the CFP marks are not a license to practice now, the differences between the CFP certification and a bona fide license like the CPA, possible avenues to transition the CFP certification from a trademark into an actual license, a few of the many hurdles such a potential transition would encounter… and why it still might be a worthy goal to pursue anyway.

It’s important to understand that, unlike a CPA license – which is granted by a state certifying body and grants accountants legal authority to perform certain tasks (e.g., attesting an audit) that they wouldn’t be able to do otherwise – the CFP certification does not fall under any state or federal regulatory body, and instead is a trademark that the CFP Board allows advisors to use if and only if they agree to honor the Board’s Terms and Conditions (which happen to include following the Four E’s of the CFP education, exam, experience, and ethics requirements). But that also means that financial advisors aren’t required to obtain CFP certification, or any substantive education or experience, in order to hold out as providing (and get paid for) financial advice, and instead need only to pass some very basic licensing exams.

In the past, this wasn’t a big deal, as the industry was focused primarily on selling investment and insurance products in the first place, for which financial planning was an effective sales strategy. However, in a world where products are increasingly accessible through technology itself, the value that advisors must bring to the table has less and less to do with financial products that are sold, and more and more to do with the quality of advice itself. Yet without the proper education, examination, experience, and ethics requirements that could be prescribed (and then overseen) by a regulatory body, financial advisors aren’t being held to the sort of standards common to professionals in other industries where the advice provided often makes such a significant impact on clients’ lives (and where the depth of expertise of the professional makes it difficult for consumers to vet who is “good” or “bad” in advance).

Unfortunately, the pathway towards turning the CFP certification into a required license to provide financial advice is difficult, as it must fall under the purview of either state or Federal regulators, and both have their own unique challenges. State regulation is often easier to implement – at least something – but rarely ends out being uniform, in a world where advisors are increasingly likely to work with clients across state lines. Federal regulation allows for uniformity across all 50 states, but can be difficult to prevail against concentrated industry lobbying forces, and ironically existing regulators themselves may not want to see their existing regulatory purview entrenched upon!

Nonetheless, the transition to higher competency standards for financial advisors might become inevitable, given the accelerating rate of adoption of the CFP certification itself amongst advisors. Because at some point, the CFP marks will become so ubiquitous that it will be “easy” for the industry to demand that anyone getting paid for providing financial advice should be required to have CFP certification to do so… simply because most advisors already will have it at that point (and the majority will then require the rest to conform).

Ultimately, though, the key point is simply to recognize that CFP certification is not a license today, and realistically can’t become one while it’s still only held by a minority (about 30%) of all financial advisors. But ironically, the best path to enshrining a minimum competency standard like CFP certification into licensing regulation may simply be to support its continued and ever-broadening adoption – which appears poised to accelerate further as it becomes a “mainstream” certification – because at the point most advisors have voluntarily adopted the standard anyway, it’s not a big leap to make it official… and set a formal competency standard akin to other recognized and true professions!