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Billing on Outside Held-Away Assets Under Advisement: Issues To Consider

July 26, 2018 12:06 pm 0 Comments CATEGORY: Practice Management

Issues To Consider When Billing On Outside On Held-Away Assets Under Advisement Featured Image

As advisory firms seek to refine their fee structures and find ways to add value for (and generate new revenue from) their existing clients, one of the more interesting shifts in the industry over the past couple years has been away from billing on assets under management and towards assets under advisement, which are those outside held-away assets (e.g., a 401(k) plan at a current employer) on which an advisor may make recommendations, but not necessarily effect any transactions (because it’s not under their direct management). The appeal of such an approach is understandable: qualified plans are an ever-increasing piece of clients’ nest egg, especially for those in their 30s, 40s, and 50s, and the dilemma advisors often face is that, while a potential client might have significant net worth, much of that is tied up in accounts that the advisor can’t manage directly.

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss the ways in which advisors are working with clients with substantial held-away assets, the issues they may face when charging an assets-under-advisement (AUA) fee on outside assets, and some operational challenges that advisors need to think about before adding on this type of fee structure.

The quintessential example of a client where an AUA fee may be a better fit than an AUM fee is the still-working client with a moderate (e.g., $150,000) brokerage account, and a sizable (e.g., $350,000) 401(k) plan at a current employer, where the client can afford to pay the advisor a reasonable fee in the aggregate, but not necessarily “just” from the account that’s available to manage.

There are a few ways to handle situations like this. In some cases, the advisor simples takes the client on in hopes of getting that sizable roll-over down the road (even if it’s an unprofitable client for years up until that point). Others may set a minimum annual fee for clients if their available assets fall under a certain threshold, ensuring that there is a sufficient level of revenue per client to service the client, and letting those with sufficient net worth (even if not all available to manage) to decide for themselves whether to move assets, or just pay the fee.

The third approach that’s emerging, though, is simply to not charge only on the assets that the advisor manages directly, but also setting an assets under advisement fee for those outside held-away assets that might provide advice on, even if the advisor doesn’t (or can’t) have discretionary authority. For which the AUA fee is typically lower, recognizing that while the advisor does provide some services, it is less than the full-service management (for the full-service management fee) on the actual managed accounts.

However, charging an AUA fee it’s not without its potential pitfalls. In some cases, clients may not want to pay for “just” asset allocation advice they have to implement themselves. And if an advisor gets the client’s login credentials to do it for them, the service is a lot less cost efficient due to the added layers on manual work involved, and means that the advisor has custody of those assets (and as such, is subject to an annual surprise custody audit under the SEC custody rule). Moreover, if the client gets accustomed to paying a lower fee to have the outside 401(k) “advised upon”, they may not want to roll over and pay a full management fee when the time comes (if the advisor has not effectively distinguished the value). Which can be especially challenging for advisors with a more passive approach, since at least active managers can claim there is additional value in rolling over by being able to implement full investment management process (e.g., offering “tactical management of retirement assets to minimize sequence of returns risk”).

Beyond those challenges, advisors also need to figure out how they’re actually going to bill on those held-away assets. As since advisors generally can’t deduct fees directly from a 401(k) account, they will either have to bill from managed accounts they do oversee (which is bad news for the advisor’s performance numbers, since the fees for the entire pie and coming from just the advisor’s slice), or send the client an invoice and implement technology to bill them directly.

These challenges to adopting an AUA fee aren’t insurmountable, however, but do require some careful thought and planning in advance. As ultimately, charging a fee on assets under advisement may be a good way for certain advisors to expand their relationship with existing clients, especially those who are still in their working years and have a sizable 401(k) plan that is unavailable to be managed directly. However, the AUA fee has got to make sense from a business perspective as well, which means having a clear operational game plan for calculating fees, dealing with all the extra manual work, and for navigating the regulatory minefield.

Financial Advisor Trends in Constructing Mutual Fund Vs ETF Investment Portfolios

July 25, 2018 07:03 am 1 Comment CATEGORY: Investments

Important Factors When Selecting Fund Provider

One of the biggest trends in the investment industry in recent years has been explosive growth in the variety, availability, and use of exchange-traded funds (ETFs). Not only because they are more tax efficient, have more flexible trading, and are typically less expensive – which has made them a popular way to implement passive investing strategies – but also because even advisors who actively manage portfolios themselves appear to be used ETFs are the core “passive” building block for their active ETF strategies. However, the industry still shows that the overwhelming majority of advisors still use mutual funds as well, which in turn raises the question: how, exactly, do advisors choose between mutual funds versus ETFs and select the particular investment vehicle they’re going to use… and from the asset manager’s perspective, what should fund companies be doing to get their investment solutions in front of advisors?

In this context, a recent industry study published by Erdos & Morgan provides a fascinating look into what advisors actually view as the most important factors when selecting fund providers. Not surprisingly, performance and fees rank were top-ranking factors, but advisors also place a high value on a fund provider’s approach to managing volatility and their perceived trustworthiness… and surprisingly (or not) weight at all on the fund company’s marketing materials, wholesalers, or “thought leadership” white papers. And the trend is especially pronounced amongst the RIA channel, which sits the furthest from traditional commission-based fund distribution models, and appears to be the most likely to take a “don’t call us, we’ll call you” approach to selecting fund providers to work with.

In fact, another study from Advisor Perspectives (also looking at fund company selection by advisors) found that advisors are becoming increasingly sophisticated in regards to evaluating a fund’s fees and performance, instead of relying on the higher-level “rankings” from research providers (e.g., Morningstar’s star ratings). And to the extent that advisors want “value-added” services from fund providers, the desire is not for practice management advice, but simply more accessibility to deeper investment expertise, from having more direct access to fund managers and research analysts, and demanding that wholesalers themselves be increasingly investment savvy (with real investment expertise like CIMA certification) as well.

The bottom line, though, is simply that with all the rapid changes occurring in the industry, there is growing recognition that the traditional distribution approach of fund providers and asset managers is changing. Yet thus far, fund companies appear to be struggling to adapt, leading to especially low reputation scores from RIAs compared to advisors working at broker-dealers, and substantial negativity towards traditional wholesalers. The good news, however, is that in the end, client assets still have to be invested somewhere… which means there is a substantial opportunity for the fund providers that can learn to adapt most quickly to the new normal of how advisors select investment solutions.

#FASuccess Ep 082: Insights From The History Of Financial Planning Since The First CFP Class with Ben Coombs

July 24, 2018 07:03 am 0 Comments CATEGORY: Financial Advisor Success Podcast

Welcome back to the 82nd episode of the Financial Advisor Success podcast!

This week's guest is Ben Coombs. Ben is the former owner of Petra Financial Advisors, an independent advisory firm that he built and ultimately sold to a successor when he was ready to retire, and is now retired after nearly 40 years of experience as a financial advisor.

But what's really unique about Ben is the fact that he was a member of the very first class of CFP certificants in 1973, and was subsequently involved in the formation of the Institute for Certified Financial Planners, also known as the ICFP, later that year, and was a member of the Board of Directors of the CFP Board in its early days. In other words, Ben has actually lived and been a part of the entire history of the movement of financial planning from the very beginning.

And in this episode, we talk in depth about the history and evolution of financial planning itself, from what it was like to be part of the first class of CFP certificants, the challenges that set back the early financial planning movement when it was still largely about using financial plans to sell products, why the professional association for CFP certificants split from the broad association for financial advisors and took nearly 25 years to be rejoined as the FPA, the lawsuit that actually caused the CFP Board to be created as a spinoff from the College for Financial Planning in Denver, and how almost all of the common industry debates that we have today, from the sometimes problematic relationship that CFP stakeholders have with the CFP Board to the battles over various forms of advisor compensation are not at all new but have actually been repeating every decade since the inception of financial planning itself.

We also talk about Ben's accumulated wisdom having been a financial planning practitioner and a part of the financial planning movement over his entire professional career, from how the financial planning approach fundamentally changes the nature of the questions we ask of and for our clients, to why it's so necessary to sometimes give things up in order to move forward, whether it's in our own career or for the financial planning profession as a whole, how different compensation models can sometimes unwittingly cause us to collect bad information about the solutions we make available to our clients, and why in the end it's absolutely crucial to be the one that delivers important news to your clients, including the bad news.

And be certain to listen to the end, where Ben shares his wisdom about what every financial advisor should be doing to advance their own careers and the quality of the services they provide to their clients.

So whether you are interested in hearing more about the beginning of the financial planning industry, how many of challenges we face as a community have cropped up decade after decade, or insights into what advisors can actively do to keep pushing their careers forward, I hope you enjoy this episode of the Financial Advisor Success podcast!

The Efficiency Benefits Of Niching From The Start To Launch An Advisory Firm

July 23, 2018 07:01 am 2 Comments CATEGORY: Personal/Career Development

Starting a new financial planning practice can be a scary yet exciting time. One of the big challenges facing any financial advisor is finding initial clients and building up a business that can financially support itself. As a result, in the beginning, many financial advisors will take anyone who is willing to work with them. Yet the reality is that while this can create some growth at the start, often this can actually impede growth in the future, as a business without any clear focus and target clientele can lead to significant problems with efficiency.

In this guest post, Meg Bartelt of Flow Financial Planning, LLC recounts the evolution of her virtual fee-only financial planning practice, from starting in May of 2016 with a focus on "working mothers in the tech industry" and growing into her current focus on “early to mid-career women who are employees in the tech industry”. Additionally, Meg notes the benefits of starting out with a niche, such as easier design of process and deliverables (as everything can be designed around a single clientele), easier referability (as clients actually know what's unique about you and who they should send to you), increased confidence (as working with a community of people you know a lot about can help you develop assurance in the value you provide to clients), more enjoyable client relationships (as working with people you know and like will make the work more enjoyable), and more effective professional development (as she can ignore many of the topics that a generalist must focus on, while specifically honing in on topics that are meaningful to her clients)!

Ultimately, every firm has their challenges in the early days and Meg's firm was no exception, but by focusing on a niche and marketing it aggressively – including sufficient investment in a quality online presence that resonated with her target clientele, efforts building SEO through her blog, networking through the right online communities, and leveraging centers of influence that many advisors traditionally don't focus on (e.g., resume writers, career coaches, and people who are "hubs" in the tech industry) – Meg was able to reach the tipping point at which her efforts paid off, and now she has an entirely virtual firm on pace to likely break $150k in revenue in just her third year of operation. And Meg has done all of that while bringing on 26 of 31 clients in her niche, and adopting a policy of only accepting clients in her niche going forward, as she has seen the efficiencies gained from growing a firm through niching from the start!

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.