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#FASuccess Ep 090: Scaling An Advisory Firm Beyond Yourself By Systematizing The Soft Skills With Julie Murphy

September 18, 2018 07:03 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 90th episode of the Financial Advisor Success podcast!

This week's guest is Julie Murphy. Julie is the founder and chief visionary officer of JMC Wealth Management, a dual-registered advisory firm in Chicago with a team of 7 that serves more than 200 active clients with $200 million of AUM, on top of generating nearly $300,000 a year in recurring financial planning fees.

What's unique about Julie, though, is her focus on what she calls "financial healing," with financial planning conversations that are heavily focused around the intersections of money and our emotions and our energy flow to the point that Julie is not only traditional strategic alliances with attorneys and CPAs, but also has what she calls more esoteric strategic alliances with psychologists and meditation specialists as well.

In this episode, we talk about how Julie has structured her unique advisory firm practice with a combination of quarterly retainer fees that clients pay for ongoing financial planning, separate implementation revenue that clients pay to have their portfolios managed as well, Julie's three-meeting planning process and how she charges for each, and the software tools that Julie uses to implement her process.

We also talk about how she's been able to generate a steady flow of new clients. How Julie authored a book to establish and demonstrate her expertise, the way that she separated her writing activities into an outside business activity to manage the compliance concerns, the way she built up 50,000 followers on Facebook and the kinds of posts that she's found to be most successful, and how Julie was able to accelerate her success and growth by doing what she calls "letting her freak flag fly," by simply being her authentic self and allowing clients who are interested in what she has to offer to be drawn to her rather than trying to advertise out to them, because in the end, most advisors attract and develop best rapport with clients who are a reflection of themselves anyways.

And be certain to listen to the end, where Julie discusses how she's systematizing the soft skills of her financial planning process to train new advisors. How she aims to transition all of her clients to other advisors so she can do the part of the process that she enjoys most, which is meeting with and working with the challenges of new clients, and why she decided to write another book not just for marketing purposes, but also because the process of writing about her planning approach is actually helping her to figure out how best to systematize it.

So whether you're interested in learning about Julie's "esoteric" strategic alliances, how she is creating a process to systematize the soft skills of financial planning to build a strong bench of like-minded advisors, or how's she's managed to gather 50,000 followers on Facebook, then we hope you enjoy this episode of the Financial Advisor Success podcast.

Competition For Talent And The Rising Shortage Of Next-Generation Financial Advisors

September 17, 2018 07:07 am 1 Comment CATEGORY: Planning Profession

With the average age of a financial advisor over 50 and nearly 1/3^rd of all financial advisors projected to retire in the next 10 years, there is a rapidly rising demand for next-generation talent to replace them. And the demand is only further amplified by the ongoing shift of the advisory industry from commission-based compensation to (recurring) AUM fees, which for the first time make it viable for advisory firms to hire a deep bench of Support and Service advisors to retain existing clients without any need to be responsible (or successful) at finding their own new clients.

Unfortunately, though, the past two decades of a rising movement of independent advisors amongst both the independent broker-dealer and independent RIA channels has drastically reduced incentives for firms to develop their own talent. Creating a prospective next-generation talent shortage at the exact moment it’s needed most.

And the rising talent shortage is increasingly evident in the latest industry benchmarking data of the 2018 InvestmentNews Compensation and Staffing study, which shows that advisory firms are being forced to hire Service advisors from outside the industry and poach Lead advisors from competing firms just to fulfill their talent needs, due to the lack of up-and-coming next-generation Support advisors. And the shortfall is especially evident amongst the largest independent advisory firms that are experiencing the fastest growth rates and are overwhelmingly seeking to hire Support and Service advisors to deepen their bench.

Fortunately, though, the model of gaining “professional leverage” by using support professionals to improve the efficiencies (and economics) of partners is well entrenched in most professional services firms, from doctors (that typically have several nurses per doctor), to accounting firms (that have as many as 10 employees per partner), and law firms (which sometimes have as many as 25 employees per partner). Which suggests that, as advisory firms continue to transition to recurring revenue advice models, there is still ample room for further hiring and talent development to occur, especially in a world where 76% of advisory firms still have more Lead advisors and Partners than Support and Service advisors to work with them. Nonetheless, the apparent rise of a talent shortage means that the advisory industry may witness substantial upward pressure on advisor compensation in the coming years until it can attract enough next-generation advisors to fulfill the demand!

Weekend Reading for Financial Planners (Sep 15-16)

September 14, 2018 02:57 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 first independent study on the SEC's proposed Form CRS disclosures on the relationship differences between working with an advisor or a broker... finds that not only do consumers fail to understand the differences in obligations between the two as "explained" by Form CRS, but they misinterpret Regulation Best Interest as being comparable to a fiduciary standard when it's not, and couldn't even articulate the differences in costs and services between brokerage versus advisory accounts after reading Form CRS in depth.

Also in the news this week was fresh buzz about the potential for "Tax Reform 2.0" legislation, including a push to make all of the "temporary" sunsetting provisions of the Tax Cuts and Jobs Act permanent... with the caveat that the legislation (or what is actually a combination of three different bills in the House) is viewed as likely being dead-on-arrival in the Senate, and that, realistically, any further momentum on tax reform won't likely happen until 2019 at best (and then will depend on the outcome of the midterm elections).

From there, we have several more articles about the Tax Cuts and Jobs Act and recent IRS guidance and planning strategies, from a discussion of the new Kiddie Tax rules and how they work for dependent children, to new IRS guidance on some of the 529 college savings plan provisions of TCJA (in particular, that any type of public, private, or religious school counts for the new opportunity for up-to-$10,000/year of tax-free distributions for K-12 expenses), and a look at how a 50-year-old crackdown on Controlled Foreign Corporations (CFCs) may suddenly be experiencing a revival as a proactive tax planning strategy in a world where top individual tax rates are 37% but the top corporate tax rate (including on CFCs) is "just" 21% now.

We also have a few practice management articles, including: how to tell when advisory firm owners may be "starving" their advisory firm's growth opportunities by taking too much out of the business (hint: if the owners extract more than 40% of revenue in some combination of compensation and profits, it may be getting "over-milked"); how to formalize the structure of a firm-wide compensation plan for employees so they better understand their upside career opportunities; why the biggest blocking point to better advisor technology is no longer the lack of advisor tech innovation but the struggles of individual advisory firms to effectively adopt the software; and why large financial services firms should consider establishing a "Chief Planning Officer" (CPO) role to better shepherd the transition from traditional financial services product sales to an advice-centric planning business.

We wrap up with three interesting articles, all around the theme of working with couples where the wife outearns the husband: the first explores how marital strife and divorce rates appear to be higher amongst the nearly one-third of couples where the wife earns more; the second covers another recent research study finding that when wives earn more, they tend to downplay her income while overstating his income to narrow the perceived gap (even when reporting to government entities like the Census Bureau!); and the last provides some recommendations of what to consider and bear in mind when providing financial advice to and working with couples where she earns more (and the importance of not making any assumptions about their money dynamics based on who happens to be the primary breadwinner).

Enjoy the "light" reading!

Are The Accredited Investor Rules Unfairly Limiting Access To Good Investment Opportunities?

September 13, 2018 02:40 pm 0 Comments CATEGORY: Regulation & Compliance

In what is ostensibly an effort to increase consumer interest and access to investment opportunities, SEC Commissioner (and Chairman) Clayton has recently floated several ideas to ease the so-called “Accredited Investor” rules and limitations, which have come into sharp relief with a growing number of high-profile private companies like Uber and Airbnb that have chosen for various reasons not to make an Initial Public Offering that would make their stocks available to the average “Main Street” investor. Yet ultimately, it’s not clear whether the Accredited Investor rules really need to be changed, or if consumers (and the media) have distorted the perceived opportunities of private investing by focusing on the few biggest successes, and not the amount of risk and opacity that otherwise lurks in the world of unregistered securities (with ‘disasters’ only rarely occurring as publicly as Theranos did).

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1 PM EST broadcast via Periscope, we discuss the original objective and purpose of the “Accredited Investor” rules, where they might have possibly gone awry, and ways to re-align the Accredited Investor requirements so that they can accomplish their original goals.

At first blush, it’s not difficult to understand the desire to make capital markets even more egalitarian than they already are, by giving “mom-and-pop” the ability to get in on the ground floor with companies with tremendous growth potential like Airbnb and Uber (or Facebook and Twitter from several years ago). But, like every single other investment opportunity, greater potential reward always carries increased risk, and it’s the elevated risk that these Accredited Investor rules were intended to address in the first place.

Accordingly, the SEC’s “Accredited Investor” rule states that, in order to purchase unregistered (and less regulated) securities, an investor must have either $200,000 per year of earned income (or $300,000 with a spouse) for each of the prior two years and the current year, or have a net worth of over $1 million (excluding the value of their primary residence).

These requirements help ensure that investors who tie up their capital in unregistered securities should at least have the financial ability to absorb any losses should the venture go south, and ideally will have the financial sophistication to be able to evaluate whether the investment opportunity is really a good deal in the first place (or not).

However, $1 million in net worth isn’t the same hurdle it one was in 1982 (when the rules were first formed), and in today’s world that nest egg can’t even generate a median household income in retirement! Moreover, these investment opportunities – the vast majority of which will never actually pan out – are often marketed in a way that highlights the “special opportunities available only to the super-wealthy” aspect of the Accredited Investor limitations, while downplaying the fact that they are extremely risky and require extensive due diligence and that the real purpose of requiring “financial sophistication” is because it’s so hard to sniff out what’s actually “BS” in the first place (as even “sophisticated” Theranos investors discovered too late).

Accordingly, perhaps it’s actually time to increase (not lower) the thresholds for Accredited Investors to purchase unregistered securities – to ensure they’re limited to those who really can afford to take the risk and the potential losses – but at the same time, separate out the pretense that having a certain amount of money in the bank or via a paycheck automatically makes the investor “sophisticated” enough to evaluate potentially opaque private investment opportunities, and instead evaluate financial sophistication more directly (e.g., via a questionnaire or by requiring a third-party fiduciary advisor’s involvement).

Of course, the ultimate the problem with many companies building wealth in private markets and shunning public markets and isn’t about “accredited investor” rules at all, it’s about cumbersome regulations that have made going public overly restrictive and unappealing for many businesses in the first place. But to the extent that the Accredited Investor rules may be modified and recalibrated, it’s time to get real about what it really takes to evaluate the risks of private investments, beyond a presumption that how much an investor can afford to lose has any relationship to being “sophisticated” enough to understand the investment risks involved for the potential rewards that may (or may not) be available.

Direct Real Estate Investing And Claiming The Section 199A Qualified Business Income (QBI) Deduction

September 12, 2018 07:05 am 0 Comments CATEGORY: Taxes

In addition to having unique income-plus-appreciation-potential investment characteristics as an asset class unto itself, one of the primary benefits of directly investing in real estate is its favorable tax treatment, where capital gains are deferred until sold (and potentially further deferred with a 1031 exchange), and ongoing rental income can be at least partially offset by depreciation deductions.

In December of 2017, the Tax Cuts and Jobs Act further extended the benefits of investing in real estate by introducing a new “qualified business income” (QBI) deduction under IRC Section 199A that further reduces net rental real estate income by up to 20%.

The caveat, however, is that recent Treasury Regulations have clarified that not all direct real estate investing will actually qualify for the Section 199A deduction. Instead, investors must be able to demonstrate that they are operating a real estate “business” in order to qualify and show that either they personally, or other employees of the business, are spending a substantial amount of time actually engaged with the real estate (to differentiate a business from a mere real estate “investment” instead).

Furthermore, the QBI deduction for real estate investors may be further limited by the so-called “wage-and-depreciable property” test, which for high-income taxpayers (married couples filing joint returns with taxable income above $315,000, and taxable income above $157,500 for all other filers) typically partially or fully caps the maximum deduction at 2.5% of the original (i.e., “unadjusted”) basis of the property, plus 25% of the wages paid to employees in the business.

Nonetheless, the opportunity to deduct 20% of a real estate business’s net income provides substantial potential tax savings, making direct real estate investing even more appealing. Especially since, for those truly engaged in a real estate business with multiple properties, aggregation rules make it possible to group real estate investments together in a manner that at least eases the challenges of navigating the wage-and-depreciable-property test in the first place!

#FASuccess Ep 089: The Truth About Advisor Marketing And The Scalable Delivery Of Financial Advice with Ric Edelman

September 11, 2018 07:07 am 1 Comment CATEGORY: Financial Advisor Success Podcast

Welcome back to the 89th episode of the Financial Advisor Success podcast!

This week's guest is Ric Edelman. Ric is the founder and executive chairman of Edelman Financial Services, a mega-independent RIA with more than $22 billion of assets under management with 165 advisors serving 36,000 clients across 43 office locations from coast-to-coast.

What's unique about Ric, though, is that he started out like any other financial advisor, selling mutual funds in the 1980s as an individual advisor, doing financial education seminars to local elementary school PTA groups to meet prospective clients and just trying to survive. But in the 30 years since, Ric grew an advisory firm that far outgrew his own capacity to serve clients, ultimately building a marketing machine that brought in a whopping 45,000 prospects to the firm last year alone.

In this episode, we talk in depth about how Ric grew and scaled Edelman Financial over time. How they've been able to build a $22 billion firm while staying focused squarely on the mass affluent and not increasing their asset minimums, why Ric is adamant about keeping the firm's minimums as low as $5,000 for a new client, how the firm successfully justifies a fee schedule that still starts at 2% AUM fee, and why he considers it the firm's job to bring in new clients and the role of advisors to simply service those clients rather than being burdened with the time and effort of getting their own.

We also talk about how Ric scaled and evolved the marketing of the firm over the years. From starting out conducting seminars to local PTA groups then getting a guest spot on a radio show that ultimately turned into a radio show of his own, which led him to writing a book, followed by eight more, and now is expanding digitally as well, all with the theme of providing free financial education to those who need it, and recognizing that many will simply be helped with the information, but a few will inevitably reach out to the firm to ask for help and become prospects in the process.

And be certain to listen to the end, where Ric talks about how he'd build his marketing differently if he were starting fresh today, why he sees such an opportunity with Edelman Financial's merger with Financial Engines, and why he believes that most advisors are still grossly underestimating how much the best advice for clients and the advisory business itself will change in the coming decades as medical advances materially increase the typical client's life expectancy.

So whether you're interested in learning about how Ric structures advisor compensation to encourage great client service, where advisors add the most value (and why they're typically unaware of it), or what Ric sees as the biggest changes for the planning profession in the coming years, then we hope that you enjoy this episode of the Financial Advisor Success podcast.