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Weekend Reading for Financial Planners (July 21-22)

July 20, 2018 02:51 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the news that the CFP Board has selected Vanguard veteran Jack Brod, CFP, to serve as President-Elect of its Board of Directors, as Vanguard itself becomes a rising force in hiring CFP certificants for its Vanguard Personal Advisor Services division (which Brod helped to establish), and the CFP Board may face new struggles during Brod's Chairman year in 2020 when the organization will have to actually begin enforcing its new fiduciary Standards of Conduct for the first time.

There were a number of other big news items this week as well, including a new set of retirement plan proposals rolling through Congress (that appear to have a chance to pass) that would expand multi-employer plan (MEP) options for smaller 401(k) plans and make it easier for 401(k) participants to buy (immediate) annuities at retirement, the revelation that, with its final IPO under two weeks out, Focus Financial's opening price may come in substantially higher than previously anticipated (suggesting there is still substantial investor demand for RIAs and potentially fueling a fresh new wave of M&A), and the finalization of New York state's fiduciary rule for annuity and life insurance sales (which could prove to be an industry-wide template if the NAIC does not implement a similar model rule).

From there, we have a number of articles on next generation advisors, succession planning, and continuity planning, including: the generational perspective gaps that are impeding the ability of founders and successors to establish effective succession plans; why next generation advisors want more than a job (and how to inspire them to come into the financial planning profession); issues to consider when implementing a real-world succession plan (from both the founder-owner and successor-owner's perspectives); the tax-related considerations in how a buy/sell agreement or succession plan is structured; and how to properly structure a continuity plan for those who do not want to retire and transition to a successor but do need a contingency plan for what happens to the business and their clients if something happens to them (e.g., in the event of sudden disability or death).

We wrap up with three interesting articles, all around the theme of how financial advisor and financial advisors are changing in the future: the first explores the rise of financial wellness programs in the workplace, as employee research finds that financially-related issues cause so much disruption in the workplace that employers can get a positive ROI by subsidizing or even fully paying for financial wellness programs for employees, spawning not only a growing volume of financial wellness technology platforms, but even a rise in human financial advisor solutions offered in the workplace channel; the second looks at how nearly 5 years ago Australia set the template for fiduciary reform by being one of the first major countries to ban commissions for financial advisors, but the fact that those advisors remained employed by the companies that manufacture and distribute product has left them so conflicted that a Royal Commission is now investigating and deliberating about whether to split advice and product sales entirely (in a move that again could become a template for reform around the globe); and the last looks at how, despite the industry's efforts to improve gender, age, and ethnic diversity, the needle has barely moved in years, raising the question of whether the problem is simply a lack of awareness and diversity support programs, or if the industry's traditional view that "Financial success is derived from having a fixed set of goals funded as a consistent percentage of income into stock-market-based accounts" (based on our investment-centric business models) could unwittingly be less appealing and less aligned to the real-world needs and views of women, Millennials, and people of color, who may approach their own financial goals and saving and investing philosophies differently?

Enjoy the "light" reading!

Why Simple Financial Advisor Regulation Requires Complex Guidance

July 19, 2018 02:46 pm 1 Comment CATEGORY: Industry News

After announcing earlier this year the final approval of its new Code of Ethics and (fiduciary) Standards of Conduct for CFP certificants, the CFP Board recently announced that it was creating a “Standards Resource Commission” – a new assemblage of 13 industry leaders formed for the purpose of providing formal guidance and supporting resources for the CFP certificant community to better understand how to comply with the new CFP fiduciary standard.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss why this was a good and needed move by the CFP Board, why it’s necessary for even simple “principles-based” fiduciary regulation to have formal guidance on how to comply, and how the industry tends to wind up with very long and very complex regulations to support fiduciary regulation – not because a fiduciary rule is complex, but because the industry is a complex beast to which even simple fiduciary regulation isn’t simple to apply.

To understand why the CFP Board’s new Standards Resource Commission is a good idea, though, it’s important to recognize that one of the key issues that many raised in Public Comment letters when the Board’s Standards were proposed was its heavy reliance on the notion of “reasonableness”. For instance, the Standards of Conduct stipulated that advisors should act in a “reasonable” manner when addressing everything from data security to avoiding material conflicts of interest. Yet unfortunately, the very definition of “reasonableness” can potentially be quite subjective… which is why the new Standards Resource Commission is so important; their job will be to determine from the advisor community, and more importantly communicate back to the advisor community, what are our generally accepted professional practices that are recognized as industry standards and therefore “reasonable”.

For some, though, frustration remains that there is a need in and of itself to define what it means to be “reasonable” in the first place. Why isn’t the fact that CFP professionals are required to act in the best interest of their clients enough? What’s so hard about that? Why do we need all this other guidance stuff?

The answer is that in reality, simple concepts, as appealing as they are, aren’t always easy to apply to a complex system… and there aren’t many industries more complex than the financial advice industry! For example, fiduciary advocates often suggest that advisors should be banned from using only proprietary products, so that they can implement a potentially-lower-cost alternative like a Vanguard fund if it’s in the clients’ best interests. But what happens if the advisors works at Vanguard; would the Vanguard advisor be banned from using best-in-class Vanguard funds because they happen to be a proprietary product for the Vanguard advisor?

The sheer complexity of the industry means that simple rules aren’t always so easy to apply to the multitude of situations… and that’s exactly why we end up some very long and complex regulations.

However, it’s crucial to recognize that while the regulatory guidance can be quite long, the actual fiduciary and best-interests standard rules that the regulators have proposed in recent years are quite short. The Department of Labor’s fiduciary rule was not actually a 1,023 page rule; the actual rule that applied directly to advisors was just 3 simple pages… followed by 800 pages of guidance for a complex industry. Similarly, the SEC’s advice rule is not actually a 917 page rule, but a 7 page rule with over 900 pages of guidance for a complex industry. And even the CFP Board’s new 16-page Standards of Conduct is actually a half-page fiduciary rule (that’s it!), and 15+ pages of guidance regarding the Code of Ethics and conduct that is expected to comply with that rule.

And unfortunately, this tendency for long regulatory guidance for a complex industry will likely continue, until and unless the financial services industry is forced to actually become less complex – for instance, by separating out the different business lines - so that companies that create and sell financial products aren’t allowed to own advisory businesses, as is the case in the medical industry where doctors aren’t paid by drug companies to sell specific products, and is now being considered in Australia in the aftermath of their initial fiduciary regulation several years ago.

Until then, the key point remains that the complexity of regulatory guidance doesn’t stem from the fiduciary rules themselves… it stems from the complexity of the industry trying to follow them. Because being a fiduciary isn’t confusing in and of itself… but it does start getting a little messy when you begin to apply simple concepts to the real-world complexity of the financial services industry.

Maximizing The “Still-Working” Exception To Delay RMDs From A 401(k) Plan

July 18, 2018 07:01 am 11 Comments CATEGORY: Taxes

While qualified plan participants are generally required to begin taking distributions April 1 of the year following the year the plan participant turns 70 ½, the "still-working" exception delays the RBD to April 1 of the year following the year the employee retires. The motivations behind the still-working exception are simple enough (Congress anticipated that some workers would continue working beyond age 70 ½ and did not want to force these participants to begin taking distributions), however the reality is that the provision itself is surprisingly complex, containing many layers of rules that influence one another and make the determination of whether an individual is "still-working" more difficult than many would expect.

In this guest post, Jeffrey Levine of BluePrint Wealth Alliance, and our Director of Advisor Education for Kitces.com, takes a deep dive into the still-working exception, examining how an individual is (or is not) determined to be "still-working", as well as the planning strategies that arise from the exception, such as rolling qualified assets into a still-working exception eligible plan, divesting more than 5% ownership of a company prior to age 70 ½, creating a new business after age 70 ½, and even just making sure the requirements are met to qualify for the still-working exception!

To the surprise of many, defining precisely what it means to be "still working" (e.g., 1 hour per week, 10 hours, 20 hours?) is not something that the IRS has done. However, the general interpretation based on a plain reading of the law is that, as long as the employer still considers an individual employed, that person is “still employed” for the purpose of the still-working exception (even if the ongoing work is of a relatively limited nature). However, this determination is further complicated by the fact that an employee must be employed throughout the entire year to qualify for the exception and delay RMDs past their 70 ½ year, which is defined as not having retired at any point during the year, including December 31st! So, if an individual worked every day of the year (including a full work day on December 31st), but retired on December 31st (i.e., did not come back to work at any time in the next year), then the individual would be deemed retired in that year and would not be eligible for the still-working exception during that year.

Another complication with determining whether an individual is "still working" is the exclusion of the rule for 5% owners of a business. One point of confusion is that 5% owners are not considered "5% owners" for the sake of this rule. Instead, owners must own more than 5% in order to be considered a 5% owner. A second point of confusion is that ownership according to the 5% ownership rule includes indirect ownership of stock owned by a spouse, children, grandchildren, and parents (though not siblings, cousins, aunts/uncles, and nieces/nephews). Further, the still-working exception is based on a one-time test of ownership in the plan year ending in the year an employee turns 70 ½, which actually means that those who own an increasing amount of a company after reaching age 70 ½ can own more than 5% and be considered less than 5% owners (or may own less but still are considered more than 5% owners).

Fortunately, this complexity does create planning opportunities which individuals can use to reduce (or at least delay) their tax bill. In particular, individuals may want to consider rolling other qualified into still-working exception eligible plans (as only an account through an eligible employer receives an exception from taking a distribution), divesting more than 5% ownership prior to age 70 ½ (as the test is only applied at this age), creating a new business and adopting a qualified plan after age ½ (as the new business would not have been around when an individual reached age 70 ½), or just making sure that the requirements to receive the still-working exception are met (as despite the popularity of retiring on December 31st, it may be beneficial to work at least one day into a new year).

Ultimately, the key point is to acknowledge that the still-working exception is not as straight-forward as is often believed. There is a lot of complexity in the rules surrounding the still-working exception, yet, at the same time, a lot of opportunity for tax planning as well (at least for those who have the luxury of not needing their retirement funds at age 70 ½ and who can continue to defer spending into the future)!

#FASuccess Ep 081: Expanding Access To Financial Planning Advice By Offering Financial Doing Instead with Louis Barajas

July 17, 2018 07:02 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 81st episode of the Financial Advisor Success podcast!

This week's guest is Louis Barajas. Louis is the founder of Wealth Management LAB, a multi-family-office style advisory firm in Los Angeles that specializes in providing financial advice and business manager services to entertainers and other celebrities in the Latino community.

What's unique about Louis, though, is the way that his advisory firm has evolved over time, from trying to serve Latino small business owners in the barrio where he grew up, to writing books and teaching financial literacy to the Latino and broader community, and now focusing on a business that is not just about financial planning, but what Louis calls "financial doing" instead.

In this episode, we talk about Louis' path into financial planning, from helping his father prepare tax returns and keep the business books as a teenager, to starting out with a broker-dealer in the 1980s but quickly getting tired of the pressure to sell products at the end of every financial plan, getting his CPA license and shifting to an accounting firm that worked with high-net-worth individuals, and then leaving the accounting firm to start his own solo practice after a chance meeting with pastor Rick Warren in a coffee shop, shortly before the pastor published his Purpose-Driven Life book, and how that 30-minute coffee shop conversation changed the trajectory of Louis' career forever.

We also talk about how Louis built his advisory firm over time, the setbacks he had that forced him to nearly start over from scratch twice after he had to split away from former business partners and associate advisors, because as he's learned you can have multiple partners in a business but only one Visionary, the Abundance Mentality Louis brings to the table that has allowed each new iteration of his business to grow even larger than the past, and how Louis building more successfully than ever this time with a focus on hiring for heart and teaching the skills, while putting a series of Core Values – or what Louis calls "Immutable Laws" – in place for the business, that serve as a guidepost for the entire team about the deliberate culture of the firm.

And be certain to listen to the end, where Louis talks about why he believes that not just financial planning, but financial doing for clients, is the key to expanding financial advice to a broader range of underserved consumers.

So whether you are interested in learning more about expanding access to financial planning advice to traditionally underserved communities, learning more about how financial "doing" differs from financial planning, or how an Abundance Mentality can help you grow your firm, I hope you enjoy this episode of the Financial Advisor Success podcast!

Introducing fpPathfinder: Flowcharts And Checklists For Diligent Financial Planners

July 16, 2018 12:01 pm 1 Comment CATEGORY: Technology & Advisor FinTech

Financial planning is full of complex decisions. From handling the nuances of Social Security planning (e.g., whether part-time income may trigger the Earnings Test, or whether past non-FICA earnings could trigger the Windfall Elimination Provision), to navigating the complex set of rules tied to retirement accounts (e.g., how to delay RMDs from a traditional IRA, or the rules for when and how to make a backdoor Roth contribution), the reality is that it can be challenging to remember how all of the many different components of financial planning might interact with each other when making recommendations to clients. Yet managing this complexity is crucial for financial advisors, as the failure to do so can lead to both omissions (e.g., a key rule that gets missed) and errors (e.g., failing to recognize the full breadth of issues that had to be considered in the first place).

Fortunately, checklists are a proven method for helping professionals manage such complexity. As highlighted in his famous book “The Checklist Manifesto”, author (and doctor) Atul Gawande illustrates that one of the easiest ways to handle the daunting complexity that face professionals today is simply to create a checklist of the key steps that must be taken, or the key factors that must be considered. In fact, checklists have been widely adopted and demonstrated to be successful in avoiding errors in many professions, including both airline pilots and surgeons. One limitation of checklists is that many people prefer to learn visually, though, which in turn has led to the adoption of flowcharts in professions such as computer programming, where the purpose of the flowchart is largely similar to a checklist (e.g., to help ensure quality control for complex processes that require consistent outcomes), but to do so more visually than a bullet-point checklist.

Yet despite the effectiveness of both checklists and flowcharts, the reality is that one of the biggest barriers to adopting the use of such tools is creating the tools themselves, as it is both time consuming, and can take considerable knowledge to develop these tools in the first place. To address the challenge, we’re excited to announce the launch of fpPathfinder, a new business specifically created to provide checklists and flowcharts for financial advisors, to use either internally in their own practices when evaluating client scenarios and formulating recommendations with clients, or directly with clients as a way to illustrate and explain key financial planning concepts and decisions.

As a starting point, fpPathfinder is offering a “Retirement Planning Essentials” package of visual flowcharts that can be used to cover key retirement planning issues, from eligibility to make tax-deductible IRA contributions and take tax-free Roth distributions, to the specialized claiming rules for Social Security benefits for divorcees or surviving spouses, the rules for delaying RMDs from a traditional IRA, and the rules for when and how to make a backdoor Roth contribution. Over time, fpPathfinder plans to launch additional flowcharts covering both retirement planning and other topics, as well as a complementary set of checklists for common planning scenarios, a voting system for members to express interest in what flowcharts to create next, and the opportunity for advisors to white-label the flowcharts with their own name and brand. Ultimately, fpPathfinder hopes to be a valuable resource for helping financial advisors adopt the checklist and flowchart processes common among other professions – as a means to both help advisors avoid errors and omissions, and to elevate the value of services that advisors provide to their clients!

Weekend Reading for Financial Planners (July 14-15)

July 13, 2018 02:52 pm 0 Comments CATEGORY: Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" – this week's edition kicks off with the news that the SEC is getting more aggressive in enforcing against advisors who violate the no-testimonials rule through social media platforms, as while previous SEC guidance has noted that there's nothing wrong with third-party social media websites that reference an advisor (from tweets about the firm, to having a Yelp page with reviews), the SEC did fine 3 advisors $10,000 each for hiring a third-party firm that solicited their clients to leave (positive) testimonials/reviews on the advisory firm's Yelp page. And also in the news this week is the decision of the SEC to move forward with a so-called "ETF Rule" proposal that would drastically streamline the time and cost it takes for asset managers to launch new ETFs.

From there, we have a number of insurance-related articles this week, from a look at the looming rise of no-load insurance policies (driven both by regulatory shifts away from commissions and towards fiduciary fees, and also the success of early no-load variable annuity products in the RIA channel), to a discussion of whether consumers (and advisors) are now overweighting the risk of future LTC insurance premium increases, and a discussion about whether advisors should start recommending various types of "concierge medicine" and "direct primary care" (DPC) health care solutions for clients in lieu of (or in addition to) traditional health insurance.

We also have several practice management articles, all focused around building teams and retaining team talent, including: an overview of Angie Herbers' "Diamond Teams" approach to developing advisor talent; tips to building deeper and stronger teams in your advisory firm; how to apply educational and instructional design principles to train and develop your team members more effectively; and a look at how to better retain female advisors in particular (as the number of female advisors has remained stubbornly 'stuck' and not rising for more than a decade, despite a significant rise in efforts to recruit women into the industry).

We wrap up with three interesting articles, all around the theme of entrepreneurship and starting your own advisory firm (or not): the first explores the challenge in larger advisory firms of finding next generation (G2) entrepreneurs to lead the business, which author and practice management consultant Philip Palaveev suggests may be less a lack of entrepreneurial talent and more a tendency of advisory firms to not take the steps and opportunities to develop the entrepreneurial talent they have; the second explores a research study that found, despite the stereotype of the 20-something uber-successful tech entrepreneur (e.g., a young Bill Gates, Steve Jobs, or Mark Zuckerberg), that the average age of an entrepreneur is actually 42, and the most successful entrepreneurs averaged age 45 when they founded their firms; and the last similarly looks at another research study finding that the odds of a startup business still being around in 5 years increases a whopping 500% when the founder is over the age of 35, and increases by 85% if the founder has at least 3 years of experience first... suggesting that in reality, the best path to starting a successful advisory firm with clients might never have been finding the "right" 20-something entrepreneurial advisor, but instead requiring all advisors to first get their 3 years of experience, complete their CFP certification, and consider waiting as long as 10-15 years into their career before actually going out to start their own advisory firm from scratch in order to increase the odds of long-term success.

Enjoy the "light" reading!